In the Netherlands (and other European countries), selling and buying (real estate) non-performing loans (NPLs) portfolios is on the increase.
The first significant Dutch NPL portfolio, known as Project Lucas, was sold in September 2015 (for €420 million). Currently Lone Star Funds is buying Propertize, a “bad bank” with loans of more than €4 billion. Additionally, Dutch Rabobank has announced its intention to reduce its entire loan portfolio by approximately €100 billion by 2016/17. These circumstances have led to a growing enthusiasm from (foreign) investors for investing in NPLs in the Netherlands.
The purchase of NPLs is often combined with the purchase of distressed assets or performing loans. A (non-performing) loan portfolio is often used as security for the third party financier and/or for sub-participations. One advantage of purchasing NPLs in the Netherlands is that no transfer tax (charged at 2 per cent on residential properties and 6 per cent on commercial properties) is payable.
Under Dutch law, it is possible to transfer both the rights and obligations under an agreement to another party by means of an assumption of contract (contractsoverneming). It is also possible to transfer (only) the rights under an agreement by assignment (cessie).
Assumption of contract
In the event of an assumption of a loan agreement, all rights and obligations under the agreement (including the benefit of security rights other than suretyship or third party security rights) will be transferred to (and assumed by) the transferee. Following the transfer, the transferee will benefit from all contractual rights and obligations under the loan agreement as if it had been an original party to the agreement.
For a transfer to take place, the cooperation (which can be construed as consent) of all counterparties is required. The loan agreement often expressly provides that a debtor will consent in advance (medewerking verleent bij voorbaat) to such a transfer should circumstances demand it. This is usually included in the loan agreement itself or in the general terms and conditions that are applicable to the loan agreement.
The transfer of rights by assignment is only considered desirable when the creditor does not cooperate (in advance). Whilst the assignment of rights under loan portfolios is often achieved by means of an undisclosed assignment (stille cessie), it can also be done by means of a disclosed assignment (openbare cessie). The advantage of the latter is that, as soon as the debtor has been notified, the debt can only be discharged by payment to the assignee.
However, an assignment does not give the assignee the full benefit of all contractual terms agreed between the original parties to the loan agreement, since the assignor remains the formal counterparty of the debtor in all relevant documents. Nevertheless, the assignee would become the creditor of the claim after assignment and that would include the right to claim (re)payment plus interest.
Following an assignment, the contractual relationship between the original lender and the debtor remains in place. The debtor is obligated to fulfil any obligations (not relating to payment) under the loan agreement to the original lender. Equally, the original lender is also obliged to meet any obligations it may have under the loan agreement to the debtor. In addition, any claims (tortious or otherwise) that the debtor may have will still need to be brought against the original lender. As the contractual rights and obligations (other than payment) still remain with the original parties, the sale and purchase agreement of an NPL will need to provide for, for example, exclusive mandates (privatieve lasten) and powers of attorney in order to give the assignee the fullest possible benefit of the contractual rights remaining with the assignor. It should be noted that the assigning lender is usually reluctant to give such mandates, powers of attorney or to assume assignor liabilities.
Loan portfolio as collateral
If a loan portfolio can be transferred, these loans should also be capable of being transferred to another party. Under Dutch law, it is not permitted to transfer claims as a means of security. Instead, a right of pledge is created over such claims against debtors with the third party financier as pledgee.
If assignability is excluded and a transfer of contract is not possible, an economic rather than legal transfer would need to be implemented. This could be achieved by a sub-participation. In the Netherlands, the transferee will always be exposed to the insolvency risk of the transferor.
All rights that are accessory to the transferred claim, either through assumption or assignment, will (automatically) transfer to the assignee by operation of law. Unfortunately, there is no clear definition of the term “accessory rights”, either in the legislation or case law. However, the Dutch Civil Code does state that the security rights purporting to secure the transferred claim are accessory rights, hence the transferee is entitled to the benefit of such rights. In addition, the transferee will have the full benefit of any interest or penalty arising under the contract, or any periodic penalty payment imposed by the court (other than those amounts due and payable at the time the transfer takes place). A mortgage and a right of pledge are good examples of accessory rights under Dutch law. When a mortgage is transferred with the transferred claim, it has to be re-registered with the land registry in the name of the assignee by a Dutch civil law notary. This is not however a legal requirement for the transfer of the claim.
Since there is no exhaustive legal definition of accessory rights, it cannot be stated with any certainty which rights are accessory (and will therefore transfer with the claim). However, it may be argued that any right that is beneficial to the transferee in respect of its claim and its security rights will also be transferred by operation of law.
Enforcement of mortgages
Investors in NPLs must be aware that the cooperation of the debtor will normally be required in order to divest the underlying assets, since a mortgage has to be enforced by public auction by a civil law notary under Dutch law. It is possible to sell the assets through a private sale, but only with consent of the court. Moreover, the Dutch Civil Code prohibits appropriation (toe-eigeningsverbod), meaning any clause purporting to allow a pledgee or mortgage holder to appropriate the encumbered property is null and void. This is different to the legal position in most other European countries, where there is no such prohibition.
In conclusion, NPLs can be transferred under Dutch law by means of an assumption or an assignment. All accessory rights to the transferred claim, such as a mortgage or a right of pledge, will also be transferred by operation of law. Attention must be paid to the legal rules relating specifically to the enforcement of NPLs, especially to those relating to the prohibition on appropriation. NPLs continue to be seen as an interesting asset class in the Netherlands, but it is important for investors to be aware of the legal implications of investing in these loans.