Borrowing against art

Types of security interest

In your jurisdiction what is the usual type of security interest taken against art, antiques and collectibles?

The usual type of security interest is a pledge, which normally entails the lender taking physical possession of the work. There is also the possibility of transferring title of the work to the lender as collateral. In this case, the work can remain with the borrower. However, there is a presumption of legal title for the possessor of the work (section 1006, CC), which entails a risk for the lender.

Consumer loans

If the borrower borrowing against art assets in your jurisdiction qualifies as a consumer, does the loan automatically qualify as a consumer loan, and are there any exemptions allowing the lender to make a non-consumer loan to a private borrower?

If the borrower is a consumer, the terms of the CC on consumer lending apply, subject to certain exceptions (section 491, CC). Two exceptions may apply to borrowings against art: (i) if the recourse of the lender is limited to the pledged work of art (section 491(2), No. 2, CC); or (ii) if the loan is for a maximum of three months and only minimal costs are involved (section 491(2), No. 3, CC).

Register of security interests

Is there a public register where security interests over art, antiques or collectibles can be registered? What is the effect of registration? Is the security interest registered against the borrower or the art?


Non-possessory security interests

Can the lender against art collateral perfect its security interest without taking physical possession of the art?

No, the lender against art collateral needs to be in physical possession of the art to perfect its security interest according to section 1205 BGB (German Civil Code). The establishment of joint possession of the work of art can suffice to perfect its security interest if the work of art can be accessed by the lender, or if the work of art is in possession of a third party and the piece can only be handed over to owner and lender together. If the lender would want to have a perfected security without taking physical possession, a security transfer would have to be implemented, by which the lender would have to become the legal owner of the work.

Sale of collateral on default

If the borrower defaults on the loan, may the lender sell the collateral under the loan agreement, or must the lender seek permission from the courts?

The lender may proceed with the sale if he or she has obtained a valid court order to do so. This requires a court process unless there is a notarial deed of acknowledgment of debt. This instrument is rarely used in this context.

Ranking of creditors

Does the lender with a valid and perfected first-priority security interest over the art collateral take precedence over all other creditors?

In German law, the concept of a perfected security interest does not exist. German law operates on the concept of priority. However, if, for example, the work of art that has been pledged to the lender ultimately becomes the possession of the borrower, a third party can acquire good-faith title to the work if it is sold by the borrower.

If the lender has obtained a valid first-priority security interest in the work of art, he or she will be entitled to the full proceeds of the sale up to the value of the loan. If a liquidator has been installed over the estate of the borrower, then the sale will be made through the liquidator. Before disbursement of the sale proceeds to the borrower, the liquidator’s fees will be deducted.