Real estate finance law in Luxembourg

Foreign lenders are not restricted from taking mortgages over immovable property located in Luxembourg.

Yes in both cases.

2.1 The distinction between mortgages on land and buildings on the land?

There is no distinction under Luxembourg law between a mortgage over land and a mortgage over the buildings on the land. In both instances, the mortgagee will be entitled to the same rights and remedies against the mortgagor.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

Luxembourg recognises and regulates mortgage certificates on the basis of the Belgium model that consists in securities issued by the owner of the real estate through which the certificate owners have the right to a part of the rental income and of the gains of the disposal of the real estate.

Mortgage certificates are bearer or registered securities representing a debt. Therefore, they can be transferred without any formality.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Second ranking security can be taken in Luxembourg. It is registered with the Mortgage Office (“bureau de conservation des hypothèques”). However, the mortgage deed will not expressly mention that the mortgagee will rank second. The rank is determined by the day the mortgagee registers his mortgage with the Mortgage Office. Mortgages registered on the same day will rank equal.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

Yes. A mortgagee can enforce the mortgage even though the property is no longer owned by the original mortgagor. In practice, a mortgage deed includes an agreement not to sell (or grant rights in or to) the property except with the prior written approval of the lender.

2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?

The preferred creditors are:

(a) The seller of the real property for the payment of the price

(b) The persons that have provided the buyers with the money to purchase the real estate

(c) The co-heirs

(d) The architects and persons that have built rebuilt and/or repaired the real estate and/or the person that have lent the money to pay the formers.

2.6 Can “all monies” mortgages be taken?

No. The mortgage deed must specify the secured amount. If the secured amount is subject to a condition future and/or value undetermined, the mortgagor will declare an estimative value that the mortgagee could reduce.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes, a landlord’s right to receive rent can be charged, assigned or transferred to a lender by way of security. Such security is generally formalised pursuant to a receivables pledge agreement. The only requirement will be the mutual agreement of the parties.

2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Yes it is customary. Restrictions over the bank account can indeed be agreed by the parties to the relevant account pledge agreement.

Mortgages should be registered with the Mortgage Office assigned to the immovable property location. The mortgagor should provide Luxembourg authorities with the original document that has created the mortgage.

All rights created by real estate-related agreements and listed under Luxembourg law have to be registered. This includes sales of land, creation of ownership splits, certain judgments, leases with a term exceeding nine years, public expropriations, certain gifts and other operations.

3.1 Consequences of failure to register?

The purpose of the registration of real estate rights is to inform potential buyers of a building or a land who the owner of such building or land is and whether or not there are encumbrances in rem affecting the real estate property. The registrar (“Conservateur des Hypothèques”) makes this information available to the public in a specific format.

Since the registration requirement does not create or otherwise affect any real estate rights, one cannot see it as a state guarantee system.

Non-registered mortgages will not bind third parties.

3.2 Formalities for execution of security and costs?

3.2.1 Formalities for execution

Mortgages must be signed and authenticated by two notaries or by a notary and two witnesses.

3.2.2 Costs relating to execution

The notary fee varies depending on the principal amount lent to the borrower, in general terms it would amount to 1.6 percent of the property value. The cost of property registration is 6 percent of the property value. An additional 1 percent mortgage tax (transcript tax) is also required. There is also a 6 percent transfer tax. Finally, an annual property fee that will range from less than 1 per cent to around 8 per cent of the purchase price (depending on the commune).

Contractual mortgages are frequently general types of security interest over real estate.

Contractual mortgages are valid for ten years and must be renewed before the expiry of that period in order to continue to be valid for another period of ten years.

Mortgages must be enacted by notarial deed (“acte authentique”) and registered with the “Administration de l’Enregistrement et des Domaines” and the Mortgage Office (“bureau de la conservation des hypothèques”) of the judicial district where the real estate is situated.

The legal possession of the immovable property stands with the mortgagor during the lifetime of the mortgage. There is no transmission of the ownership to the mortgagee or to an agreed upon third party.

Luxembourg security interest cannot exist in the absence of a secured obligation. Difficulties may arise when the third party holding the security interest as trustee does not itself have a Claim against the issuer.

Luxembourg is a member state of the Hague Convention on the law applicable to trusts and their Recognition.

Hence, trusts settlements subject to foreign laws will be recognised as such in Luxembourg.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

The modification of the lenders’ security system relies upon the method used for such modification.

Therefore, if the transfer is made by novation, then according to normal practices the parties have to be notified that the existing security remains in place and bears the same priority rank. If they develop a more complicated system, the documentation for the transfer will contain provisions enabling the new lenders to take over the rights (including security) granted to the former lenders. In this event, the mortgage agreements will only be modified to exhibit the replacement of the former mortgagee.

Loan agreements secured by mortgages over Luxembourg real estate must be registered according to Luxembourg law. Consequently, any subsequent change must be registered.

In the absence of agreement to the contrary, the landlord/borrower has no control over changes in tenants. So, if the tenant wishes to transfer the lease to a new tenant, he can do it. However, the landlord could have entered into an agreement with the tenant in order to restrain the transfer of the lease. It is usual in commercial leases to restrict the transfer of the lease by a tenant.

When the leasing contract has been assigned, the former tenant cannot be bound by the leasing contract terms. Hence, if the original tenant assigns the lease to a new tenant, the landlord will have no claim against the original tenant.

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Luxembourg law recognises foreign courts and/or arbitration tribunal’s jurisdiction even if Luxembourg parties are involved whenever the subject matter of the dispute does not involve:

(a) immovable property located in Luxembourg;

(b) insolvency proceedings of Luxembourg companies.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Luxembourg is a member of the Brussels I Regulation, therefore recognition and enforcement of foreign court decisions from European Union members will be granted automatically provided that:

(a) the decision does not in contradiction with Luxembourg public policy;

(b) the necessary requirements and guaranties have been given to the defendant in order to enable him to defence himself such a s serving of documents in sufficient time, unless the defendant has failed to commence proceedings to challenge the judgment when it was possible for him to do so;

(c) the decision is not irreconcilable with a judgment given in a dispute between the same parties in Luxembourg;

(d) the decision is not irreconcilable with an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, when the earlier judgment fulfils the conditions necessary for its recognition in the member state addressed.

Luxembourg Courts are willing to recognise and enforce arbitral awards and/or foreign judgements provided that:

(a) the judgment is final according to the law of the state where it was rendered;

(b) the court that rendered the judgment had jurisdiction to do so;

(c) the judgment can be enforced as a matter of law in the state of the court that has rendered the judgment;

(d) the right to seek enforcement of the foreign judgment has not expired under Luxembourg laws;

(e) the courts of the country that has rendered the decision will reciprocally enforce Luxembourg Court decisions; and

(f) there is evidence that the legal proceedings have been properly served in accordance with the laws of the state where the decision was rendered.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

A mortgage is considered as a judgment of possession; a court decision that determines who is entitled to possession of the property. So, enforcement of a mortgage is issued as a writ of execution.

Therefore, Luxembourg courts will order the enforcement officer or a (private) bailiff to take possession of the real estate owned by the judgment debtor. No private sale or appropriation is possible, recourse to Luxembourg courts is always necessary when enforcing mortgages over Luxembourg real estate.

The mortgagee can apply to the court in order to obtain the enforcement order and directly enforce the mortgage without further examination on the merits of the fundamental claim.

Luxembourg judges will attach the enforcement order (‘seal’) to the judgment and the court’s enforcement order will be delivered to a court enforcement officer or a (private) bailiff. The real estate subject to the mortgage will be sold through public auction and the mortgagor will have to reimburse the mortgagee’s enforcement fees

The outcome of the enforcement procedure is that the mortgagor loses title to the mortgaged property. The title to this property is then either:

(a) transferred to the mortgagee as a result of its appropriation of such asset; or

(b) transferred from the mortgagor to a purchaser as a result of the sale of the mortgage property by public auction.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

If the lender takes title in the mortgaged property, it will be bound to meet all obligations attached to that property.

The position is not clear however where the lender takes possession of the mortgaged property in order to sell it by public auction. Normally, in such circumstances, the mortgagor would remain liable for those obligations until the title in the relevant property is transferred.

There are certain concerns of general interest regarding enforcement of security (whether real or personal).

Specifically:

(a) enforcement of a mortgage in Luxembourg is subject to Luxembourg procedural laws and has to be done under the Luxembourg court supervision;

(b) there are certain spoiling tactics the borrower can use such as (i) opposition to enforcement, (ii) application to open insolvency proceedings, (iii) starting fiscal enforcement proceedings; and

(c) under Luxembourg law loan agreements, documenting loans granted by Luxembourg banks are deemed writs of execution. As such, a Luxembourg bank can apply directly to enforce the claim documented in the writ of execution without any examination by the court on the merits of the claim. However, it is not clear whether a loan agreement governed by a foreign law and documenting a loan granted by a foreign bank to a Luxembourg borrower would be recognised as a writ of execution in Luxembourg. Therefore there is the possibility examination by the court on the merits of the referred claim is required before it will be enforced in Luxembourg.

In Luxembourg, real estate is held regularly by vehicles incorporated as public limited liability companies (S.A.) and private limited liability companies (S.à r.l.). We highlight here below the specific issues that arise in the context of enforcing a security interest taken over the shares of a Luxembourg real estate company.

Security over the shares in a Luxembourg company can be granted to foreign lenders.

Second ranking security over shares in a Luxembourg company can be taken. A second ranking security over shares is registered in the shareholders’ register of the company.

A security over shares shall be perfected by way of its registration in the shareholders’ register of a public limited liability company (société anonyme). Registration in the shareholders’ register of a private limited liability company (société à responsabilité limitée) is not mandatory and not a perfection requirement.

3.1 Consequences of failure to register?

The enforceability of the security over shares in a public limited liability company is subject to its registration to the shareholders’ register of the company. The failure to register results in the invalidity of the security over shares.

3.2 Formalities for execution of security and costs?

To the extent the word “execution” means “enforcement” and not “signing”, then upon the occurrence of an event of default, the pledgee is immediately able to enforce the security over the shares without any prior notice to the pledgor or other formalities. There are, therefore, in principal, no particular costs for the execution of the security over the shares in Luxembourg.

A security over the shares of a Luxembourg company is a charge allowing direct appropriation by the lender in the event of the borrower’s default. Therefore, the creation of such security does not require any transfer of title to the lender or its nominee.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

Upon the occurrence of an event of default of the borrower, the lender can opt to enforce a security over shares as follows:

(a) it is entitled to sell all or part of the shares in a private transaction at arms’ length terms (“conditions commerciales normales”); or

(b) it is entitled to appropriate the shares further to the valuation of the shares at their fair market value, as determined by an independent external auditor (“réviseur d’entreprises”), appointed by the parties of the security agreement or alternatively, by the president of the Luxembourg “Institut des Réviseurs d’entreprises” on the basis of the last published accounts and/or any recent interim accounts of the company and any other relevant documents as deemed appropriate by such auditor; or

(c) it is entitled to realise the shares in any manner as provided for, or permitted by Luxembourg law or to request attribution by the competent court, in all cases without prejudice to any rights of appropriation in relation to the shares arising under the relevant security agreement or any applicable laws; or

(d) it is generally entitled to act in relation to the shares in any such reasonable manner as it shall determine.

There is a lack of established decisions regarding the possibility of a lender to transferring a security over shares to a third party. Therefore, the general view is that a security over shares may be transferred to a third party with the prior consent of the security provider in the absence of any contractual arrangements prohibiting such transaction.

Upon the occurrence of an event of default of the borrower, the lender may appoint liquidators subject to the following conditions:

(a) the liquidation must be voluntary; and

(b) the lender must be entitled to exercise voting rights and to have the sufficient quorum of required majority.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Under Luxembourg law, loans from shareholders are not automatically subordinated. Also, it is common practice that deeds of subordination are entered into between the borrower, its shareholder(s) and the lender(s) of a facility agreement providing subordination of the shareholders’ loan(s) to the loan granted by the lender to the borrower. The parties may decide contractually to waive or write off such loan(s) from shareholders as part of an enforcement of a share pledge, but this is not currently common practice in Luxembourg.

1.1 Typical lease length?

There are no provisions under Luxembourg legislation providing for specific lease length. They are usually concluded for a period of nine years. In practice, both the tenant and the landlord have an option to terminate the lease at the three years intervals, the so-called 3-6-9 lease.

1.2 Maximum/minimum lease length if any?

There are no provisions under Luxembourg law with regard to maximum/minimum length of a lease.

1.3 Statutory controls and obligations renewal/termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

The fixed term lease is terminated automatically when the term lapses. However, the tenant of the commercial lease may under certain conditions be entitled to preferential renewal. This preferential treatment is limited up to 15 years.

The Luxembourg courts may grant lease extensions. As a result, at the end of the lease the commercial tenant may further be allowed to remain in the lease for two consecutive periods of six months each.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

Unless otherwise specified, all so-called 3-6-9 leases contain a six months’ notice period. In other cases the lease is tacitly extended.

According to Luxembourg case law, the tenant may terminate a fixed term lease with immediate effect if:

(a) the building or the land is partly occupied by the previous tenant involving late delivery of the leased premises

(b) the competent authority refuses to approve the electric connection because of a failure of the landlord;

(c) there is an impossibility of the peaceful enjoyment resulting from the landlord’s refusal to make any repairs.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

Exceptio non adimpleti contractus is unanimously accepted by Luxembourg case law and, as such, applicable to commercial leases. In the case of a landlord’s serious failure, the tenant may refuse to pay the rent.

Nevertheless, this exception is strictly interpreted by the courts and recognised only when the peaceful enjoyment of the leased premises was breached.

2.1 Rental income receivable quarterly/monthly in-advance/in-arrear?

Rent is usually paid monthly or quarterly in advance.

2.2 Periodicity of reviews?

Periodicity of reviews depends on the contract’s conditions but in practice the rent is generally reviewed annually.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

In order to prevent the risk of rental income losses, the landlord may expect the indexation of the rent.

The parties may also provide for the linear adjustment of the rent.

2.4 Are rents/reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

Rent reviews of the commercial leases are not subject to the statutory control.

3.1 Internal maintenance, decoration and repair?

The landlord has the legal obligation to ensure urgent and necessary repairs of the leased premises.

However, in the absence of further precisions, it is difficult to pin down the scope of such obligations.

In general, the landlord is bound to repair the heating system, major repairs as the roof, necessary repairs resulting from “force majeure” etc.

The tenant has to be prudent and diligent (“en bon père de famille”) with regard to the leased premises. The leasehold repairs as doors, windows, electrical installations etc. are payable exclusively by the tenant.

3.2 External maintenance, decoration and repair?

See point 3.1 – depends on contractual terms

3.3 Structural repairs?

The landlord is bound by law to ensure the peaceful enjoyment by the tenant of the leased premises. Therefore, the landlord is under the obligation to provide the structural repairs.

3.4 Insurance?

The Luxembourg Civil Code provides the tenant’s presumption of blame in case of fire or of degradation or losses occurring during its enjoyment unless he proves it is not his fault.

The obligation of the tenant in order to purchase insurance for fire and rental damage has become a standard provision in lease contracts.

3.5 VAT?

In principle, leases are exempt from VAT. However, this exemption is not applicable to specific leases such as hotels, parking spaces, machines and tools etc.

In practice, if the tenant and the landlord are subject to VAT, they can opt for the application of VAT to the rent.

3.6 Rates?

In the event the tenant and the landlord opted for VAT option, the applicable VAT rate varies depending on the type of each leased property.

3.7 Other typical outgoings?

See point 3.1

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

The landlord may opt for Double or Triple Net Rent. A net lease means that the tenant will have to pay, in addition to the fixed rent, some or all of the property expenses.

With a single net lease, the tenant must pay property taxes and fixed rent.

For double net leases, there will be supplementary real estate taxes and building insurance in addition to the fixed rent.

A triple net lease sees the tenant being responsible for all real estate taxes, building insurance and maintenance costs on the property.

4.1 Are terms of leases/contracts recognised and supported by case law in the jurisdiction?

The Luxembourg courts recognise and support the terms of leases being enforced in accordance with applicable law.

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated/qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

The recognition of the appraisal report depends on the approval of the Luxembourg courts.

5.2 Is it possible/customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

Access to any registers and lists of environmental information established and maintained under Luxembourg law is provided upon request.

The above mentioned access to the information understands the distribution of held environmental information, free on-site or online consultation, supply of copies and report’s publication.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

No.