The risk of subsequent erosion of the collateral as a result of a lessor’s lien

Banks frequently require security transfer of title (Sicherungsübereig­ nung) to the goods or other assets of their borrower as collateral for financing. This generally takes the form of a transfer of the ownership title to goods stored in a specific space as collateral, meaning that all of the borrower’s moveable goods in a specific location, such as a warehouse or office building, are transferred (for security purposes) to the bank as collateral for its claims under the loan.

If this space does not belong to the borrower and has merely been leased by the borrower, then a competition arises between the bank’s collateral title on the one hand and the lessor’s statutory right of lien on the other. Under sections 562 – 562d of the German Civil Code (BGB), the lessor is entitled to a right of lien (Vermieterpfandrecht) over the items introduced by the lessee for the purpose of securing the claims arising from the lease relationship.

Competition between security transfer of title and lessor’s lien

Both the transfer of goods stored in a specific area as collateral as well as the lessor’s right of lien are established as a result of the introduction of the items into a specific space. If the lease area is smaller and is located inside the security area, then the bank’s collateral title is the first to arise and the lessor’s lien is ineffectual because the items introduced into the leased premises no longer belonged to the lessee at the relevant point in time. If, on the other hand, the security area is within the leased area, then the lessor’s lien is the first to arise, meaning that the bank can still acquire security title, but such title will be encumbered with the lessor’s lien. If the two areas coincide, which is frequently the case in practice, then theoretically both collateral titles arise at the same time. However, the German Federal Court of Justice (BGHZ 117, 200) has ruled that the priority of an existing lessor’s lien remains unaffected in cases in which a lessee’s (present or future) title to the totality of assets (inventory of goods) introduced into a certain leased space is subject to a contract of assignment of goods in favour of a bank during the term of the lease. The lessor’s lien shall then take priority and also extend to individual items of stock added to the existing inventory after collateral assignment.

Protection for the bank via a waiver of the lessor’s lien

If the bank’s security title is encumbered with a lessor’s lien then this results in an erosion of the value of the bank’s collateral.  In order to protect themselves from a reduction in the value of their collateral as a result of the lessor’s preferential claims arising from the lease relationship, banks generally require a declaration by the lessor in which the latter waives his lessor’s lien, meaning that the bank obtains unencumbered collateral title to the goods in the warehouse.

Loophole in the event of a sale of the property

However, this can result in a lack of protection from the bank’s point of view when the property is sold, as demonstrated in a case decided recently by the Federal Court of Justice (BGH NZI 2015, 63):

In the case decided by the Federal Court of Justice, the lessor was simultaneously the owner of the property. He had let commercial premises to a lessee which contained business inventory. A few years later, the lessee assigned his entire business inventory to his bank as collateral for a bank loan. At the same time, the lessor provided a declaration waiving his lessor’s lien at the bank’s request, meaning  that the bank acquired unrestricted collateral title to the business inventory at this point in time.

However, the property owner / lessor subsequently sold the property to a new owner, who became the new lessor in the lease relationship in accordance with the principle enshrined in section 566 BGB that a “purchase is subject to existing leases”. When the lessee became insolvent shortly afterwards, the issue as to who was entitled to the proceeds from the sale of the business inventory became the subject of a dispute between the bank and the new lessor.

The appeal court came to the conclusion that the new property owner / lessor was not entitled to any claim to the proceeds, since according to the court he could only assert his lessor’s lien in as far as the items were still owned by  the lessee when the property was acquired. However, the court stated that the bank had already acquired unrestricted collateral title to the inventory at the time of purchase.

In contrast, the Federal Court of Justice ruled that the proceeds should be paid to the new lessor in the amount of the collateralised claims under the lease, since the lessor’s lien did not have lower priority than the seller’s lien in terms of its scope, and specifically remained unaffected by any security transfer following introduction of the items. In relation to the question as to whether items introduced into the leased premises are subject to the lessor’s lien of the acquirer, the Court ruled that the sole deciding criterion was the point in time when the items were introduced into the leased premises. It held that a security transfer of an item as collateral in the period following its introduction into the leased premises and prior to a change in lessor following a sale does not prevent the lessor’s lien of the acquirer from extending to the relevant item. Alongside the lessor’s lien of the seller, which provides collateral for claims under the lease relationship, the Court found that a separate lessor’s lien of the acquirer also arises in such cases, with both liens applying to the same items  and having equal priority.

Opinion

The ruling by the Federal Court of Justice is neither convincing in terms of the rationale provided nor in respect of its result. The Court of Justice justifies its decision on dogmatic grounds, i.e. principally that in accordance with section  566 of the BGB the acquirer of the property does not enter into an existing lease relationship as legal successor but rather into a new relationship under lease law by way of novation which has the same content as the lease relationship previously in place with the seller. This new lease relationship accordingly also has a separate (new) lessor’s lien associated with it.

However, according to the wording of the German Civil Code the new lessor only takes over rights such as the lessor’s lien “during the period” of his ownership (of the property). We cannot therefore understand why the Court of Justice links the lessor’s lien retroactively to the start of the (original) lease relationship, and does not in any way take into account the fact that in the meantime – with the consent of the previous lessor – the lessee had assigned the assets to the bank as collateral, meaning that the assets no longer belonged to the lessee when the property was conveyed, but were instead owned by someone else. This is all the more relevant since the lessor’s lien ceases to apply under section 562a of the BGB if the lessee removes items from the leased premises in a way that is consistent with the ordinary circumstances of life. If the lessee had removed the inventory briefly from the leased premises, transferred the inventory for security purposes to the bank and then returned it to the premises, then no new lessor’s lien would have arisen and acquisition of a lessor’s lien on items not owned by the lessee is not possible in good faith. We therefore believe that the decision of the Federal Court of Justice is flawed in that it gives the lessor’s lien of a subsequent acquirer priority over a previous assignment as collateral.

Recommended response

Despite the above conclusion, it will be necessary to adapt to this case law going forward. In order to protect oneself from the risk that the value of a security transfer of title can be subsequently eroded in the event of a sale of the property through a (new) preferential lessor’s lien of the acquirer (of the property), we recommend not only agreeing the waiver of the lessor’s lien bilaterally between the bank and the current lessor, but also via a supplement to the lease agreement. This ensures that the acquirer is also bound by the waiver declaration provided by the former lessor, since the acquirer inherits a lease agreement which already includes a waiver of the lessor’s lien. If the parties involved are not prepared to do this, the bank should at all events seek a commitment from the lessor that consent must be obtained from the bank or the latter must in any case be informed prior to any sale  of the property. This would at least mean that the bank is notified of any impending change in the ownership of the property and would be able to make contact with the future owner in good time regarding the lessor’s lien. While the bank would not be able to prevent a (new) preferential lessor’s lien from arising in the event that the owner breaches his obligations, it could then potentially assert claims for compensation against the seller