Under current case law of the German Federal Court of Justice (Bundesgerichtshof - BGH) the purchase of shares can normally be considered to be private asset management. The purchaser is then also considered to be a consumer in the relationship with the bank financing the purchase price pursuant to section 13 of the German Civil Code (Bürgerliches Gesetzbuch - BGB). In its decision of 22 September 2010 (3 U 75/10) Celle Higher Regional Court affirmed the consumer status of the borrower even if the borrower purchases all the shares in a company with the intention of later assuming management. The number of shares to be acquired is disregarded when the activity is categorised as a private activity. When a director manages a limited liability company (GmbH) this is not considered to be a commercial activity. Although the purchase of all the shares of the company does constitute a company purchase, according to Celle Higher Regional Court, a company purchase can also be private in nature and implemented by the purchaser as a consumer. However, the Higher Regional Court does acknowledge exceptions: If the asset management associated with the purchase of the shares is so complex that the time involved is comparable with the exercise of a profession then the activity is to be regarded as commercial and the purchaser is not awarded consumer status.

Scope of financial power of attorney

In its decision of 21 October 2010 (34 Wx 133/10) Munich Higher Regional Court addressed the scope of financial powers of attorney. The financial powers of attorney in question permitted two purchasers of real property to “make any declarations necessary and expedient for implementing the financing of the purchase price”. While the purchase price for the real property was agreed at about EUR 200,000 the parties later created a notarised land charge for the amount of EUR 300,000. The competent land registry rejected the application for entry of the land charge. The Higher Regional Court held that the registry had been correct to do so: a land charge which exceeds the purchase price by more than 50% is neither necessary nor expedient for its financing. Although there are situations in which the land charge would have to be a certain amount higher than the purchase price required, this was not the case here. In the light of this decision we would recommend stating a specific amount or a cap for the land charge capital if this amount is greater than the purchase price to be financed.

Federal Finance Court on duty to pay capital gains tax on loans linked to an equity kicker

While interest payments from normal loans are not normally subject to capital gains tax, income from loans linked to an equity kicker are subject to capital gains tax pursuant to section 43 (1) sentence 1 no. 3 as read with section 20 (1) no. 4 of the German Income Tax Act (Einkommensteuergesetz - EStG). However, there is no statutory definition of loans linked to equity kickers. In its decision of 22 June 2010 (I R 78/09) the German Federal Finance Court (Bundesfinanzhof - BFH) issued a decision on the criteria regarding loans linked to an equity kicker which departed from previous practice. One of the conditions of the loan agreement underlying the decision for the maturity of the interest on the loan was that the borrower has the corresponding liquidity. This link between maturity of the interest on the loan and the liquidity of the borrower can, in the view of the BFH on the classification of the loan, be regarded as a loan kicker and therefore lead to the interest payments being subject to capital gains tax. It is difficult to say how wide-reaching the BFH decision is. This is because, according to the wording frequently used in practice, a loan including interest which ranks behind other liabilities of the borrower means that the maturity of interest is contingent upon the liquidity of the borrower. It remains to be seen whether the tax authorities will take this stance on the basis of the new BFH case law. Thus a certain amount of care is definitely to be recommended in future when drafting loan agreements. In order toavoid capital gains tax the maturity of interest should not be directly linked to the liquidity situation of the borrower.

New RONIA interbank lending rate launched

On 6 June 2011 the Wholesale Market Brokers’ Association (WMBA) launched a new interbank lending rate called RONIA (Repurchase Overnight Index Average) to secure against risks of changes in the interest rate for secured sterling loans. The new lending rate is the weighted average rate of all sterling overnight lending transactions brokered in London. It is based on secured overnight swaps, which are repo transactions. There are two main differences between RONIA and LIBOR: On the one hand RONIA, unlike LIBOR, reflects the actual rate banks charge each other, rather than a notional rate. On the other hand RONIA is based on transactions where collateral is provided as security. Secured lending has grown rapidly between banks since the financial crisis. RONIA could therefore become an important landmark for future hedging transactions. (Source: WMBA press release of 6 June 2011.)

“Nuisance premium” for release of subordinate collateral not permitted

Schleswig Higher Regional Court issued a decision on 23 February 2011 (5 W 8/11) on the release of subordinate encumbrances. In order to secure loan liabilities of a borrower its real property was encumbered with one first-ranking and one second-ranking land charge in favour of various banks. After insolvency proceedings on the assets of the borrower had been commenced, a party was found who was interested in purchasing the real property at market value. The creditor of the first-ranking land charge would have been fully satisfied by a sale to the interested party on the open market. The price obtained by the sale of the real property would not have been enough to fully satisfy the creditor of the second-ranking land charge. The creditor of the second-ranking land charge then demanded a “nuisance premium” from the prior-ranking creditor. The latter refused to make this payment. Thereafter it was not possible to execute the sale. The real property was subsequently sold at public auction at a price considerably below the market value. The Higher Regional Court affirmed that the borrower had a compensation claim against the second-ranking creditor. There were ancillary contractual duties of protection and trust both from the loan agreements and the security agreement with regard to the creation of a land charge. The court held that the security agreement in particular established a trust relationship without express agreement. It also found that the recipient of the security is obliged as a matter of principle to observe the interests of the trustor (borrower). By demanding the nuisance premium the creditor of the second-ranking secured land charge had breached this duty.

Bank charges for loan accounts of consumers not permitted

After two different decisions from Stuttgart Higher Regional Court (21 October 2010 – 2 U 30/10) and Karlsruhe Higher Regional Court (decision of 8 February 2011 – 17 U 138/10) on this count the BGH provided clarification in its decision of 7 June 2011: General terms and conditions under which a credit institution levies bank charges on a loan account are invalid in banking transactions with consumers pursuant to section 307 (1) sentence 1, (2) no. 1 BGB. An understanding regarding bank charges is not a price agreement (which would exempt it from being subject to the “fair and reasonable” test applicable to terms and conditions) because the bank customer does not receive any direct consideration from the credit institution for the bank charges. The sole purpose of the bank charges is to shift operational and other costs to the customer. As holding a loan account is primarily in the interest of the credit institution itself it would contradict the principle of good faith if the customer had to pay an additional fee.