Anyone who buys, sells or finances a property sooner or later encounters the term land charge (Grundschuld). It is recorded in section III (Abteilung III) of the land register and is usually the security with which a bank backs a loan. For owners and buyers it is important to understand what is entered there, what it means and what happens to it on a sale. As an estate agency with more than 60 years of experience in Düsseldorf and North Rhine-Westphalia, we guide sellers and buyers through exactly these questions and review the land register together with its encumbrances. This guide explains the land charge calmly and clearly.
What is a land charge?
The land charge (Grundschuld) is a so-called real property lien. It encumbers a plot of land in such a way that a certain sum of money is to be paid from the land to the creditor, usually the financing bank. It is governed by sections 1191 ff. BGB. If the debtor does not repay the loan, the creditor can use the land charge to enforce against the land, that is, to initiate a forced sale or compulsory administration.
A land charge arises through the agreement between owner and creditor and the entry in the land register. In addition to the principal amount, interest and ancillary payments can also be entered. That is why the entry often shows a higher interest rate than the loan actually costs: this is the in rem interest on the land charge, which gives the bank additional scope for accrued interest and costs, not the interest on your loan.
In practice the land charge is usually created as a so-called security land charge. This means: a separate security agreement, the security undertaking, links the land charge in substance to the specific loan. In addition, the owner usually submits in the notarial deed to immediate enforcement. Under section 794 ZPO, this submission creates an enforceable title, so that in an emergency the bank could enforce without a prior court judgment.
Land charge or mortgage: the decisive difference
The land charge and the mortgage are both real property liens and are entered in the same part of the land register. The central difference lies in their legal tie to the secured claim.
The mortgage (Hypothek) (sections 1113 ff. BGB) is accessory. That means: it is firmly coupled to a specific claim. It arises, exists and lapses in step with the loan. Once the loan is repaid, the mortgage legally shrinks with it and would have to be continually adjusted to the level of the claim.
The land charge (Grundschuld), by contrast, is abstract, that is, not accessory. It does not presuppose a specific claim and remains in existence even if the loan was never paid out, was invalid or was repaid in full. Section 1192 BGB provides that the rules on the mortgage apply to the land charge only insofar as they do not presuppose the existence of a claim. It is precisely this detachment from the claim that makes the land charge so flexible.
Why banks prefer the land charge for property finance
In practice the land charge has almost completely displaced the mortgage in property finance. The reason lies in its flexibility, which results from the absence of accessoriness.
- Reusable: Because the land charge does not lapse with the individual loan, after repayment it can be used for a new loan, for example in a modernisation or follow-up financing, without a new security having to be entered.
- Can secure several claims: A land charge can secure different claims of the same bank, one after another or at the same time.
- Less administrative effort: Unlike the mortgage, the register status does not have to be constantly adjusted to the respective outstanding loan amount.
An important note: we are an estate agency and not a bank. We do not finance and do not grant loans. The creation of the land charge, its amount and its terms are matters you clarify with your bank and the notary. We explain to you what is recorded in the land register and accompany you through the sale or purchase process.
Section III: where the land charge stands in the land register
The land register is divided into the inventory and three sections. The real property liens are in the third:
- Inventory: the plot of land itself, with location and size.
- Section I: the owners.
- Section II: charges and restrictions such as rights of way, residential rights, usufruct or priority notices.
- Section III: the real property liens, that is, land charges, mortgages and annuity charges.
In section III (Abteilung III) you can read off how high the land charge is, at what interest it was entered, who the creditor is, at which rank it stands and whether it is a certificated or a registered land charge. The entry in section III is what first makes the encumbrance effective in rem and visible externally. Anyone who, when buying, wants to know what debts lie on a property looks precisely here. When marketing a property, we obtain an overview of the entries at an early stage so that there are no surprises at the notary appointment.
Certificated land charge and registered land charge
On entry a distinction is made as to whether a certificate is issued over the land charge or not.
The certificated land charge (Briefgrundschuld) is the default case under the law. Through the reference in section 1192 BGB to section 1116 BGB, a land charge certificate is issued in principle. This certificate is a document similar to a security. The land charge can thereby be transferred outside the land register by assignment and handover of the certificate, which gives banks room to manoeuvre. The drawback: if the certificate is lost, a laborious public summons procedure is needed before, for example, it can be cancelled.
The registered land charge (Buchgrundschuld) arises only if the issue of the certificate is expressly excluded and this exclusion is entered in the land register. Here there is no certificate; every step runs via the land register. This is organisationally safer because nothing can be lost. Many banks therefore work with registered land charges today. Which variant is entered you can see in section III.
Rank: why the order matters
If several rights stand in section III, the order of rank decides in which sequence the creditors are served when the land is realised, for example in a forced sale. The rank is governed in principle by the time of entry and by recorded rank notes.
A first-ranking land charge is served first from the proceeds. A subordinate land charge receives only what remains after the prior-ranking rights have been satisfied. For a financing bank, the highest possible rank is an essential security criterion, because it lowers its default risk. That is why a first-ranking real property lien is usually required to finance a buyer.
Ranks can be changed subsequently, for example by rank retreat or rank reservation, in each case with an entry in the land register. When buying a property the rank plays an important role: if an old land charge is to remain in place, it must be clarified whether the new security obtains the necessary rank.
Cancellation, takeover and buying with an existing land charge
Once a loan is fully repaid, the land charge initially remains in the land register, because it does not lapse by itself. The owner has a claim against their bank for restitution. For the cancellation, under section 875 BGB a consent from the creditor and the entry of the cancellation are required. For this the bank issues a notarially certified cancellation consent (Löschungsbewilligung), with which the notary applies for the cancellation at the land registry.
Instead of cancelling, a paid-off land charge can also be left standing. This saves the cost of a later new entry and can make sense if refinancing is to take place in the foreseeable future. Consumer advice centres point out that cancellation is worthwhile above all when a future loan is unlikely.
On a sale there are two usual paths. Often the seller's land charge is cancelled so that the buyer receives unencumbered ownership. The notary handles this on a fiduciary basis and ensures that part of the purchase price flows directly to the redeeming bank. Alternatively, the land charge can remain in place and be reused for the buyer's financing or assigned to the buyer's bank. This requires the consent of the banks involved and can save costs. Important: whoever takes over the land charge does not automatically take over the old loan. In every marketing we review the encumbrances in section III and discuss with seller and buyer which path fits.
