27 March 2023
Due to high demand and limited supply in the property market, buyers are increasingly forced to make an offer on property without a financing arrangement clause.
During the search for a suitable mortgagee, the focus is almost entirely on repayment terms and interest rates; in practice, the contents of the mortgage deed are only sporadically examined by buyers after reaching agreement with the mortgagee. First-time property investors generally start by letting their first property. But this is frequently not allowed under the terms of the mortgage deed. It is therefore good to keep in mind that the mortgagee has far-reaching rights and powers, especially when buyers act in violation of mortgage terms. In this contribution, Glenn Kerver and Jeffrey Strik take a closer look at the mortgage deed and prohibited letting.
The mortgagee has the right of summary execution under Article 3:268 of the Dutch Civil Code (Burgerlijk Wetboek). In short, this means that the mortgagee can sell the property if the mortgagor fails to fulfil their obligations. The mortgagee has an interest in maximising their proceeds. A property in a let state is often worth less than a property in an unlet state. This is due to the far-reaching nature of Dutch rent protection and the limits it imposes on renovation options.
Consequently, mortgagees exclude letting without their consent in the mortgage deed. Needless to say, this is not the case for a buy-to-let mortgage or an investment-linked mortgage. Such a provision is also known in law as a ‘letting clause’. If there is a breach of the letting clause, the mortgagee can demand the return of the full mortgage amount in a lump sum, and — if the mortgagor is unable to pay it — sell the property to satisfy the mortgage debt with the proceeds. At that point, the mortgagee can, under certain circumstances, annul the rental agreement between the tenants and the mortgagor. Article 3:264 of the Dutch Civil Code stipulates when a mortgagee can successfully invoke a letting clause.
The mortgagee may annul the rental agreement prior to the public sale unless:
It follows from the above legal exceptions that rental protection also carries over into the mortgage relationship: the rental agreement cannot be annulled if the mortgagee is obviously not restricted in means of recovery available to it and the proceeds from the property are adequate. However, this does not rescue the mortgagor; the mortgagee is entitled to sell the property in a let state and use the proceeds to pay the mortgage debt.
Recently, the preliminary relief judge of the District Court of East Brabant ruled that mortgagee O had forfeited their right to summary execution by tolerating prohibited letting at an earlier stage (District Court of Oost-Brabant 16 September 2020, ECLI:NL:RBOBR:2020:4534). In this case, the mortgagee had granted a right of mortgage to the mortgagor in 2005; the mortgage deed contained an explicit letting clause. In 2010, mortgagee O informed the mortgagor that he had let the property without permission, but that it would not take any steps if the mortgagor complied with their obligations. Mortgagee O did reserve the right to invoke the nullity of the rental agreement at a later date.
In 2018, the mortgagor re-let the property. According to mortgagee O, they had forbidden the mortgagor to do so over the phone, but mortgagee O failed to produce documents to prove this claim. Mortgagee O thereupon announced that they would foreclose on the property unless the mortgagor moved into the property himself or paid off the entire mortgage debt (whether or not by refinancing the mortgage). According to mortgagee O, this stricter stance was necessary because of harsh new regulations issued by the Financial Markets Authority (AFM). The total mortgage debt at the time of the proceedings was still €168,993; an appraisal showed that the property was worth €197,000 in its let state and €225,000 in its unlet state.
The preliminary relief court ruled that because of the previous correspondence with mortgagee O, the mortgagor was entitled to assume that mortgagee O would not take action against prohibited letting as long as they complied with the payment obligations. It is undisputed that the mortgagor paid on time and in full and even repaid more than they were obliged to, and that mortgagee O had sufficient security because of the appraisal value. Under these circumstances, the preliminary relief court ruled that mortgagee O had to discontinue the planned foreclosure of the property.
Although the preliminary relief court did not mention it in so many words, the above case seems to involve the forfeiture of rights. The general principle is that the lapse of time is in itself insufficient grounds for a claim of forfeiture of rights, even if the mortgagee knew about the prohibited letting from a certain point in time (see for instance the Court of Den Haag 26 July 2019, ECLI:NL:RBDHA:2019:7823, legal grounds 4.6 and the District Court of Noord-Holland 9 June 2015, ECLI:NL:RBNHO:2015:4709, legal grounds 4.7). The present case involved special circumstances, such as the long-standing policy of tolerance. In the vast majority of cases, however, the adage pacta sunt servanda applies; parties must abide by the agreements made, which means that the letting clause remains in full force.
Many owners choose not to run the risk of letting the property without permission. The risks of doing otherwise are obvious. We therefore recommend checking with a mortgage broker whether it is possible to take out a buy-to-let mortgage or make additional arrangements with the mortgagee.
Do you have questions about your mortgage deed and/ or prohibited letting? Or do you have another legal question? Please do not hesitate to contact us. We will be happy to help you.
This contribution about mortgage deed and prohibited letting was written by mr. Glenn Kerver, lawyer at GMW advocaten (email@example.com/www.gmw.nl) and Mr Jeffrey Strik, property mortgage broker and financial advisor at Vastgoed Finance.com (firstname.lastname@example.org/ https://vastgoedfinance.com/nl/) and Search and Finance (email@example.com, /https://searchandfinance.com/).
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