Germany
Giving or taking guarantees
In order to be valid, a guarantee upon first demand must be granted by a guarantor experienced in international transactions and familiar with guarantees upon first demand. This is because the guarantor of a guarantee upon first demand has only limited defenses. For more information, see Giving and taking guarantees and security – common types.
Giving or taking security
Notarization requirements
The following security interests require notarization under German law:
- a pledge over shares in a German limited liability company; and
- the creation of a mortgage or land charge.
Registration requirements
A mortgage or land charge must be registered in the relevant land register (Grundbuch) to become valid.
Initial and subsequent over-collateralization
In case of an initial disproportionate relationship between the value of the granted security and the secured claims (initial over-collateralization), the agreement creating such security may be invalid. If, after the conclusion of the agreement (subsequent over-collateralization), the value of the security exceeds 110% of the secured claims, the grantor may have a claim for release of the excess security.
Are there any restrictions on lending and borrowing?
Lending
Lending business is qualified as licensable banking business and subject to prior authorization by the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)).
Borrowing
Borrowing does not constitute a regulated activity in Germany.
What are common lending structures?
Lending in Germany can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, eg term loans, working-capital loans, equity bridge facilities, project facilities and letter of credit facilities.
A peculiarity in German law is the Schuldscheindarlehen – a specific financial instrument with a hybrid structure which sits between debt securities and bilateral/syndicated bank loans. Schuldscheindarlehen refers to an underlying loan agreement for which a separate borrower's note (ie Schuldschein) as documentary evidence of the loan debt is usually issued. Schuldscheindarlehen are exempt from the obligation to publish a prospectus under European prospectus law. They enable borrowers to gain access to institutional capital markets investors that usually cannot be reached via other bank financings. See the LMA Schuldschein Product Guide published by the Loan Market Association (LMA) for more information.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers is subject to less regulatory oversight and so less burdensome from a compliance perspective.
By contrast, lending to consumers is a regulated activity and subject to special requirements for consumer credit agreements pursuant to section 491 et seq. of the German Civil Code (Bürgerliches Gesetzbuch – BGB), regarding, for example, the written form, minimum content, information obligations of the lender and right of withdrawal of the borrower.
Do the laws recognize the principles of agency and trusts?
The principle of agency is recognized under German law. For instance, it is possible to appoint an agent to act on behalf of other parties.
The English common law concept of trust is not recognized as a matter of German law. However, the same effect of a trust is achieved through the use of a similar German law legal instrument, namely a Treuhand which creates a contractual fiduciary relationship. Hence, in a finance transaction the security can be held by a security agent for the benefit of the secured parties as trustee under German law (Sicherheitentreuhänder) on similar conditions as a English common law trust. Particular provisions are required with respect to accessory security interests. (For more information, see Giving and taking guarantees and security.) Please note that, in order to minimize insolvency risks, the payment streams have to be checked on a case-by-case basis as the German Sicherungstreuhand does not, in contrast to an English common law trust, create a separate legal estate.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles, such as:
- the general civil law principle of good faith (Treu und Glauben);
- the general civil law principle prohibiting violation of good morals (gute Sitten);
- usury (Wucher); and
- the prohibition of compound interest (Zinseszinsverbot) under German law.
Standard form documentation
Most German law syndicated finance transactions are governed by documentation based on the German law versions of the recommended forms published by the Loan Market Association (LMA) in the English language. Bilateral finance transactions are more likely to be documented on bank standard form documentation prepared in-house in German language. Sometimes, the standard documentation developed by the Association of German Banks (Bundesverband deutscher Banken) is used.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the EU’s Bank Recovery and Resolution Directive (BRRD), which outlines certain measures for dealing with failing financial institutions.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to ‘bail in’ obligations of failed EEA financial institutions and also postpone the enforcement of early termination rights against the affected institution. ‘Bail in’ describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of English or other EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Wolfram Distler
Partner
DLA Piper LLP
[email protected]
T +49 69 271 33 022
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