German private international law concerning real estate, loans and mortgages
By Rechtsanwalt Dr. Götz-Sebastian Hök
German conflicts of law is based on the tradition of Savigny and its famous ”Sitztheorie”. Today it is mainly governed by statute law and international conventions.
Two European Regulations have replaced German domestic conflicts of law rules. It worthwhile to note that the Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations, also referred to as Rome I) and the Rome II Regulation (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to noncontractual obligations, also referred to as Rome II) cover both, contractual and extra-contractual obligations.
However, still the German conflict of laws rules in respect of real estate and tangibles remains untouched and is purely domestic law. According to article 43 EGBGB the lex rei sitae or lex situs applies.
Unfortunately German courts are often not very familiar with conflicts of law rules because no specialised courts and judges do exist for this kind of work. Sometimes German courts are suspicious about the application of foreign law which is still dealt as a fact not as law (see Section 293 ZPO = Civil Procedure Code). Thus German courts are free to take evidence as to the applicable foreign law. In most cases University professors are asked to provide expertise on foreign law which normally consist in summaries of the content of the foreign law found in available books. If they are not famliar with the orginal llanguage they rely quite often on English texts which sometimes are not up to date. Thus there is a risk of misleading expertises.
In principle German conflicts of law rules are broadly harmonised by EC-instruments. Especially jurisdiction rules and international contract law are based on such instruments, as there used to be the Convention on the Law Applicable to Contractual Obligations of 1980 (for short Rome Convention, which has been replaced by the Council Regulation EC/593/2008 of 17 June 2008 (OJ 2008 L177/6) referred to as Rome I) and the Council Regulation (EC) 44/2001 of 22 december 2000 on jurisdiction and recognition of foreign judgments (OJ 2001 L12/1).
A particularity of German conflicts of law is that the question of whether the court has jurisdiction to hear and determine the matter before it, is usually not treated as a part of conflicts of law. Consequently German textbooks on conflicts of law generally only deal with the question on how to determine the governing law if the case involves contacts with several different states or jurisdictions. In principle German law does not provide for special provisions concerning questions of international jurisdiction. As a rule international jurisdiction is given when a local venue is established by applying the rules of the ZPO, unless they are excluded by the above mentioned EC-regulation (for short Brussels I). In German law there is no such clear cut distinction between jurisdiction in rem and in personam as exists in common law. Pursuant to § 12 ZPO the court before which a person is generally amenable to suit shall have jurisdiction for all complaints brought against him or her, unless an exclusive venue shall be established for a complaint. Generally the proper ordinary venue is the place where the defendant resides permanently. Several special venues also exist. In disputes over property the local court where the property is situated has exclusive jurisdiction. In most cases, however, questions of international jurisdiction are regulated by the provisions of the EC-regulation 44/2001 (Brussels I), which are quite similar to those given by the German legislator.
Whereas domicile for english and american lawyers is the legal tool employed to attach a person to a particular locality for some particular purpose, i.e. to decide whether there is sufficient contact between a person and a state so that its law may be applied to the person´s affairs or its courts may hold him subject to its jurisdiction, under German law no similar tool exists. The German term Wohnsitz signifies more than mere physical presence but does not come near to domicile. § 7 BGB defines the Wohnsitz as the place where a person is permanently resident.
1. Loan contracts
In the event of a dispute arising from a agreement the proper ordinary venue is the place where the defendant has his permanent residence (art. 2 Brussels I). Concurrent jurisdiction may exist in the place where the contract has been performed (art. 5 n° 1 Brussels I). Jurisdiction may also be agreed between the parties (art. 23 Brussels I, art. 38 ZPO). A court without jurisdiction per se, shall have jurisdiction by reason of the express or implied agreement of the parties, in the event that the parties to the agreement are merchants, juridical persons of the public law or separate public estates. The jurisdiction of a court may also be agreed on in the event that at least one of the parties has no domestic general venue. This agreement must be in writing or, in the event that is was made orally, confirmed in writing (§ 38 para. 2 (1) ZPO, art. 23 Brussels I). In all other respects, an agreement on jurisdiction shall only be permissible in the event that, expressely and in writing, it is concluded for the event that the party sued transfers his or her residence or customary abode is unknown at the same time the complaint is filed (§ 38 ph. 3 n° 2 ZPO).
b. Choice of law (current law)
Formerly German international contract law was governed by art. 27, 28 EGBGB. Nowadays their homologues in articles 3 and 4 Regulation Rome I apply having replaced the former Rome Convention (see Britton  ICLR 380, 387 with regard to the fact that different language versions of the Rome Convention existed, which were equally authentic which sometimes led to interesting discussions). Pursuant to article 3 para. 1 Regulation Rome I (= article 3 para. 1 Rome Convention = art. 27 para. 1 EGBGB) an express choice of law is conclusive. Parties may even select a system of law by implied terms. Freedom of choice however is limited by the principle that parties are not allowed to evade the application of the rules of a system of law which they do not like by resorting to another system. If the parties have not expressed a choice of law, such an implied choice of law must be demonstrated with reasonable certainty by the terms of the contracts or the circumstances of the case.
c. Absence of choice (current law)
According to article 4 para. 1 Rome I Regulation (= article 4 para. 1 Rome Convention = art. 28 ph. 1 EGBGB), in the absence of choice, the applicable law is to be the law of the country referred to in artile 4 para. 1 Rome I Regulation.
In the past this used to be as a General rule the law with which the contract was most closely connected. But if there was a severable part of the contract having a closer connection with another country then this part could by way of exception be governed by the law of that other country. Art. 4 para. 2 to 4 Rome Convention then went on to give three presumptions for determining with which country the contract is most closely connected, providing in principle that the contract is presumed to be most closely connected with the country in which the party who is to effect the performance which is characteristic of the contract has, at the time of the conclusion of the contract, his habitual residence. Art. 4 para. 5 finally restates the principle set out in art. 4 para. 1 Rome Convention in the sense that if the characteristic performance cannot be determined the presumptions in art. 4 para. 2 to para. 4 do not apply. We may summarize that in the case of a contract for the supply of goods or services it is the provision of the goods or services, not the payment for them, which is characteristic performance.
Under article 4 Rome I Regulation there is list of rules, for instance with regard to sales contracts or service contracts. Sales contracts involving the transfer of a title in rem are governed by the lex rei sitae. However, if a contartc is involved which is not listed in para 1 of article 4 Rome I Regulation gain the law with which the contract is most closely connected applies. This is the case in respect of loan Agreements (Palandt/Thorn, BGB, Rom I 4, note 26).
Thus a loan contract or agreement has continuously been held to be governed by the law of the country in which the bank´s head office is situated. The same conclusion was reached by applying the presumption of characteristic performance for a bond agreement. But if the bank has branches in several countries the place where the branch is situated will determine the applicable law when it granted the loan. Mortgage lending however is sometimes regarded as a special agreement thus not falling under art. 4 ph. 2 Rome Convention. By art. 4 ph. 3, a contract, in so far as it concerns immovable property or a right to use the property, is presumed to be most closely connected with the country of its situs. But this presumption, it seems, does not extend to contracts for mortgage lending. But in mortgage lending cases the accessory character of the mortgage and the land charge calls in question whether a characteristic performance can be determined. Therefore German authors and courts rather seem to prefer not to apply the presumption of art. 4 para. 2 Rome Convention than to apply art. 4 para. 5 Rome Convention. Thus a loan secured by a mortgage or a land charge is considered to be more closely connected with the state where the surety has been granted (BGHZ 17, 89, 94 concerning a case with connections to the former RDA).
d. New law (Regulation Rome I)
Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I) (OJ no. L 177/6) have replaced the Rome Convention. Pursuant to its Articles 28 and 29, the Regulation applies from 17 December 2009, to contracts concluded after the same date.
According to Art. 3 para. 1 Rome I Regulation a contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to the whole or to part only of the contract. Thus in principle current law has been maintained.
To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined according to a catalogue of conflicts of law rules (Art. 4 para. 1 Rome I Regulation). Where the contract is not covered by the catalogue in Art. 4 para. 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence.
According to recital 17 of the aforementioned Regulation the concept of ‘provision of services’ and ‘sale of goods’ should be interpreted in the same way as when applying Article 5 of Regulation (EC) No 44/2001 in so far as sale of goods and provision of services are covered by that Regulation. Thus it is suggested that loan contracts fall under Art. 4 para.1 lit. b (compare Micklitz/Rott, EuZW 2001, 325, 328), according to which a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence.
2. Physical securities
Where the subject of an action is some item of property located within the state of the forum, the court may exercise in rem jurisdiction as to that property. This enables the court to determine the rights of the entire world in that specific property. Therefore art. 22 n° 1 Regulation 44/2001 provides that jurisdiction for claims concerning rights in rem will be given only at the situs of the right in rem. In turn, classification of an action as in rem or in personam depends on the type of relief sought by the plaintiff. Most actions to establish or extinguish an interest in land are actions in rem. Thus a foreclosure action pursuant to Sect. 1147 BGB is considered an action in rem (Zöller/Vollkommer, ZPO, Sect. 24 note 11; Kropholler, Europäisches Zivilprozeßrecht, Art. 22 note 15) and so falls exclusively under art. 22 n° 1 Brussels I. By contrast a claim based on the obligation of the mortgagee arising from a fiduciary agreement (Sicherungsvertrag) to grant the mortgagor the right to have the land charge waived or ceded when the need for security has ceased, can not be introduced at the situs court (BGHZ 54, 201). In such case a foreign bank being the mortgagee will have to be sued at its seat, unless there is no special forum, i.e. subsequent to art. 5 Brussels I or Sect. 29 ZPO (place of performance).
Insofar as the parties are free to chose their forum by agreement, a standard term which declares the courts at the seat of the mortgagee exclusively competent for all claims arising from the mortgage deed does not conform with §§ 305 et seq. BGB (OLG Köln Rpfleger 1956, 340).
b. Choice of law
First the court must decide whether or not the case presents a property problem. If so, no choice of law is admitted. As a rule the forum would characterize an interest as property according to its own law (lex fori principle) without reference to any foreign law. But in practise the law of the situs of the interest will control the characterization issue. Thus a German court will classify as immovables freehold titles, leasehold titles under the Leasehold Act, condominium property and all limited rights in rem.
Title in property is, in general, exclusively governed by its lex situs or lex rei sitae (article 43 EGBGB). The policy favoring reference to the law of the situs is so strong that courts usually apply the whole law of the situs, including its conflict rules (renvoi). As to limited rights in rem the lex situs rule is applicable as well. Thus a mortgage or land charge subject to land is governed by the lex situs notwithstanding that the debt, not the charge, is the principal characteristic of the transaction. The fact that the lex situs rule is paramount does not, however, conclude all difficulties which may appear. As far as formalities are concerned, any transaction or instrument that purports to change, then and there, the ownership of immovables must satisfy the formal requirements of the lex situs. But a different position arises where the inquiry relates not to the actual disposal of the right in rem but the rights and liabilities of the parties under a contract relating to immovables. A contract by which A agrees to transfer a mortgage encumbering land to B is not necessarily governed exclusively by the lex situs. The debt for which the mortgage or land charge has been granted may be governed by another law and the contract of assignment may be governed by a third law as well. This may bear some special problems regarding the accessory character of mortgages against land.
A (a French bank) grants a loan to B (a German citizen). They expressly chose the law of France. The loan will be secured by a mortgage subject to a German estate, thus ruled by German law (lex situs rule). Then A assigns the mortgage to C, an English bank, in such terms that it is exclusevely subject to English law. The mere fact that it relates to a foreign land ought not to affect the contractual rights and liabilites of the parties A and C. Two problems may arise: (1) breach of contract and (2) failure to comply with certain formalities.
(1) If C brings an action for breach of contract to the German court the action may succeed against A if the contract by which A has agreed to do so is a an enforceable binding agreement under English law.
(2) In doing the transfer A and C will have to obey to German and French law as well in order to avoid the nullity of the assignment. Under French and German law the transfer of the claim will effect the transfer of the mortage. But French law does not provide a special form for the assignment. However, German law does. As under German law the written form and the transfer of the mortgage certificate is required, the assignment of the mortgage will only become effective if German law has been respected.
A fiduciary agreement, however, by which a land charge is tied to its purpose to serve as a security does not fall under the situs-rule. Artilces 3 and 4 Rome I Regulation will apply, thus a choice-of-law-clause will be valid and is recommendable.
LAW OFFICE Dr. Hök, Stieglmeier & Kollegen
Contact: Advocate Dr.Götz-Sebastian Hök
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WARNING: the material contained in these notes is a simplified guide to some of the major topics in German law. It is not intended as a substitute for legal advice on individual transactions, and does not necessarily stand on its own. Whilst the contents are believed to be correct, the author cannot accept any responsibility for errors or omissions.