Advisor

What is a land charge?

26 August 2025

Scharf Attorneys at Law

A land charge is a security right (lien) over a property. By registering it in the land register, the bank secures a loan claim against the property owner. In the case of a loan, the land charge grants the bank the right to realize the encumbered property if the borrower stops making payments. A land charge can repeatedly secure a loan from the same owner - it remains abstract even if the original loan has been repaid. The legal basis is §§ 1191 ff. BGB, whereby the land charge - unlike the mortgage - is not accessory to any specific claim.

Land charge vs. mortgage

The land charge and the mortgage are both mortgages, but they are fundamentally different. Mortgages are accessory: they only exist for as long as the underlying claim. If the loan is paid off, the mortgage expires automatically. Land charges are abstract: they are legally independent. This means that the land charge remains in the land register even if the loan has been repaid. The property owner can then reuse the same land charge later, for example for a modernization loan. For this reason, banks rely almost exclusively on land charges for real estate financing and hardly ever on traditional mortgages. (Today, mortgages are only used occasionally in specialized cases).

Role of the land charge in real estate financing

In the case of real estate loans, the bank usually requires a land charge on the property to be financed. This allows it to lend large sums of money relatively risk-free: If the borrower defaults, the bank secures access to the property. The property serves as a pledge, similar to a guarantor. If an installment is not paid, the bank can take legal action to foreclose and, for example, foreclose on the house to settle the outstanding installments. At the same time, the land charge protects the bank from subsequent encumbrances: Before a new loan is disbursed, the bank checks the land register for existing liens. Rights with a higher ranking (older entries) must be clarified or rearranged, as in an emergency, priority creditors are satisfied first.

The land charge guarantees the bank security in the case of construction financing: it is usually agreed in conjunction with the loan agreement. The buyer and bank conclude a loan agreement, which also contains a declaration of purpose (security agreement). This regulates which claims are covered by the land charge. A notary then draws up a land charge deed. In this deed, the owner as guarantor specifies the precisely designated property and the agreed loan amount. After signing, the notary has the deed submitted to the land registry, which enters the land charge in section III of the land register. In the case of a registered land charge, the land registry also issues a land charge certificate (a security), which serves as a document for the creditor. The main difference between this and a registered land charge is that the registered land charge is only recorded in Section III, whereas a land charge by letter also has a document.

Declaration of collateralization (collateralization agreement)

The declaration of security purpose (also known as a security agreement, declaration of purpose or declaration of security) is the contract under the law of obligations between the borrower and lender that links the abstract land charge to a specific loan. It specifies which claims are to be secured by the land charge. In practice, there are often two variants: a narrow security agreement (only a specific loan claim) or a broad security agreement (which, for example, covers all existing and future claims from the business relationship). Terms such as "declaration of purpose" or "declaration of security" essentially mean the same thing. Example: A typical building loan agreement states that the land charge serves "as security for all claims arising from loan no. ..."; this specifies exactly the extent to which the property is liable. The security agreement is usually made as an ancillary agreement to the loan agreement and does not itself require a notarized form.

Creation of the land charge

A land charge is created in several steps, always with the involvement of a notary:

Contract with security agreementIn the loan agreement or a separate security agreement, the buyer and the bank agree on the amount of the land charge and the purpose of the security.
Notarial deed: The property owner signs a deed with the notary in which he "creates" a land charge. The deed must contain details of the property, the amount of the land charge, the term and the interest rate. It often also contains a submission to foreclosure (§ 794 ZPO), with which the owner agrees to immediate foreclosure. As soon as the deed has been drawn up, the notary submits it to the land registry.
Entry in the land registerThe land registry enters the land charge in section III. If a registered land charge without a letter is desired, entry in the register is sufficient. In the case of a registered land charge, a land charge certificate is also drawn up. With the entry, the land charge is legally deemed to have been validly created. The declaration of submission automatically provides the bank with an enforceable title.

The costs of the order are based on the amount of the land charge and notary fees. The notary cannot rule out legal errors, which is why the notary checks the content of the deed carefully.

Enforcement of the land charge

If payments are not made, the bank can enforce the registered land charge. This means that the bank can realize the property by way of forced sale. The proceeds of the auction are used primarily to repay the outstanding loan amount. However, it must first be ensured that the claim is due (often after termination of the loan with a notice period). In practice, borrowers usually sign a declaration of submission (§ 794 ZPO) at the time of appointment so that the bank can foreclose immediately without separate court proceedings. In the case of rented properties, forced administration can be applied for at the same time in order to transfer current rental income to the creditor.

In an emergency, the bank uses the land charge to foreclose on the property. The proceeds from the auction will then be used to repay the loan. The borrower loses the property as a result, and any remaining debt may be claimed from other assets (e.g. by foreclosure on wages or accounts if a corresponding subjection exists)

Cancellation of the land charge

Once the underlying loan has been repaid in full, the land charge can be deleted. To do this, the bank issues the owner with a deletion permit - and in the case of a land charge by letter, the original of the land charge letter. With these documents, the owner applies to the notary for deletion from the land register. The notary checks the documents and forwards the deletion order to the land registry. The land registry then removes the land charge entry. In the case of a land charge by letter, the original of the land charge letter must be submitted. The result is a "clean" land register without this encumbrance. If the property is sold again, the notary will ensure in the purchase contract that the land charge is deleted beforehand. (The owner usually receives the land charge certificate and the bank's deletion documents back immediately after repayment).

Risks and protection mechanisms

Land charges entail risks for the owner: If the security agreement is very broad, it can also secure all other liabilities to the bank in addition to the original loan. If there is a lack of clarity, a buyer may unexpectedly remain encumbered with an old land charge. For this reason, the buyer and seller usually agree in the purchase contract exactly which encumbrances are to be taken over or deleted. The notary is obliged to ensure that the buyer acquires the property free of encumbrances (release of encumbrances). As a rule, existing land charges are deleted or transferred to the buyer before the purchase price is paid.

An additional protection for the purchaser is the priority notice of deletion (§ 883 BGB): It can be entered in the land register in favor of the buyer and prevents the old creditor from disposing of the land charge elsewhere before the deletion has been completed. This protects the buyer from subsequent dispositions by the bank. Overall, legal certainty increases with the care taken in drafting the contract and checking it with a notary.