The Euromortgage proposal and its effects on two core principles of property law

“M-EPLI encourages its student fellows to actively participate in all the activities of the institute, which includes blogging. It is therefore with pleasure that we introduce you to Pavel Tehlar, one of our (former) student fellows who wrote an interesting piece on the Euromortgage.” 

On 2nd October 2013, M-EPLI fellow prof. Dr. Sjef van Erp gave a lecture at Maastricht University to Master students of European Law within the framework of a course entitled European Property Law, in which I have the pleasure to take part. In this lecture, among other things, prof. van Erp talked about the Commission’s initiative for introduction of the so-called ‘Euromortgage’ (GREEN PAPER on Mortgage Credit in the EU; COM 2005/327). This proposed ‘Euromortgage’ largely resembles the German type of non-accessory security right on immovables, i.e. die Grundschuld, which main feature is its non-accessoriness. This means that the property security right is not related to the existence of a debt, which it secures. And thus, once the debt is repaid, the property security right continues to exist, even though the debt does not. This is in direct contrast with the accessory type of mortgage, in which once the debt is repaid (i.e. ceases to exist), the property security right terminates as well. It is to be noted that the latter type of mortgage is to be found in the majority of EU Member States. One might therefore ask the question, why did the European Union, namely the Commission, propose a non-accessory type of mortgage, which most of the legal systems of the Member States simply do not know?

The answer to this question lies exactly in the difference between these two types of mortgages, i.e. the accessoriness. The non-accessory mortgage facilitates trade in mortgages better than the accessory mortgage. The German non-accessory property security right on immovables, die Grundschuld, works as a document, which represents the property security right and therefore whoever holds this document, holds the security right. It is therefore clear that this document can be sold and bought and so can be the property security right. The proposed ‘Euromortgage’ being of non-accessory nature working in a similar way would therefore contribute to facilitation of trade in mortgages, which is one of the aims of the Commission’s proposal (see section 47 of the Green Paper on Mortgage Credit in the EU; COM 2005/327). Since it is the document stipulating the right of mortgage, which provides its holder with the security right, it is absolutely necessary that the information on the document is correct. Otherwise the potential investors in the mortgage would be discouraged from investing in it, since they could not be sure as to the accuracy of the document. No investor would invest in a mortgage if he were not sure whether the mortgagor actually has the power to create the right of mortgage on the particular immovable asset. Consequently, the market for trading in mortgages would never work. In order to be able to rely on the correctness of the document, it is necessary that the immovable asset, which is the subject of the right of mortgage, is located in a country, which keeps the so-called positive land registry. In these countries, the land registries ‘guarantee’ the correctness of the registered information. But here again the problem arises, because many EU Member States do not keep the positive land registry, but negative (i.e. not guaranteeing the accuracy of the registered information). Hence, as prof. van Erp correctly pointed out in his lecture, in order to achieve the aim of the introduction of the non-accessory ‘Euromortgage’ (i.e. facilitating the financial market in mortgages), many EU countries would have to change its land registries from negative to positive. This presents a substantial impact on many EU countries’ property law systems.

It can be said that property law recognizes, amongst other, two main principles, which can be found in any legal system. One of them is the principle of transparency, under which falls the principle of publicity, encompassing the registration requirement mentioned above. The other main principle of property law, on which the proposed ‘Euromortgage’ would have a substantial impact, is the principle of numerus clausus of property rights. The existence of the principle of numerus clausus can be considered as a direct consequence of the nature that property rights possess, i.e. the erga omnes effect. Since property rights have effect against third parties (against everyone) it is understandable that these third parties want to know what kind of rights are considered as having this effect. The ‘against all’ effect also gives property rights a certain ‘power’ (this can be best seen when looking at the definition of ownership, which is generally defined as the strongest right a person can have over an object) and some of them can even limit people’s freedom in use of their own objects (a good example could be a right of way- a servitude with regards to a piece of land, which allows an owner of the dominant land to walk over the servient land, which is owned by another person). It is therefore wise not to allow persons to create just any right and give it an erga omnes effect. Hence, each national legal order recognizes only a certain limited number of rights as being of a property law nature (the numerus clausus). Since, as explained above, property rights can be seen as strong rights, it is of no surprise that the Member States want to be the only ones who decide (within their jurisdiction), which rights would be considered property rights and which, in turn, would not. And, at least up until now, the States have largely been successful in keeping this privilege.

The proposal for the introduction of the ‘Euromortgage’ substantially infringes this privilege of States to decide on their numerus clausus. The ‘Euromortgage’ is proposed to function as a 29th regime (the GREEN PAPER on Mortgage Credit mentions 26th regime, but this is due to the fact that the proposal is dated in 2005 when the European Union consisted of only 25 members). It means that it would function alongside all national legal regimes as an additional regime created at the European level. This could be an argument in favor of saying that this European type of mortgage would not have to be transposed to national legal regimes, and thus would not infringe the national numerus clausus, since it would function ‘outside’ of the legal regime. However, this is clearly not true for many reasons, one of which is that once this European mortgage would form an issue in a legal dispute in front of a court of a Member State, because of the principle of supremacy of EU law (established in the well-known CJEU’s case Costa v Enel) the court would have to recognize it as a right having a property law nature (as it is seen in the proposed form). Thus enlarging the national limited number of property rights. It is therefore evident that the introduction of the ‘Euromortgage’ would have a substantial impact on one of the most (if not even the most) well-established principles of property law.

By proposing the creation of a ‘Euromortgage’ the European Union legislator directly touches upon one of the most sensitive areas of law from the perspective of the Member States. Whether the Union has the competence to do so is a question for another day. In my opinion the fact that the proposal for ‘Euromortgage’ is now ‘on hold’ is not because of the legal difficulties that it would create, but rather because of the aftermath of the world financial crisis, which showed how dangerous the trading in mortgages could be. Nevertheless it is clear that not the trading in mortgages itself but rather the irresponsibility in mortgage lending lead to the crisis and so it is believed that the crisis would never occur if the rules on lending were more transparent and responsible.

On 10th September the European Parliament provisionally passed a proposal for a Directive (Proposal for a Directive on credit agreements relating to residential property, COM 2011/142), which main aim is precisely to make mortgage lending more responsible. Does it mean that the ‘Euromortgage’ is going to follow in a short time?

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