Global Property Law - Master Notes

Stuvia.
com - The Marketplace to Buy and Sell your Study Material
Property Law - Principles
Numerus clausus =only limited types of property rights are recognized as such by the legal
system
○ the number and content of absolute rights are limited by
mandatory law
○ Absolute rights:
■ Ownership
■ mortgage (hypothec),
■ pledge,
■ servitude,
■ usufruct,
■ Superficies,
■ Emphyteusis (a long lease of land, used in
particular by local communities to control the use of
land)
■ intellectual property rights, such as copyright
→ the parties have no freedom at all to determine the content of
absolute rights
→ the list of of proprietary rights is closed; parties cannot adjust
or create new types of proprietary entitlement
⇒ accepting fragmented ownership would infringe the
numerus clausus of absolute rights
● Granting ownership rights to several people would effectively

mean that new real rights could be created, and this is exactly
what the numerus clausus doctrine wants to avoid
doctrine of duplex = fragmentation of ownership in civil law systems → feudal

dominium ● Vassals (have the dominium utile) de facto used the land, but had
to acknowledge the superior rights of the lord (dominium
directum)
● Purpose: maintain a unitary concept of ownership (dominium)
Cujus est solum, ejus = things above and below land

est esque ad coelum
et ad inferos
Superficies solo cedit = anything which is placed upon and attached to the ground
If it is an accessory, then based on the principle superficies solo cedit it
Linked to accessory becomes an integral part/a component of the main thing.
summa divisio of civil = the distinction between personal rights and real rights / relative rights
law and absolute rights
Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

Distribution of this document is illegal extra per year?
Stuvia.com - The Marketplace to Buy and Sell your Study Material
duplex ordo Common law system: common law and Equity
res nullius = you have taken possession of an object that does not belong to any
one
res derelicta = Take possession of something that did belong to anyone, but that
person abandoned its property and its rights
Principles of property 1) Numerus clausus

law 2) Transparency
The Nemo Dat Rule → holds that nobody can transfer a property right that he did
not have himself in the first place
● A person who owns a thing can transfer the full ownership of it,
but the holder of a mere right of usufruct may be able to transfer
the right of usufruct but cannot transfer the full ownership of the
object
● implemented in the requirement that a person transferring a
property right must have the competence to dispose of that right
Prior Tempore Rule ● older property rights trump newer rights

● The creditor with the older property right has priority over the
creditor with the newer right
● Prior tempore → highest priority ranking of creditors
paritas creditorum ● assets are distributed equally among the creditors from insolvency
(50% because the total assets are with half as much as the total
debt)
The Principle of ● Transparency

Specificity ➢ Publicity (possession/registration)
➢ Specificity Re Goldcorp Exchange Ltd [1994] UKPC 3
→ fungible objects, which occur in masses, such as grain, sand,
and also money, can generally not be the object of individual
property rights if they are mixed with other objects of the same
kind
= refers to commingling
The Principle of ●Transparency

Publicity ➢ Publicity (possession/registration)
→ essential to know whether there is a hypothec (or mortgage)
on the house

→ In respect to land, publicity is realized through a land registry
Droit de suite If burdened asset is transferred, limited property right remains in

existence
● (right to follow)
Principle of Accessority
Right of redemption = If the debtor repays he can get his ownership back
Week 1 - the concept of property law and property rights
Private law (relation between private individuals (citizens)

● Family law (property aspects involving marriage / divorce)
● Contract law → relative rights
● Tort law → relative rights
● Property law - Intellectual property law (object is different) → absent rights
Property law in Europe: differences in what can be owned

Germany and Netherlands: what can be owned deals with tangible objects = ownership
France: includes both irrespective of whether you can touch them
England and Wales: property law is related to land law e.g. things such as cars = personal
property law
Property law vs Contract law

Both create obligations in relation to an object
Major difference: strength of the right
Contract law: Property law

● personal rights - concerns specific ● Property rights have effect against their
people parties by their very nature
● Rights and obligations that a person has ● Concerns everyone
against others ● Owner has strong right
● Sue and John both have rights and ● Can be enforced against everyone
obligations ● Everyone has to respect his ownership
● Contract creates rights and obligations (ask permission for trespass)
only against the party that consensually

agreed to it ● Numerus clausus

● Party autonomy ○ Specific strong rights
○ Parties can establish the content ○ Limits through specific set of rights
of the relationship / contract ○ E.g. ownership, possession,
○ Parties want those rights and use, … → strictly regulated
obligations and not to deviate from it
○ How extensive and limited ● Erga omnes effect
● Inter partes effect ○ Property rights are erga omnes
○ They can be relied on against the
● A relative right = right that a world
specific person has against one or ○ Everyone has to understand the
more specific other persons who rights and obligations towards the
are under a corresponding owner
obligation → law of obligations ○ An absolute right = right against
⇒ broader rights the world / a right erga omnes
■ these rights are
extremely strong → law
of property (the law of
property rights)
● Property rights are limited
⇒ absent rights
⇒ limited type of rights e.g. use, ownership
is a type of right
● property differs from other types of

personal obligations in the law. This is
particularly so because of the way in
which legal powers and priorities
regarding both specific assets and more
generally categories of resources (land,
chattels, intangibles, intellectual property)
regularly implicate numerous parties with
diverging features and types of interests
● parties affected by property legal
powers and priorities may not have
privity or prior explicit legal relations
among them and are often
“strangers” that find themselves ex
post facto entangled in a clash of
competing claims over an asset →

different in contract
● summa divisio of civil law = the

distinction between personal rights and
real rights / relative rights and absolute
rights
Contract law Tort law Property law
● Agreements ● Wrongs ● Things

● Consent ● Involuntary ● Consent, status quo
● Obligation to keep your ● Obligation to make ● Absolute rights
promise good
● Non Contractual
obligation
What are the “things” that are related to property law?

→ division between a) intangible (incorporeal) b) tangible (corporeal)
Intangible Tangible
- Claims (as an object) a) Movable

→ obligation raising from a → Cars, bicycles, clothing, jewelry,
contract can be an object of telephones, laptop, books
property law → Movable objects are identified in
relation to immovables (e.g.
anything that is not considered
here the claim of repayment immovable is movable)
is the object that is intangible and relevant
for property law b) Immovable
→ Things can't be moved as a whole
- Intellectual property → Land on which a house is situated
a) Copyrights (writing a → House
song/story)
→ Right of intellectual
property comes from
the direct creation of
the “object”
b) Industrial rights
1) Trademark (e.g.
brand names)

2) Patent (protect and

invention)
! while a vaccine for instance is an

immovable object, the idea that
was created for making the
vaccine is intangible !
What about statues or pieces of art? (in relation to the assignment of week 1)
➔ National law Italy: Art. 812(3) Civil Code Italy - Distinction of good [...]
everything that is naturally or artificially incorporated into the ground - Art. 817
- Appurtenances/Accessories
Italian Law: Art. 812(3) Civil Code – Distinction of goods:

Are immovables the land, springs and other constructions, even if joined to the ground for a
transitory purpose, and in general everything that is naturally or artificially incorporated
into the ground.
Mills, baths and other floating buildings are considered immovable when they are firmly
secured to the shore or riverbed and are intended to be permanently secured for their use .
All other assets are movable.
→ Statute can be removed → movable
→ painting is immovable
Art 817 – Appurtenances/ Accessories (Pertinenze):

Things destined in a lasting way for the service or adornment of another thing are
appurtenances/accessories.
The destination can be made by the owner of the main thing or by whoever has a real right
over the same this.
French Law: Art 517 Civil Code:

Things (biens) are immovable, by their nature, by their purpose, or through the object to
which they apply.
Art 527:
Things are movable by their nature or by operation of the law.
Art 525:
The owner is deemed to have attached to his property movable effects for perpetual
residence, when they are sealed therein with plaster or lime or cement, or when they cannot
be detached without being fractured or damaged, or without breaking or damaging the part o
the fund to which they are attached.
The mirrors of an apartment are supposed to be put in perpetual residence when the floor on
which they are attached becomes one with the woodwork.
The same applies to paintings and other ornaments.

As for the statues, they are immovable when they are placed in a niche made expressly to
receive them, although they can be removed without fracture or deterioration.
German Law: § 93 BGB - Essential parts of a thing:

Parts of a thing that cannot be separated without one or the other being destroyed or
undergoing a change of nature (essential parts) cannot be the subject of separate rights.
§ 94 (2) - Essential parts of a plot of land or a building:

The essential parts of a building include the things inserted in order to construct the building.
§ 95 (2) - Merely temporary purpose:

Things that are inserted into a building for a temporary purpose are not parts of the
Building.
→ They make it clear that if the roof tiles are attached to the land/into a building
only for a
temporary purpose, they do not accede the land/building.
§ 97(1) – Accessories:
Accessories are movable things that, without being parts of the main thing, are intended to
serve the economic purpose of the main thing and are in a spatial relationship to it that
corresponds to this intention. A thing is not an accessory if it is not regarded as an accessory
in business dealings.
Dutch law: Art 3:3 BW:

(1) Immovable are the land (...) as well as the buildings and constructions that are
permanently connected to the land, either directly or through combination with other buildings
or constructions.
(2) Movable are all objects that are not immovable.
Art 3:4:
(1) All that according to common opinion constitutes part of an object, is component of that
object.
(2) An object that is connected with a principal object in such a way that it cannot be
separated without significant damage being done to one of the objects, becomes a
component part of the principal object.
→ Painting→ immovable
→ Statute → movable, does not create any damage
English law: Property →land

● What objects does the property right include?
● Land, house & objects viewed as part of the land → Elitestone Ltd v Morris
[1997] 1 WLR 687, HL
○ Chattel (something independent of the land => not covered by property right in

the land)
○Fixture (something attached to the land => covered by property right in the
land)
○ Part & parcel of the land itself (e.g. house)
○ Whether a structure becomes part of the land itself depends on the degree of
annexation, and a house which cannot be moved without being destroyed
cannot have been intended to be a chattel but must have been intended to
form part of the land.
⇒ Elitestone: What is linked to the ground, if the chattel can be removed then
movable
● Sculpture: Tower Hamlets LBC v Bromley LBC [2015] EWHC 1954 →Norris J:
‘Sculpture is an entire object in itself. It rested by its own weight upon the
ground and could be (and was) removed without damage and without
diminishing its inherent beauty. It might adorn or beautify a location, but it
was not in any real sense dependent upon that location’
● Is painting on the wall a fixture? →look at degree & purpose of annexation
→Botham and ors v TBS Bank plc [1996] EWCA Civ 549, CA
Botham and ors v TBS Bank plc [1996] EWCA Civ 549, CA
Lord Justice Roch:
‘The tests, in the case of an item which has been attached to the building in some way
other than simply by its own weight, seem to be the purpose of the item and the purpose o
the link between the item and the building.
If the item viewed objectively, is, intended to be permanent and to afford a lasting
improvement to the building, the thing will have become a fixture.
If the attachment is temporary and is no more than is necessary for the item to be used
and enjoyed, then it will remain a chattel. Some indicators can be identified. For example, if
the item is ornamental and the attachment is simply to enable the item to be displayed
and enjoyed as an adornment that will often indicate that this item is a chattel. Obvious
examples are pictures. But this will not be the result in every case; for example ornamental
tiles on the walls of kitchens and bathrooms. The ability to remove an item or its
attachment from the building without damaging the fabric of the building is another
indicator.
The same item may in some areas be a chattel and in others a fixture.’
Test:
✓ Attached to, part and parcel of land
✓ Intended to remain such
✓ Intention to be determined objectively

Week 2 - The history and principles of property law
Feudal System in Common law

● Starting point: Battle of Hastings 1066
● William the Conqueror brought the Norman / Feudal system back to England and Wales
to collect taxes
● Person received land → taxes to the government; lords had their own court
● Feudal system resembled the continental system with differences of terminology
● Pyramid was different:
○ Knights had to do military services in return for land
○ Allowed for armee
○ Lord (king)→ seigneur in turn would also split up and give the land to
tenants → Vassals
○ Tenants would owe payment to lord
○ = the land was hold tenir by the lord in return for survive and loyalty by the king
○ The relationship between lord and tenant = estate
○ Estate had double meaning: either particular time in which land is held from lord
or the land itself
○ Mesne lord = seize the land / in between the lord
○ Many subtenanties → on the same land ⇒ prevented
○ Many transfers to tenants
Formative Period
● 1290 Quia Emptores → no more subinfeudation
○ Statute requires all tenants to wish to alienate their land to do so by
substitution or replacement (transfer of person’s position but
prohibited transfer of subinfeudation) → land is nowadays directly held
from the crown
● 1450 Common law was fixed
○ Reaching unity of common law
○ By Royal Courts
○ Local custom was overlooked, common law prevails
○ Roman law did not take over
○ Rules were fixed
○ People went to the centralised court to ask for ruling → Equity
● Trust:
○ tenant had to be part of military together with the lord/king
○ Tenant needed person to trust to take care of the land while being gone e.g.
neighbor
○ Transfer held in trust
○ Transfer for safety → if neighbor had full ownership: common law
○ Wife had ownership in equity: equitable rights in the relation to the plot of land

○ ⇒ neighbor would be trustee and wife beneficiary

○ ⇒ trust patrimony = land
○ Some did not return from the military, the person took care of property took over
the land
○ Former family “trespassed” and went to court but had no legal
standing, appeal to the Crown → Lord Chancellor → applied common
law in King’s Bench
○ King’s Bench: Equity
● A solution in Equity:
○ Women had remedy in the Court of the King or Queen in Equity
● King’s / Queen’s Bench: Duplex Ordo
○ Court had specific jurisdiction
○ Splitting of jurisdiction → any court could apply Common law and
Equity
● Reform Period (1833-1925)
○ 1870 - merging of the Courts by the Judicature Acts
○ But also the estates were part of a reform
○ Estate: duration or less than freehold
● Situation lead to reform 1925 in law of property acts → because it was hard to
establish who owned which land
Law of Property Act 1925

● Abolished the two types of estates at law
○ limited the number of legal estates (at common law) to just two: the fee simple
and the leasehold. The other estates might still exist, but as equitable estates,
typically in the form of a trust.
● Introduced a numerus clausus for common law estates in land
● Keppel v Bailey [1834] MYL & K 517 39 ENG REP 1042
● Only the Fee Simple and Leasehold remained
● Other forms of estates → only as equitable estates behind trust
● Property law is dynamic
- English law: property in the common law systems can be deeply affected by the
enactment of a statute, can be illustrated by the English Law of Property Act 1925
- The Law of Property Act attempted to do that by standardizing and limiting the
number of common law ‘estates’ (property rights), thus effectively introducing a
numerus clausus into English land law, a concept well-known in civil property law
systems
Feudal System in Civil Law

● Property law develops significantly with the French Revolution and the adoption of
Napoleon Code
● Roman law influenced the present institutions

● Holding of land in exchange for service

● System of land holding & governance
● Hierarchical, divided ownership of real property
● The property rights system was one of ‘holding’, not of ‘owning’
● Feudal system: governance (public law) and land holding (private law)
○ Land was held in small plots
○ Person who held the land in exchange for services = vassal →
fragmentation of ownership
○ Feudal Pyramid: governance of the land and property (plots of land and
ownership)
○ This system was brought to England by William the Conqueror after the Battle of
Hastings 1066
● End of 11th C Corpus Juris Civilis was rediscovered: led to legal culture which was
taught at the University of Bologna
○ 12th C system based on Roman law
○ Germanic Customary law remained the principle source of law, canon law,...
○ → many laws in one territory
○ 13th C Collection of Glossators: adapt the new Roman law and explain the text
○ 14th C rise of Commentators: apply the new law to the feudal area
● Real estate was rarely owned independently by a single person → usually
multiple partial owners; divided ownership of real estate
● no “absolute property”
● Land between Seigneurs and Vassals
○ Roman law offered two types of texts of ownership “dominium”
○ Nobles / Seigneurs = Dominium Directum
■ collect the dues and exercise authority over the tenant
■ Lord has the dominium directum
■ exercised over their tenants regulatory powers / varied from fief to fief
■ Against principles of liberty and equality
○ Knights / Vassals (tenants) = Dominium Utile
■ right to use the land and appropriate its fruits
■ de facto used the land, but had to acknowledge the superior rights of the
lord
■ Have the dominium utile
○ the property right of the lord (superior) who conferred feudal rights upon
someone, and the property right of the person to whom these rights were
conferred (vassal)
○ a doctrine of duplex dominium was created = fragmentation of ownership
○ The purpose of this doctrine was to maintain a unitary concept of ownership
(dominium)
○ = Relations of domination and subordination
● The French regime before 1789 is described as tenurial system, as a system of holding,
than a system of ownership

● Property rights were no longer publicly known

○ Land and buildings are rarely owned independently by person
○ Any real estate had partial owners who stood in legally enforceable relations
○ Security: for e.g. over entire patrimony
○ Existential duties
● Issues:
○ Increase in secrecy and in duties
○ Harvest duties (heavy for bad years of crop) → lead to unrest
○ → not everyone can read and write - hard to understand the duties →
demand for easier law to understand
○ Situation was even harder because common law, custom, feudal law,... applied
at the same time
○ ⇒ Storming of the Bastille 1789

○ Distinction between property and power → feudal order could be
dismantled
○ → there was a problem of power and property and the way to govern in
feudalism
○ Period Droit intermédiaire (1789-1804) → feudal system was replies with
Roman ideas and influenced by Natural law (ancient Greece)
○ 1804 Code Civil: property distinction from contract law was different
Code Civil
● Distinction between property and contract
● Most important change: ownership: Ownership is a unitary concept
○ Civil law jurisdictions do recognize co-ownership & limited property rights
(emphyteusis)
○ Most extensive right in relation to an object
○ Positive
■ use , enjoy, consume, transfer, burden, alter, destroy
○ Negative
■ Others should not compromise it (damage, destroy, trespass, take)
○ Absolute
■ Erga omnes
■
● Successors of the French Revolution transformed property:
○ Abolished venal office
○ Abolished Seigneurie
○ → abolition of ownership of public power
○ Converted tenure into individual ownership
○ Transforming royal domain into a national one
→ no ownership of a piece of land can convey supremacy and jurisdiction

● Dominium directum and utile distinction did not prevail → replaced by unitary concept
of ownership
○ Caquelard case (Cour de cassation, 13 February 1834)
○ There cannot be different owners for the same thing with different content of
rights
○ No more Positive duties with the lord; were not connected to land anymore
● How was the holding of land governed under feudalism? → system of public power &
land holding
● Rights of ownership in civil law following the French Revolution → Ownership is a
unitary concept
● Does English law recognise the right of ownership? → No concept of ownership
○ Ownership is not recognised as the organising principle under English law (it is
recognised in overall) but in comparison to other systems, it’s the possession that
is the “root of the title” (Rooseberg v Cook)
Ownership
● Cujus est solum, ejus est esque ad coelum et ad inferos = things above and below
land
○ Bernstein of Leigh (Baron) v Skyviews & General Ltd [1978] QB 479
○ Overhanincing cranes - Anchor Brewhouse Developments Ltd v Berkley house
(Docklands Development Ltd) [1987] EGLR; OLG Düsseldorf, 9 August 1989
(The overhanging crane)
● What about natural resources or other things in soil? → depends on the
jurisdiction
○ US case law: Edward v Lee’s Administrator 96 SW 2d 1028 (1936, Court of
Appeals of Kentucky) (The Great Onyx Cave)
● What about digital data? - see also Regulation 2018/1807 on the free flow of non-
personal data
Superficies solo cedit

● Acquisition of objects by accession to land
● = anything which is placed upon and attached to the ground
● Unjustified enrichment?
● Paradigms case: illegal builds on land
○ Yes you can remove it
● Remedies?
○ Sale of land
○ Amotion = deprivation of possession of property build on land without
authorisation of the owner
■ French example Samuel v Monlon and others (Cour de cassation civ 3e,
21 November 1969, Wall in the wrong place)
○ Tolerate
■ Limited property right (superficies)

■ Affirmative injunction in tort law (personal right)
Ownership & Possession in FR/DE/NL Ownership & Possession in England
● ownership = a right → Legal right ● Ownership is not recognised as an organizing

● possession = a fact → factual control principle
○ Possession might lead to ownership ○ Ownership is not recognised as the
○ Functions of possession: publicity and organising principle under English law (it is
protection recognised in overall) but in comparison to
○ possession assumes ownership and may other systems, it’s the possession that is th
transcend into it “root of the title” (Rooseberg v Cook)
○ Remedies: possessory actions to regain ○ No technical content in property (land) law
control over your asset (e.g. someone ● Possession is ‘root of title’ and give exclusive right
possess your house) ○ Rosenberg v Cook [1881] 8 QBD 162
○ Possession = Intention to hold for oneself
● Detention = intention to hold for another
Sjef Van Erp, ‘Comparative Property Law’, in Mathias Reimann and

Reinhard Zimmermann (eds)
- German and Ducth law: the definition of ownership
under German and Dutch law is limited to the most
comprehensive right regarding physical things
- Tangibles cannot be ‘owned’ and,
consequently, are governed by a different
set of rules
- This implies that sometimes a new object of
property law can only adequately be
protected through property law by the
creation of a new property right
Ownership Possession Detentorship
= a property right that a person has in = a factual relation between a person ● A detentor also exercises
respect to some object and an object factual control over a good
● This is an immaterial relation ● A person who possesses an but not on behalf of himself;
between the person and the object exercises factual ● he recognizes that he is
object, without the need for any control over this object; holding factual control for
physical equivalent allowing someone who was someone else
● Physical possession is not dispossessed to recover → recognizes the right of
needed possession someone else

● the possessor can generally ● the possessor can generally

retrieve an object with a retrieve an object with a
possessory action possessory action, a detento
cannot
- Examples of
detention are when a
person has borrowed
or leased a good.
Civil Law
● summa divisio of civil law = the distinction between personal rights and real rights /
relative rights and absolute rights
● A relative right = right that a specific person has against one or more specific
other persons who are under a corresponding obligation → law of obligations
○ important sources of relative rights are contracts and torts
■ Contracts: Different content in contracts; Party have freedom
■ Tort: What constitutes a tort is laid down by the law, and the resulting
obligation is generally one to make good the loss that has arisen
○ Focus on the duty
● An absolute right = right against the world / a right erga omnes
○ these rights are extremely strong → law of property (the law of property
rights)
○ Focus on the right
○ The duty rests on everyone: he must not violate the absolute rights of others
● summa divisio between real rights and personal rights is not absolute
○ E.g. lease:
■ lease is a contract from which mutual obligations arise:
■ The lessor has to provide the lessee with the use of an object, and the
lessee has to pay the price that has been agreed upon
■ However, the lessee is granted special protection in a situation where a
lessor, who also owns the object of the lease, sells and transfers that
object to a third party
■ the lessor would still be bound by the lease agreement, even though he is
no longer able to perform. Only the new owner can provide the lessee
with the use of the object
■ protected the lessee against eviction by allowing him to assert his right
even against the new owner
■ → The legal maxim that has been coined in that respect is that
‘sale does not break lease’
■ lease has been turned into a legal status

⇒ The moment someone other than the original owner/lessor acquires

ownership of the object of the lease, the legal status of lessor also
passes to the new owner
⇒ The latter will not only be bound by the contract of lease, but will
also have the corresponding rights
● English law: lease has developed into an ‘estate’, a right that is not
strictly personal, but valid ‘against the world’
● ‘qualitative’ rights and duties, also known as Reallasten or Real Obligationen
○ rights and duties attached to the quality of being the owner of an object
numerus clausus doctrine

● erga omnes effect of absolute rights: certain limits concerning the number
and content of these rights → the so-called numerus clausus doctrine
○ at the heart of civilian property law systems
○ the number and content of absolute rights are limited by mandatory law
○ Absolute rights:
■ Ownership (defined either by statute or by case law)
■ mortgage (hypothec), (defined either by statute or by case law)
■ pledge,
■ servitude,
■ usufruct,
■ Superficies,
■ Emphyteusis (a long lease of land, used in particular by local
communities to control the use of land)
■ intellectual property rights, such as copyright
→ the parties have no freedom at all to determine the content of absolute rights
○ the articles in the French Code civil on ownership do not have an

absolute character → new property rights can be created in legal
practice
● ‘civil law trust’, such as the Treuhand under German law

○ the former owner has only a personal contractual right, rather than a real
property right, against the new owner that the new owner will use his right of
ownership for the purpose agreed upon. Otherwise, we would be faced with a
fragmentation of the right of ownership
○ Ownership is unitary!!!
⇒ accepting fragmented ownership would infringe the numerus clausus of
absolute rights
● Granting ownership rights to several people would effectively mean that new real rights
could be created, and this is exactly what the numerus clausus doctrine wants to avoid
● limited real rights = limit the right of ownership and take away certain rights from the
owner
○ a limited real right as a démembrement of ownership

○ a limited real right as entailing limited powers
Common Law
● feudal terminology are the concepts of ‘tenure’ and ‘estate’
● ‘tenure’ expresses that a person holds (French: ‘tenir’) rights from the Crown or from a
lord. The King or Queen is in the feudal system the Lord Paramount.
● The rights of other persons holding land at common law are called estates
● The distinction between personal (e.g. contractual) rights and real (property) rights is
also known to the common law.
● “Absolute rights” do not exist in common law
● existence of a duplex ordo: common law and Equity
○ The trustee (manager of a fund) has a property entitlement at common law
○ The beneficiary, in turn, has a property entitlement in Equity
○ The position of the common law ‘owner’ (the trustee) is stronger than the position
of the equitable ‘owner’ (the trust beneficiary)
■ The beneficiary of a trust is protected by an equitable right, which refines
the transfer of title to the trustee
■ This right entails, in the first place, that the trust property and the
proceeds of authorised investments thereof are held in a separate fund,
distinct from the trustee’s patrimony, and are therefore protected against
claims from the trustee’s creditors
→ Common law
- Under the rules of common law, the King is the owner of all land; → feudal
system
- two types of feudal rights on land remained
- The fee simple absolute in possession, also known as freehold
- The fee for a term of years, also known as leasehold
- If several persons who are all entitled to the same good all claim possession over the
good, the person with the stronger entitlement will receive possession
→ Equity
- In a trust, management powers and enjoyment rights relating to property are separated
and divided between a manager (trustee) and one or more beneficiaries (beneficiary
owners):
- A trust is very useful to manage property, for example to decide on what happens to
your property after death, giving certain goods to your chil- dren, but others to charity.
Another example is to manage money or shares in another (off-shore) jurisdiction.
Common Elements
● property rights have erga omnes effect
● In the law of property a strict hierarchy exists in order to protect the erga omnes effect

of property rights
● Transparency principle (both in civil and common law): In order to provide a sufficient
degree of transparency it must, first of all, be clear with regard to which object a
property right is claimed and, second, that right must be visible to third parties
● in both civil law and common law the same types of transfer systems can be found:
systems to regulate the creation, transfer, and termination of real rights
Principles of property law

● Numerus clausus
➢ BUT: courts may recognize new property rights Caquelard (Cour de Cassation,
13 February 1834) & National Provincial Bank v. Ainsworth [1965] AC 1175
● Transparency
➢ Publicity (possession/registration)
Ground rules for property law

● Nemo dat (nemo dat quod non habet or ‘nemo plus’)
● Prior tempore, potior iure (priority in time)
● Limited rights have priority over (“burden”) the fuller right
● Protection
✓ Property law: ownership/possessory actions
✓Tort law
Re Goldcorp Exchange Ltd [1994] UKPC 3

- from the Court of Appeal of New Zealand
- Concerns Dealings in gold coins by the company which becomes insolvent
- It considers when there is sufficient certainty of subject matter to form a trust, and tracing
Facts:
- Sellers of gold bullion handed certificates of sale to their customers, but their gold stock
was never segregated
- The seller later went insolvent, the customers sought to claim beneficial ownership of the
gold bullion against creditors
- The case concerned a gold bullion (i.e. gold bars) exchange which went into insolvency.
The exchange entered into standard contracts that required the exchange to acquire
bullion for their customers and to hold the amount of their customers’ orders in their
vaults
Issue

- was whether the customers had title to the gold on for them, and thus beneficiaries of a
trust, or were merely unsecured creditors resulting from a breach of contract
- Their Lordships do not doubt that the vendor of goods sold ex-bulk can effectively
declare himself trustee of the bulk in favour of the buyer, so as to confer pro tanto an
equitable title. But the present transaction was not of this type
Outcome
- No trust was created due to lack of certainty of subject matter
Week 3 - Acquisition of ownership and transfer systems

➢ How does one acquire ownership, title or any other property right in relation to objects?
➢ There are many ways you can become an owner of things
○ you have taken possession of an object that does not belong to any one (a res
nullius),
○ that you created a thing new (e.g. a freshly baked cake cf. specificatio),
○ that you inherited something
○ it was transferred to you
Acquiring ownership (or equivalent/proprietary interests)
Occupatio:
= taking possession of a res nullius or res derelicta
● e.g. shells on the beach
○ taking exclusive possession of the shell and acquired possession over it because
it does not belong to anyone else
○ Taking possession of a thing that does not belong to anyone; no owner and no
former owner (belongs to you now): res nullius
● e.g. piece of furniture ready to be collected by garbage car:

○ Take possession of something that did belong to anyone, but that person
abandoned its property and its rights: res derelicta
○ Thus rejecting its proprietary interests in the object;
○ you taking them, makes you the owner of the thing
● e.g. Interesting case in this respect is the coins that are thrown into the Trevi fountain
every year. A few years ago there was a big row over who owns the money in it: yearly
EUR 1.5 million
○ Rome City Council – wanting to use the money to fix potholes in Roman streets
○ Charity Charitas – who has been receiving money from the fountain to help the
city’s poor

○ Signore Roberto Cercelletta – Also known as d’Artangan who has fished from the
fountain for 34 years
○ The answer: whom ever it takes, for the ownership of the coins is abandoned the
moment you throw in the coin. Support for this position is found in a local
judgment, by which an accused was cleared from criminal proceedings for theft
because there was no owner of the coins
○ Res derelicta
○ Those who appropriate the coins become the owner → coins belong to
noone
Commingling: confusio / commixtio

the mixing of two similar things as a result of which these things can no longer be ascertained
on their own
= the mixing of multiple similar things, making it impossible to define who owns what precisely
1. Confusio: genuine mixing of different things; absolutely impossible and impractical to

trace and ascertain who owned it before
○ oil in a tanker: different owners become co-owners in the entire bulk relative to
the quantity they owned before the confusio.
○ Applies to oil, water, salt, sand, coal, etc
2. Commixtio: impossible to completely merge, as objects are separate, but not clear who
has what. Following the specificatio rule, the original owner whose property has been
mixed with other similar objects can no longer be ascertained. In that case, only the
possessor becomes owner (much like the important case of Re Goldcorp)
→ not certain who is the owner of what object
→ the possessor who exercises factual control over the coins is assumed to
be the owner
→ So should you have stored your gold coins in this vault and these bank
employees
Acquisitive prescription:
= taking (adverse) possession of another's thing for a long enough period as set by
the law (e.g. in the civil code, case law, or act of limitations)
→ possessed by another person
○ E.g. Statute of Banksy put up for sale at Sotheby’s but later removed from auction
because of a claim of ownership.
○ Statute stolen in 2004 by Andy Link

○ Link put it in his garden for reportedly 3 years, until in 2007 it is stolen

○ It then disappeared, only resurfacing in 2014, when the current possessor offered
it to Sotheby’s to be put up for auction
○ Who holds the better property right? It that Andy Link, so to return possession to
him. Or does the person (‘the seller’) who had wanted to sell it at Sotheby’s have
a better claim than Andy Link?
● Assignment Q: What principles and rules of property law are at play?
● Have the proprietary interests lapsed over time?
● Sotheby’s decided to withdraw the sculpture after a British artist, Andy Link, claimed that
he was ‘the owner’
English law: title

- a person acquires such a title simply by taking possession, title will have priority which
was acquired first
- independent titles may exist simultaneously in a given object
- ‘title’ = greatest kind of interest that the law recognises (a general property interest)
- If you find a thing: case law shows that you will acquire a ‘general property interest’
(‘absolute interest’ or ‘ownership interest’)
- the central issue is not whether Link was ‘the owner’ of the sculpture, but whether he
has a title that is better than the title of the person (‘the seller’) who had wanted to sell it
at Sotheby’s. To determine whether he does, we need to answer three questions:
- (1) Did Link acquire a title for The Drinker?
- (2) If so, does Link still have his title or has it been extinguished?
- (3) If Link still has a title, is it good as against the seller?
Specificatio:
= creating a new good with different properties or characteristics, compared to the things that
went into the creation of the good
● E.g. cupcakes are different from the goods they were made of
● The one who creates this new good is the owner / has interest in that good
● Stichting Crediteurenbelangen Hollander’s v Coöperatieve Raiffeisenbank ‘Donburg’
(Hoge Raad, 24 March 1995)
○ Dutch SC: Hatchery. New identity of object. → no longer the eggs that
were provided by the owner; the eggs seized to exist
○ So no re vindicatio action possible for supplier, only a personal claim
○ ⇒ it is about getting a new identity
Accession:
= creating a physical connection between two things, whereby the one (accessory) becomes
part of the other (principal), while its original identity of the accessory is not lost
● Keeping the identity is the difference to specificatio

○ Car owner will become spoiler owner once it is fixed to the car →
Spoiler is the accessory
○ Independent of the contract and the payment of the price under the contract, who
becomes the owner of the spoiler?
○ The accessory accedes to the principal. The debate is generally over which is the
principal and which is the accessory
○ Possible tests that could be adopted in deciding this question include:
■ Economic value
■ Size
■ Physical identity
○ → car is bigger in size and value, owner of the car
will also become the owner of the spoiler once fixed
to the car, independently from payment and
contract
○ → regardless of good or bad faith
○ No compensation for loss, no possessory action (e.g. conversion) possible, for
the original owner has lost its proprietary interests altogether
○ This is regardless of whether there was consent, or whether the acquirer (the
owner of the main object) acted in good or bad faith
○ In case of bad faith (tricking someone into losing its property), however, there
might be a claim in tort to be compensated in monetary terms for the loss of
property rights.
○ How may the original owner be protected?
Right of retention: the right of a creditor to retain a thing which belongs to a
debtor, and which is in the creditor's possession, until the debt has been fully
paid. Form of security right, to be discussed in Meeting 6.
■ Form of security right
● This principle of accession also holds in the case a moveable good accedes an
immovable, say a piece of land
● What is constructed on the land, becomes part of the land and thus becomes the object
of the property rights that exist in relation to the land
● → thus becoming part of ownership rights of the owner over the building
● The same rule holds if a movable object is physically attached to an

immovable object: → Rule superficies solo cedit via doctrine of accession
● If it is an accessory, then based on the principle superficies solo cedit it becomes an
integral part/a component of the main thing → 3 criteria for superficies solo
cedit
● German law specifies these rules in §§94-95 BGB. §94(1) and (2) set out rules on
essential components of buildings
○ §95 BGB (1) and (2) include special rules on thing temporarily attached to
immovable

● objects are attached to an immovable object for a specific business purpose, e.g. heavy
machinery that is specific for the purposes of production of a firm or an antenna that is
affixed to a flat or tower
● → Here specific rules may exclude those movable objects from becoming part
of the immovable and thus becoming part of ownership rights of the owner
over the building
Accessory: Elements to determine whether the facade is becoming part of the immovable (land
or building):
—> 3 elements to determine the status of the facade based on the principle superficies solo
cedit
1. ✓ Attached to, part and parcel of land

—> Is the facade physically attached to the building?
- if is possible to take the facade away but it is physically attached
2. ✓ Intended to remain such
the facade is intended to be replaceable
What was the facade intended to remain
→ They make it clear that if the roof tiles are attached to the land/into a building
only for a
3. ✓ Intention to be determined objectively

Objective intention: 3rd party perspective based on the principle of transparency or publicity
→ if they are fulfilled then the principle of superficies solo cedit applies and facade
becomes part of the immovable and by relying on this type of service contract, the
company would lose ownership
→ Service type of contract means not retaining full ownership of the facade =
ordinary lease
If it concerns English law: Elitestone case
● 2 types of fixtures: Real estate fixture & Trade fixture

● Real estate fixture = personal property attached to the real estate;
○ it becomes part of real estate and is conveyed with the property
○ E.g. tenant makes bookshelves into the wall: part of the improvement
in the real estate → conveyed to the landlord
● Trade fixture = not conveyed to the landlord, does not revert to the landlord at
expiration of the term
2 ways of Accession (between movables and movables and immovables)

Movables → Movables: identity / size / economic value

Movables → Immovables: superficies solo cedit, unless the law allows for other
arrangements in contract or limited property rights
Transfer:
3 conditions need to be met for a valid transfer
1. Legal ground for transfer (e.g. sale, gift, last will) that manifests or expresses
an intention to transfer ownership to another transferee → sales contract
● contract of sale is said to be the causa traditionis
● causa traditionis = the legal ground for the transfer = what the legal reason for
the transfer of ownership is: sale, barter or a gift
● Law of obligations, succession law
● Court / administrative order
● Does not encore title of ownership
2. Power to dispose on part of transferor to legally transfer (Rechte zu verfügen)

● Rights / entitlement on object
● Transferable rights / entitlement
● Specified & existent object
○ Specified e.g. sold in container → general good becomes
specified with 1 kg
● Capacity to dispose rights
○ E.g. if someone is insolvent, you cannot dispose rights
3. Delivery: objects must be delivered

● Depends on object: movable or immovable
● deed + registration (land, registered goods for movables such as airplanes and
ships ) Possession (movables)
● notification (claims)
- two dividing lines intertwine: the distinction between causal and abstract systems and
the distinction between consensual and tradition systems
❖ Avoidance of contract in case of mistake:

➢ where the contract of sale itself is said to pass ownership, it is obvious
that avoidance of the contract will inevitably lead to ownership
reverting to the seller with retroactive effect → consensual system
➢ the transfer of ownership necessarily depends on the validity of the
contract; a transfer system that needs a valid causa traditionis →
causal system

➢ the most common defect of will, except in cases where the wrong thing has been
transferred or a transfer has been made to the wrong person
Transfer Systems
❖ causal tradition systems

➢ the Dutch, Swiss or Austrian systems
● the validity of the transfer does depend on a valid causa traditionis
● demands that the transfer be based on a valid legal ground, i.e., a legal reason justifying
the passing of ownership (iusta causa traditionis)
● In the case of sale and transfer, the transfer should be based on a valid contract of sale
● If the obligatory contract is void or has been avoided with retroactive effect, the transfer
is invalid and either ownership has never passed (in the case of a void contract) or it is
deemed never to have passed to the buyer
● The seller is then able to claim back the ‘thing’ on the basis of his ownership
● an action of revindication (rei vindicatio)
● If the contract of sale is avoided the entire transaction should be reversed:
the money, if already paid, should be paid back to the buyer, and the bicycle
should return to the seller → ownership reverts automatically to the seller
when the contract is avoided
❖ abstract transfer systems

➢ German system
● the transfer is valid even if it is not based on a valid legal ground (e.g. a void or avoided
contract)
● the act of transfer is in principle independent of the validity of the obligatory contract
● because the validity of the transfer is judged abstractly, i.e., independently, of the
contract
● The invalidity of the obligatory contract has no effect on the validity of the transfer; the
transfer will remain valid even if the legal act that obliged the transfer to be made is void
or has been avoided
● where there is no valid causa traditionis the transfer, though valid, leads to an unjustified
enrichment of the buyer
● obliges him to undo his enrichment by re-transferring the thing to the seller
● If the contract of sale is avoided the entire transaction should be reversed:
the money, if already paid, should be paid back to the buyer, and the bicycle
should return to the seller → the validity of the transfer will not be affected:
buyer has an obligation based on unjustified enrichment and the seller a
correlative personal right to the retransfer of ownership

❖ consensual system
● property rights can pass from transferor to transferee without a delivery of possession
requirement.
● Solo consensus rule
● a valid transfer of ownership in principle does not require any transfer or providing of
possession
● ownership passes simply as a result of entering into a contract which imposes an
obligation to make a transfer
● the contract, i.e., consensus between the parties, suffices (hence its name)
● in common law systems often called ‘delivery’
● e.g. French law and the UK Sale of Goods Act 1979
● ‘Better title’ → Who holds the better property right?
○ = The person with the best possessory title is the owner
○ When two or more people have conflicting rights of possession, the person with
the first (earliest) right of possession wins
○ Thus, with respect to the protection of property, the concept of ownership is
redundant and possession essential
❖ traditio system
● oth a legal act of transfer and an act of delivery (e.g. a registration of the deed of the
transfer of land) is required for a valid transfer
● registration of the deed of transfer is constitutive for the transfer of the land
Consensual Traditio
Causal France Netherlands
Abstract Germany
Common law equity
Sales of goods Consensual Consensual
Land Traditio Consensual
Transfer of Immovables
English law: ❖ consensual transfer system
● Freehold sold – transfer requires
○ 1) deed of transfer &

○ 2) registration of deed at Land Registry

● → transferor remains owner (legal title remains with
the transferor) until buyer has been registered as new
owner
● legal estate only passes to the buyer when the buyer has
been registered as the new owner of that estate
● (Land Registration Act 2002, s 27(1), 27(2)(a) & Schedule 2
para2(1))
● Scott v Southern Pacific Mortgages Ltd [2015] AC 385 – until
the registration transferee has only equitable
interests → Equity in common law
French law: ❖ Consensual transfer system

● contract of sale passes ownership→ transferee is
owner
● Art 1196 CC
German law: ❖ Abstract transfer systems

● Transferor is owner: contract requiring
○ 1) transfer of immovable needs to be laid down in
notarial deed (§311b(1) BGB)
● What is needed for transferee to be an owner?→

○ 2) additional act of transfer (Auflassung) * &
○ 3) registration in land registry (§873(1) & §925 BGB)
→ transfer and registration is abstracted from the underlying
legal ground, e.g. the contract of sale
→ the transfer is valid even if the underlying contract of sale
is void and the transfer remains valid even if the contract of
sale is avoided with retroactive effect
Act of transfer = parties agree in front of notary to the
transfer which is incorporated in the deed → not enough to
just have a contract
● transfer of immovable property = Auflassung
● transfer is valid even if the preceding contract is void or has
been avoided with retroactive effect
Dutch law: ❖ causal tradition systems

● transferor remains owner
● registration in the land register is substituted for transfer of
possession – legal effect from entry into land register (Art

3:89(1) BW);
● Deed represents valid legal ground
● transferee – ownership from registration in the Land Registry
Transfer of Movables
English law: ❖ consensual transfer system
● consensual system is the Sale of Goods Act 1979
● a tradition system requiring a transfer of possession
● the purchase price will not pass to the seller when the
contract is made
● movable property: requires a transfer of possession (delivery
or traditio)
● The main provisions are to be found in the Factors Act 1889,
the Sale of Goods Act 1979 and the Hire Purchase Act 1964.
In addition the doctrine of estoppel is used
● ✓ Baron annulled sales contract , but Tom holds a
title, but this is not better than Baron’s title → Drew is
not owner (nemo plus)
● ✓But bona fide third-party acquirer – protected from
annulment of legal ground
● ✓Section 23 Sale of Goods Act requires Drew to have
acquired vase before Baron annulled sale → transfer
is valid
The French Transfer ❖ Causal and Consensual transfer system

System Valid Transfer
● Art 1196 CC – consensual system
○ ‘transfer takes place at the moment contract is
concluded’
○ Contract based → if there is a mistake, then the
contract can be avoided → no legal ground
● Art 1583 CC for sale – ownership is acquired from moment
they agreed on the object & price
● Delivery is not separate constitutive element for transfer
● Contract annulled→retroactive effect: no legal ground
for transfer
● does not require a transfer of possession

● consensus between the parties suffices

● the contract itself is held to pass ownership: Ownership
passes at the moment the contract is made
● result of the principle of specificity, ownership of generic
goods can pass only when certain goods are separated and
appropriated for delivery to the acquirer
● in the case of sale, the ‘translative effect of obligations’
applies only to the passing of ownership of the thing, not the
transfer of the money due in exchange.
● in a double sale scenario, where the owner A first sells his
land to B and then sells the same land to C, B acquires
ownership immediately without registration being needed,
and C can only acquire a non domino
● the purchase price will not pass to the seller when the
contract is made
The German Transfer ❖ Abstract transfer systems

System
❖ § 929 BGB: transfer of ownership of a movable →
owner hands it over to the acquirer & both agree to
transfer of ownership
❖ At the same time a tradition system: apart from Einigung (real

agreement) § 929 BGB requires for the transfer of movables
Übergabe (a transfer of possession)
❖ Übergabe: transfer of possession needs the will of the
transferor to make the acquirer possessor, and the
corresponding will of the transferee to acquire possession
from the transferor
❖ Possession: fact and a right - transfer of possession is legal
act
❖ § 854(2) BGB, a transfer of possession by mere agreement
❖ Invalidated sales contract, power to dispose &
delivery→ may still lead to valid delivery to Tom
(§932(1) BGB; see also § 934 BGB as possibility of
valid delivery)
❖ Exception: annulment due to defect of consent→
annulment of legal ground→annulment of transfer -
no valid transfer
❖ §932: legal gound → Tom did not act in good faith
Dutch law: ❖ causal tradition systems

● causal system of transfer – Art 3:84 BW

● requires the providing of possession to the acquirer.
● every transfer needs a valid legal ground
● causal tradition system
● Article 3:84 BW (Civil Code) requires that the transferor
should have the right to dispose (beschikkingsbevoegd)
● But bona fide third-party acquirer & assume paid fair
market value →Drew protected from annulment of
legal ground
⇊⇊⇊
Transfer Systems - Dividing Line 1 How does ownership pass?

1. Legal Ground
2. Power to Dispose
3. Delivery
❖ Consensual Transfer System:

● Solo consensus rule, delivery is declaratory
● France: general rule
● England: sale of goods only
➔ It is sufficient to agree to sell or to give the asset to the person

➔ Sometimes has to be in writing because of the value: sufficient to have a contract that
the ownership passes
➔ No additional act for the validity of ownership is needed
❖ Traditio(n) Transfer System:

● Delivery is separate act, constitutive
● Germany & the Netherlands: general rule
● England: land & real property only
➔ Besides the agreement (contract) there is an additional passage that the asset is
given; requires a second step
Transfer Systems - Dividing Line 2 Does the validity of the legal ground affect the
transfer?
1. Legal Ground
2. Power to Dispose
3. Delivery

❖ Causal Transfer Systems

→ NB: Causal system requires validity of legal ground
● Consequence: no transfer (proprietary effect)
● Anything that was exchanged should be reversed
● Ground for reversal: revindication or unjustified enrichment
● Same goes for consensual transfer systems
➔ If the contract is invalid but the asset is in someone else's hands does not make the
other person owner
➔ Once there is no contract (problems of consent) → no title because it is
annulled → transfer never happened → everything is reversed to the person
❖ Abstract Transfer Systems

→ NB: Abstract system requires no validity of legal ground
● Consequence: transfer! (no proprietary effect)
● Anything that was exchanged should be reversed, incl. ownership via a retransfer
● Ground for reversal: unjustified enrichment
● Title is invalid; transfer stands
➔ It does not matter what happened to the contract

➔ The legal ground (contract) and the transfer are separate
➔ Even though the contract is invalid, it does not mean that the transfer of ownership is
invalid
Delivery
Immovables: Deed + Registration
Movables: Possession → Deed+Registration
A claim B: Notification→ Deed + Registration
● Delivery of possession, not ownership

○ N.B. Do not forget about the other constitutive elements
● Importance of distinguishing between owner/ possessor/detentor
○ Also a non-owner can deliver
○ One can deliver via one’s detentor
● Traditio vera
○ Passing of possession from hand to hand, sometimes via a token (traditio
symbolica)
● Traditio ficta
○ Constitutum possessorium, brevi manu, longa manu for moveables

Delivery of movable
Regular (old delivery) Brevi manu Constitutum Longa manu Attornmen
Possessorium / by a third party
Attornment of transferor
to transferee
Before : A is possessor, Before : A is indirect Before : A is possessor, Before : A is indirect

owner; B is just being B possessor, owner; B is owner; B is just being B possessor, owner; C is
After: B is possessor, owner; detentor for A After: A is detentor for B, detentor for A; B is just be
A is just being A After: B is possessor, who is indirect possessor, B
owner; A is just being A. owner holding through A. After: C is detentor for B;
is indirect possessor, own
A is just being A.
Transfer of Land
★ The valid transfer of land under traditio systems (Germany, the Netherlands,
England & Wales for land under common law) requires delivery of land via
a) a deed and
b) registration of that deed → registration is a constitutive requirement for
the transfer of ownership of land
★ The valid transfer of land under a consensual system (e.g. France) does not require
delivery via a deed and registration for delivery is not constitutive for the transfer.
However, there is clear incentive for the acquirer to register the deed. The registration
does have effects in relation to third parties who hold a competing right in the registered
object. First, if the right holder did not register his property right, a third party holding a
competing right on the very same object can dismiss any claims from the right holder on
that object provided he filed for registration first. Second, third parties may not be in
good faith if the contested property right was registered (See at 8.107 (FR)).
two types of registration systems:

1. positive systems, or “better title” registration systems
a. directly register the correct property entitlement to land
b. registrar will therefore examine the validity of the data presented to him or her.
Hence they are known as positive

c. examples of such systems are Germany (with its Grundbuch) and England (with
its Land Register)
d. If the registry proves inaccurate, a claim (in tort) can be brought against the
registrar
2. negative system or deeds registry system
a. whereby transfer-deeds are received and those are registered
b. Subsequently there is often another registry, known as Cadastre in which, on the
basis of this public registry, entitlement of land is administered
c. These systems are known as negative because the registry ‘simply’ administers
the data it receives, without going into the validity of it
d. If the registry proves inaccurate, a claim (in tort) cannot be brought against the
registrar, but is likely to be advanced against the professional submitting the
entry to the registry (e.g. a notary or conveyancing professional).
● main difference between the two is speed

● In a positive system: the investigation undertaken by the registrar can take up to three
months (or even more)
● A negative (or deeds) system will enable registration within a matter of seconds if it’s
done electronically.
● under tradition systems, registration is a constitutive requirement for the
transfer of ownership of land→ Without it, no title to land (ownership in civil
law terminology) can pass from the seller to the buyer
England & Wales

● distinction between registered and unregistered land
● Registered land is land of which the title is recorded in the official registry ‘The Land
Register’.
Unregistered land concerns land of which the title is not (yet) recorded. Why would land be
unregistered? Two principal reasons concern:
- The land has never been registered. This concerns for example land held by the Crown,
the church, universities, local authorities, which is often is held in fee simple, meaning for
perpetuity. It may thus never pass, and previously registration was not required.The land
has not been conveyed since 2003 (entry into force of the Land Registration Act 2002).
- That a land is unregistered does not mean it cannot be registered

- Recordable titles include the estates and interests in land as defined by the Law of
Property Act 1925
- The Land Registration Act 1925 enabled the registration of title and provided for a
system of conveyance by registration of title. However, such registration was optional
and conveyance by deed was possible even though if property was registered.
- The Land Registration Act 2002 implemented a new system: in case of registered land,
conveyance by registration of title is required.

- Some 85% of the land in England & Wales is registered, and most likely this will become
more and more. Registration is now required for a number of property right and it offers
a number of advantages (efficiency, protection, priority)
Bona fide third-party = of good faith, thinking that the other person is e.g. owner →
making inquiries if it concerns rare goods → required for certain type of goods
(threshold for professionals is higher than for consumer)
→ protection of bona fide third party; threshold for professionals is higher than for
consumer
Week 4 - Limited property rights: Use rights

(i) rights that allow for the use of the object itself (e.g. usufruct, servitudes, habilitation
rights, trust life rents)
● Limited property right stem from a fuller right / mother right e.g. ownership=
full right from which property rights are derived
⇒ derivatives are limited property rights
○ The rights holder can separate a part of his right and grant it to another person in
form of a limited property right
How do limited property rights come about?

● Creation (grant): they are created through a grant
○ follows requirements for the transfer of the object which the limited right will
burden
■ Example: creation of real servitude follows the rule of transfer of land
because the real servitude exist in relation to the land
○ Contracts again play a key role (as legal ground) → in transfer of goods
and in granting of limited property rights to other persons
● Transfer of burdened object: right to follow (droit de suite)
○ Whenever the object in relation to which the limited right was granted is
transferred, the limited property right is transferred with that object
○ Limited right tags along the object in relation to which it exists whenever that
object changes ownerhsip
● Two theories: démembrement (subtraction) v. limitation
→ explain how the property rights come about
→ How a limited right is related to a fuller right
○ In context of Abolition of feudalism: duplex dominio before French Revolution

Démembrement (subtraction) Limitation Model

● This model is adhered to in France and NL & ● Germanic systems
England and Wales for land rights at common ● Ownership was seen as sacred right
law ● Grantor will offer of the grantee a limited
● The owner (right holder to full ownership property right (ius in re aliena) as a right in a
right): entitled to severe elements of his object of another
right and grant them to another person ● As a separate right but should be
(grantee) → subtracted of ownership conceptualised as a right in an object of
● E.g. slice of pie another → the ownership right remains in
● Limited rights are separate from ownership tact
● Limited property right in general ends by lapse
of time
- Subtraction: creation of limited right is act of ● If the right ends: it does not flow back to the
derivative origination ownership right: it remains separate
● Once it is created it remains separate →
individual limited property right
● Based on constitutive act: the grant the grantor
made previously
● Possible that this property right can be granted
to someone else
- Limitation model: creation is original creation of
a wholly new right separate
Démembrement (subtraction)
- A is owner and has taken out a loan with bank B
- It grants a security right to B on its ownership to secure the
loan
- A is grantor and grants B grantee the security right
- A contracts with ban C for another loan but C does not agree
to the loan before it seizes security right
- A is in the same position as to B
- B stands in higher rank because it comes before C
- B is allowed first to seize the ownership, sell it on the market
and thus settles the loan
- If anything is left it will flow to C to settle the debt that
A and C had

Démembrement (subtraction)
- A repays loan with B

- Obligations under contract are fulfilled; contract ends
- No loan to be secured: security right stops to exist
and flows back to A to make the ownership full again
- Limited right is extinguished
- B has no longer security right over ownership of A - C
trades up
- Security right of bank C is priority
- Security right to bank D stands second
Limitation Model
- A holds ownership
- Takes out loan with B
- B requires security right to secure the loan
- A grants limited property right to B
- → priority
- C stands second
Limitation Model
- A repays B
- B loses security rights because there is no loan anymore
- Security right does not flow back to the ownership right of A;
it remains separate
- it keeps same property rights and rank at time of creation
Limitation Model
- A can assign the security right that it previously awarded to

bank B to a third party: bank D
- Specific right including its ranking is granted to bank D
Advantages of this model:

1)
- The limited right will rank from the monet of its creation and
keeps the rank
- This creates certainty among the security right holder and
allowed to calculate the risks (rent on the loan they charge)
- If the security right stands higher in rank, the risks they take
to the grantor is lower
- the lower the priority rank of the security right, the
higher the risk that is associated with the loan →
determine the rent they charge for the loans
2)
- Owner can transfer ownership while retaining a property right
that was created on his own terms and conditions and with

the rank he wishes

- Party autonomy of party A is greater (determining
conditions)
Primary Right
● It grants the holder of the right the most extensive entitlement to use it e.g. ownership
Secondary Right
● Limited real rights in land that are defined by law (numerus clausus rule)
● Real property rights are divided into full ownership and limited (subordinate) rights
● rights to use
● security interests
Use Rights Security Right
● Real servitude ● Pledge

● easement ● hypothec / mortgage
● Usufruct ● Right of retention
● Emphyteusis ● Security ownership
● Superficies
● Lease
● Apartment rights
Use Rights (usus or prohibitio usus)

= right to use and enjoy land that is owned by someone else

Real servitude / ➔ legal right to use another person's property, generally in order to cross a part of the propert
Easement or to gain access to something on the property
● A typical example is the right of way, which allows the owner of the one piece of land to
walk (or drive) over the other piece of land, usually that of the neighbour (financing
infrastructure and common facilities)
● limits the ownership of the land on which the servitude runs
● Right held by one person to use land of another person: Agreement for specific purpose e.
access to property
○ Servient property is used to access the dominant property → it must benefi
the dominant land
○ Continues after selling property: same rights
➢ Real Servitude (Civil law)=

● Property right which burdens a piece of land
(no real servitudes on movable objects
○ German law: §1018 & 1190 BGB;
○ French law: Art 637-707 CC;
○ Dutch law: Art 5:70-84 BW
● Come in existence by agreement

● = Right that burdens a piece of land (servitude land) with the obligation to tolerate or refrain
from doing something for the benefit of another piece of land (dominant land)
● Dominant & servient land (servient land is the burdened land: the slave)
● Different owners of the lands
● Owner must tolerate or not do something (negative burden) → obliged by law to tolerat
a neighbouring owner from entering his land
● No positive duties for owner servient land→ exceptions: secondary duties in real servitude
(e.g. conservative exercises of legal rights, duty of maintenance of land or buildings based
on an agreement, duty to bear costs related to relocation of facilities – see
○ German law: § 1020-1023 BGB;
○ Dutch law: Art 5:70(2) BW,
○ French law: Art 696-697 CC)
● … real servitude of support

● Must benefit the dominant land (not just owner)
- agreements between neighbours or co-owners or current and future owners

- Burdens one party while benefiting either the owner of another parcel or benefiting
individual
- Special restriction thats does not apply to ordinary piece of land
German & Dutch law – right to path is found trough a limitation on the right of ownership imposed
by law) v. French law – constructed as recognition of a limited property right (legal servitude)
right of way/path
Dutch law:Art 5:57 BW;
German law: §917 BGB
French law: Art 682 CC

● Acquirer servient land must endure (droit du suite)

● Acquirer dominant land keeps the right (accessority rule)
● In common law jurisdictions: the right “runs with the land”
● Function: specific use (e.g. access)
● No further restriction on use/enjoyment/disposal of servient land
● Germany, France & Netherland for land, not recognized as such in England & Wales
Legal Servitude: real servitudes as a consequences of a legal act

= Servitude comes into existence by operation of the law (e.g. Art 649 CC) & function as right of re
servitude
● E.g. right to use public water for irrigation of land, right to set boundaries, right to enclose
land by fence/wall
● Servitudes for public purpose arise out of specific legislation & have no dominant land (e.g.
public roads, public transmission lines in France, sewage, waterways)
● Noodweg (NL)/ Notweg (DE)
● Easement by necessity – Adealon IntInternational Property Ltd v Merton London Borough
Council [2006]
French law:
- Art. 637 CC (definition)
- Art. 686 CC (when can they be used)
- Art. 640 ( Legal Servitude)
- Art. 649 (legal servitudes are created by law and have a purpose for public or private
interest)
- Art. 650
- Art. 682
German law:
- §1018
- §906 􏰀 servitude by law
Dutch law:
- Art. 5:70(1)
- Art. 5:71(1)
- Art. 5:70(2) 􏰀 may be secondary positive obligations
- Art. 5:38 􏰀 real servitude by law
- Art. 5:47
- Art. 5:48
➢ Easements / servitudes (Grunddienstbarkeiten) English law

○ may entitle to use neighbouring land in different ways, including a right of way for
pedestrians and/or vehicles, the construction of water and sewer tubes, of dividing
constructions, the provision with light or a certain view (not recognised in England)
and the distance between buildings
○ allow the right to enter and use, for a specified purpose, land that is owned by
another (e.g., the right to install and maintain an electric power line over someone
else’s land).
○ easements in appurtenance= i.e. to the benefit of the owner or possessor of
neighbouring land; in this sense, one may refer to a dominant tenement (piece of

land) and a servient tenement

○ easements in gross, i.e. to the personal benefit of another person (beschränkte
persönliche - Dienstbarkeiten, §§ 1091 ss. BGB)
● Right to use land in the possession of another → (= Right to use land in the
possession of another, equivalent to civil law real servitude)
Re Ellenborough Park [1956] EWCA Civ 4

The case established six factors which constitute an easement:
1) A dominant and a servient tenement
2) Easement must accommodate the dominant tenement
3) Rights to possession of both tenements must belong to different persons
4) The content of the right must be certain
5) No positive obligation may be imposed on the person in possession of the servient tenement
6) Easement must not be negative on the holder of the easement
Liverpool City Council v. Irwin [1977] AC 239 (p.328)

- Concerning easement, as explained in Re Ellenborough Park [1956] Ch 131
- “There can be a right of easement in the form of a right of way over a neighboring plot of
land, however the servient “owner” will be tinder no liability to keep the road or path in
good repair”
- The providing of a right of easement does not include obligations for the servient owner - the
dominant owner must ensure the eg. staying in good condition of the road
● Arrangements need to be laid down in a deed

● Express grant or reservation of easement for interest equivalent to an estate in fee simple
absolute in possession or a term of years absolute over registered land is required to be
completed by registration (Section 27(2)(d) of the LRA 2002 in conjunction with Section 1(2
(a) of the Law of Property Act 1925).

= right to use and enjoy an object that is owned by someone else

Usufruct ➔ usufruct is (legal) the legal right to use and derive profit or benefit from property that belong
to another person, as long as the property is not damaged.
→ extensive
● the permission to use and enjoy the object of the owner, who no longer holds this permissio
rights of use
giving full himself
possession ● The owner now holds «bare ownership», signaling that he has given away his
permission to use and enjoy the object → leaves the owner “bare”, he can only
transfer the bare ownership
● For example, it can be the right to have a painting, owned by someone else, in your house
for the remainder of your life.
➢ usufruct right =
○ the right to use a land and to enjoy its fruits, i.e. all kinds of earnings from the land
including rent payments
○ Typically, usufruct is not limited to land but extends to movables and rights accordin
to most systems
○ Derivatives from usufruct are usus (recognised inter alia in Spain and Portugal) whi
also entitles to the use and to the fruits of the land, but only to the extent necessary
for the owner and his family
○ Another derivative of usufruct is the right of habitation recognised in all continenta
countries
● Right to use/enjoyment of an object owned by another and to take the “fruits” of this object
for the lifetime of the right holder
○ French law: Art 578 CC;
○ German law:§1030 BGB,
○ Dutch law:3:201&216 BW
● When created – inventory to establish assets covered
○ French law:Art. 600 CC,
○ German law:§1034 BGB,
○ Dutch law: Art 3:205BW)
● Type of ‘personal’ servitude
○ Connected to the person, who must be a ‘good usufructuary’
○ French lawArt 601CC,
○ German law:§1036-1037;BGB,
○ Dutch law:Art 3:207 BW
● Function: separate legal ownership from benefits
● Applied mainly for estate planning
● Germany, France & Netherland: immovables, movables, claims → Not recognize
in England & Wales
● Right holders can assign rights in France & Netherland
○ French law: Art 595 CC,
○ Dutch law: Art 3:223 BW), not in Germany.
● ‘Bare’ owner can transfer
➔ Nothing is paid to the owner
= grants the right holder the right to use/enjoyment of land owned by another for a substantive
Emphyteusis period, no ownership

= The land is thus still owned by the original owner (the bare owner) but used by another:
(Ground Lease) The right holder may have exclusive use of the land and construct immovables on it + building put
on the land that is hold by emphyteusis become the property of the owner of the land (but is the
→ extensive
property of the rights holder for as long as he owns the right)
rights of use
giving full
French law: Art L251-3 Construction and Housing Code
possession
● Right to use and enjoyment of the land
● E.g. right of way and right to pipes of the land
● Right of use of the ground on which the object is; not only the building / object
● Enjoy the content as being the owner without being the bare owner
● Periodically Payments
● Right to land → if you sell, sell the limited right to the land as well
➢ emphyteusis or long lease=

○ entitles to the long or perpetual use of land against a fee, combined with the
obligation to improve it
○ French legal systems
○ In England: due to the lack of any numerus clausus, one may also find rights of us
sui generis such as an abandoned spouse’s occupation right of the matrimonial
home
○ Other more important extensive right of use are rights of superficie respectively
building leases, which consists of the transferable and inheritable right to erect an
own a building above or below the surface of a foreign piece of land
● Right to use/enjoyment of land owned by another for a substantive period

○ French law: Art 451-1 Code rural
○ Dutch law: Art 5:89(1) BW)
● Function: enable others to develop the land (and finance it)
○ Applied in agriculture and real estate management by cities
● Right holder owns immovables on or in land
Period:
✓France: up to 99 years
✓Netherlands: also in perpetuity
✓England & Wales use “long lease”
✓Germany uses Reallast (real burden)
● Right holder can assign right & grant limited rights

● “Bare” owner can collect payment (canon) and can transfer ownership right
● Duplex dominium?
Example:
➔ Majority of properties in Amsterdam is built on land which is owned by the City
Amsterdam; the municipality charges a fee for the use of land → ground lease /
leasehold
➔ long -term ground lease can be compared to lease

= This is a limited (use) right that enables the right holder to own immovables on land owned by
Superficies another, Ownership is limited: right of access and owner of the building
➔ proprietary right thus disables the effect of the superficies solo cedit rule (the owner of th
→ extensive
land does not own the immovable property of the right holder! → stays separate
rights of use
giving full
● separates the ownership of a building or construction from the ownership of the land (only o
possession
immovables)
● One asset sitting of another one has a different owner
● Not only possession but limited owner!!!! → difference to a lease where you only
possess
● You do not have a right on the land itself, some form of use; only the asset that is on the
ground → different to Emphyteusis
● Right to own immovable on land owned by another
○ French law:Art 552 CC;
○ German law:§1 Regulation on Superficies (ErbbauVO)
■ If the attachment was for a temporary purpose, this means the
object placed on the building/land does not accede to the
building/land, does not become one with these. → §95 BGB
■ Accession !
○ Dutch law:Art 5:101 BW

● Function: disable the effect of the superficies solo cedit rule (= building/constructions o
land follow ownership of land)→ enables parties to separate entitlement to
building from that to land through agreement
● Enable complex structures and diversified financing of those structures
● Right holder can assign right & grant limited rights
● Right to access is implied
● Recognized in Germany, France & Netherlands
● England & Wales → leasehold: “ground lease” / building lease
● Duplex dominium?
Lease in Civil Law Systems = contract based ! not a limited use right!!
Lease ● Contract → personal rights;
○ establish all kinds of rights because the parties determine the content of their contra
Only in English law
○ Parties have more freedom regarding the asset of the lease
= a limited property
● An agreement for the use & enjoyment of the land having effects between the parties
right!!
● Lease of land or goods → only personal rights between the lessor & lessee
● Lease is a contract → privity of contracts applies & only parties are bound by it
● But lessee is protected from potential abuse by law → transfer of land by the
lessor leads to a transfer of the lease agreement to new owner (if the object is
sold)
● Lessee cannot transfer his right to another person → law of obligations
● E.g. renting / leasing an apartment = form of lease

○ If the apartment is sold, it does not affect the lease unless in the contract
was determined that lease will end when sold → does not affect the rights
of the lessee
○ Legal provisions protect the lessee
○ 3rd person: buyer needs to respect the lessee’s right

➔ Payment to the lessor e.g. in instalments
Ordinary lease
- Lease is a personal right → contractual right
- Option to retain ownership
- Unless the lessor and lessee agree that any fixtures build on the land will not become part
the land (agreed in the contract), the superficies solo cedit rule applies (ownership will be
lost)
- They can include provisions to the contract → then Option to retain ownership
- General principle from Art 552 CC can be derogated from with the agreement of the parties
owner of both building and company have to include provision to limit the application of Art
552 (otherwise based on Art 552, it becomes part of the building)
French law: Art 552 CC → renunciation of accession

- The lessor becomes also owner of the objects on his land
- As a result of that rule, the owner of the land also acquires ownership of those objects that
are attached to that land
- In order to determine whether this is the case, it must be considered whether the objects
comprising the solar farm are:
- ✓ Attached to, part and parcel of land
- ✓ Intended to remain such
- ✓ Intention to be determined objectively.
- Fixtures risk to become ownership of lessor (during or once lease expires)
- Once the lease finishes: risk because what you have on the ground becomes
ownership of the person who is the owner of the ground
- Example: if you lease a garden on someone loses ground, then there is the risk tha
the lease (contract) expires, the owner of the ground becomes owner of the garden
unless it was concluded differently in the contract
- Leases accession by statute is excluded or postponed until end of lease→bail

emphytéotique, bail à contruction (construction lease), bail à réhabilitation,
concession immobilière, bail à domaine congeables (a convention) & contract to
exploit a mine
- Constructions that postpone the transfer until the end of the contract
- Contract: separation of owner of land and the lease of the garden
- If there is nothing agreed by the parties: everything that is on the land becomes par
of the owner
- Construction lease (bail à construction) is a property right French law: Art L251-3
English law → property right

● Not a contract
● Grant of a right of exclusive possession of land for a fixed term
● Retain the right of the object
● After temporarily use: The lease agreement has to contain a provision on retention of title
and right of removal of the façade at the end of the leas
○ not retain ownership if no provisions are in the lease agreement
● Positive duties can be part of the arrangement
○ In civil law systems lease is a personal right, with specific tenant protection

● Subject to registration of title in LRA 2002

○ Leases granted for a term of more than 7 years (Section 4(1)(c) & Section 27(2)(b)(
○ Right holder (lessee/tenant) can assign & grant limited rights
● Landlord (lessor) can assign (“reversion”)
○ “Lease runs with the land”
● Ends: expiry of term (“effluction”), forfeiture by lessee, eviction
elitestone case + Botham case

Elements to determine whether the object is an accessory
—> 3 elements to determine the status of the facade based on the principle superficies solo ced
Accessory

→ They make it clear that if the roof tiles are attached to the land/into a building only
for a

Objective intention: 3rd party perspective
→ Here the apparent intention of builder, along with common sense plays a decisive
role. Whether it is technically possible to detach he object does not matter.
→ Service type of contract means not retaining full ownership of the facade = ordinar
lease
→ retention of title clause and right of removal, otherwise the façade becomes integra
part of the land/building.

● Right to own an exclusive area in a complex building – right to use & enjoy a certain part of
Apartment building combined with co-ownership regime of common parts (e.g. staircase, hallways,
rights elevators, supporting walls of the building
○ French law: Loi n° 65-557 du 10 juillet 1965 fixant le statut de la copropriété des
immeubles bâtis
○ German law: Law on Apartment Ownership (WEG) in Germany
○ Dutch law:Art. 5:106 BW
● Function: disable the effect of the superficies solo cedit rule
● Enable complex structures and diversified financing of those structures
● Membership of association – essential element that is transferred from old to new acquirers
● Mandatory in France & Netherlands, optional in Germany
● Germany & Netherlands: distinct property right, France - type of co-ownership
English law
● Long leases, freehold is held by landlord or by lessees jointly
● Maintenance and repair
○ Interior of individual flats
○ Exterior: structure and common parts (cf. Liverpool City Council v. Irwin)
● New form: commonhold (cf. Commonhold and Lease Reform Act 2002)
○ Flat owners hold a freehold, rather than a lease
○ Similar to apartment rights in Germany & Netherlands and co-ownership in France
Elements to determine whether the facade is becoming part of the immovable (land or building):
—> 3 elements to determine the status of the facade based on the principle superficies solo ced
Accessory
→ They make it clear that if the roof tiles are attached to the land/into a building only
for a
temporary purpose, they do not accede the land/building

Objective intention: 3rd party perspective
→ Service type of contract means not retaining full ownership of the facade = ordinar
lease

Land Goods Claims
Dutch law ● Servitude Usufruct (Use something owned by someone else for Usufruct
● Superficies as long as right holder is alive)
● Usufruct → use those goods
● Emphyteusis → if the usufruct finishes: return the same
● Apartment rights goods; quality and characteristics must be the
same
E.g. ownership of apartment

- Divide ownership between usufruct and bare
ownership
- Usufruct can be given to someone
- Usufruct can be hold or given away to
someone else
- In land registry: ownership + usufruct (not full
ownership e.g. can't sell) is registered
- Usufruct continues even if the bare
owner sold it → claim of usufruct for the
remaining period
German law ● Servitude Usufruct Usufruct

● Superficies
● Usufruct
● Reallast (=
Emphyteusis)
● Apartment rights
French law ● Servitude Usufruct Usufruct

● Superficies (not a
● Usufruct property
● Emphyteusis right)
English law ● Freehold Lease (not a property right)

● Easement
● Lease
○ Commercial
lease
● Commonhold
○ Longlease
○ (Apartment
Rights)

Week 5 - Limited property rights: Security rights
Terminology
Pledgor = debtor
Pledgee = creditor
Transferor = debtor
Transferee = creditor
Hypothecor = debtor
Hypothecee = creditor
Chargor = debtor
Chargee = creditor
Recap: limited property rights

● Derived from and burdening a more comprehensive right, e.g. ownership
● Many security rights are limited property rights
○ Pledge (civil and common law)
■ In Germany and E&W: only possessory
■ In NL and France: both possessory & non-possessory
○ Hypothec (civil law): registered immovables
○ Charge (common law): non-possessory
● Limited rights: a right to sell and priority on proceeds of the sale
Last week: creditor lend money to debtor and debtor would establish a limited
property right whereby remaining the owner e.g. right of hypothec in favour of the
creditor
This week: debtor does not establish a limited property right, he transfers right of
ownership on his assets to the creditor
Fiduciary transfer: creditor obtains ownership → that does not mean creditor is in
actual possession, he acquires merely ownership
Pledge: obtains right to sell and right of subsequent priority
What are limited property rights?

● Rights derived and stemming from a more extensive right
● More extensive right is burdened by the limited
The link between limited property rights and security rights: why?
● Most security devices are limited property rights (today)
● Right of Pledge

○ Possessory pledge: NL, France, Germany, E&W

○ Non-possessory pledge: NL & France
● Right of hypothec (NL, France, Germany)
● Right of charge (E&W)
○ Fixed charge
○ Floating charge
● BUT: not all security devices are limited property rights
○ Security based on ownership
○ Fiduciary transfer of ownership
○ Retention of title
● Personal security rights
● Not discussed in this course: part of contract law
Security rights: WHY?

Function of security rights
● Security rights secure the (re)payment of a claim
○ So, there is always a claim for which the security right is established (the secured
claim)
○ Presupposes a creditor-debtor relationship
○ Everyday example: buying a house!
● Creates and increases an access to finance
○ Financing companies want to know how you intend to pay back voluntarily
■ Companies: viable business plan?
■ Individuals: sufficient income?
○ Security right functions as safety net
■ In case debtor is in default *if you cannot pay back the loan)
with repayment of the loan → bank still wants the money back
even though debtor cannot pay
■ Right of hypothec: if you go in default of loan, the bank can sell the house
and has priority right
■ Right to sell + right of priority
■ Ensures that the money comes back
○ More security = more inclined to lend money
➔ Main purpose of security: the secured creditor enjoys a preferential position
over unsecured creditors → Prior Tempore Rule
Secured creditor (pledgee/hypothecee) has 2 rights:

○ Security rights hold by the creditor
1. Right to sell the subject matter of the security right
○ only if the debtor is in default with repayment = protection of the debtor from the
creditor
2. Right of priority on the sales proceeds (Vorrang auf den Verkaufserlös)

○ Sometimes: multiple security rights on one asset → priority ranking

(Prior Tempore Rule)
○ If sold, any surplus value goes back to the debtor → otherwise unjust
enrichment
○ or surplus value distributed among unsecured creditors on the basis of paritas
creditorum = assets are distributed equally among the creditors from insolvency
Personal and Property security rights

Two types of security rights:
● Personal security rights: extension of the object on which the creditor can execute his
claim.
○ Sureties (‘Burgschaft’, ‘Cautionnement’, ‘Borgtocht’)
○ Guarantees (third person C will guarantee that B will pay money back, if B goes
in default it can demand money from C)
○ Not discussed in this course? Why?
○ a security right against a third party, who ensures that the debt of the
debtor will be repaid. If the debtor goes into insolvency, the creditor
can seek payment from the third party → not a strong right
● Property security rights

○ Most (but not all) are limited property rights (such as pledge or hypothec): right to
sell the assets and of priority on the sales proceeds of those assets
○ Ownership as security device: retention of title + fiduciary transfer (next week)
○ Some form a subcategory of limited property rights
■ Pledge
■ Hypothec
■ Charge (England & Wales)
○ not affected by the insolvency of the debtor
○ the creditor can sell those buildings with a subsequent right of priority on the
proceeds of the sale
○ a property security right tends to offer more protection against the insolvency of a
debtor
○ rights (sell + priority) are not affected by the insolvency → In Dutch, we
call this the ‘separatistenpositie’.
→ All those rights: Securing the (re)payment of a personal obligation: Example with the
bank
→ the loan of the bank is the secured claim
○ Protection against the debtor’s insolvency

■ Insolvency = risk for creditors because in an insolvency there is
not enough money to pay all creditors; then general rule applies
→ paritas creditorum

■ General rule: paritas creditorum = assets are distributed equally among

the creditors from insolvency
■ Security right: offers a right of priority → preferential treatment
as a secured creditor → Prior Tempore Rule
Advantages as a Secured Creditor over an unsecured Creditor

→ as a Secured Creditor you have advantages over an unsecured creditor
Three main advantages: if there is a security right
1. No enforceable order (i.e. court judgment) needed to seize debtor’s assets

- No Necessity of court judgment (which entails enforceable order) to seize your assets
and thereby force payment Secured creditor can ‘just’ enforce his security rights
- Not time-consuming and no litigation risks
- No Risk that the claim is not acknowledged by the judge
- BUT: prohibition of self-help
2. Security rights are effective during insolvency
- Dutch: ‘separatistenpositie’
- no need to send a note to the administrator, security right to enforce rights as if no
insolvency proceeding is taking place (NL: ‘separatistenpositie’) → exercise right
while ignoring the insolvency proceeding
3. Priority over other creditors
- Exception to paritas creditorum → does not apply
- If there is no security right: paritas creditorum: assets are distributed equally
among the creditors from insolvency (50% because the total assets are with half
as much as the total debt)
- Prior Tempore Rule: security rights offer a right of priority (preferential treatment)
Are these advantages significant? → Yes, see the average recovery rates during
insolvency
Important distinction of Security Rights:

● The claim for which the security right is established
○ With regard to the secured claim (for which)
● The subject on which the security right is established
○ With regard to the burdened asset (subject matter – on which)
● Students often do this wrong when it concerns a security right on claims

● Bank against landlord = ‘for which’

● Claims the landlord has against tenants = ‘on which’
○ Receivables that are collected, not sold
1. Right of Pledge
Pledgee = Pfandgläubiger → creditor (bank)

Pledgor = Verpfänder → debtor
A pledge is a bailment that conveys possessory title to property owned by a debtor (the pledgor) to a
creditor (the pledgee)
● Function of a Pledge: Secure the repayment of a claim

● Presupposes a debtor and creditor relationship
● For movables: machines, cars, or receivables (claims)
○ Pledge on receivables = bank makes pledge on the claims you have with
debtors → the bank (creditor) will collect
Possessory Security - the Pledge

- Debtor / pledgor establishes the pledge in favour of the creditor and the debtor will
transfer his possession to the creditor / pledgee
- the debtor must be dispossessed of the pledged items → creditor is in
possession of it
- Creditor is in possession of the pledge
- Since the debtor has only dispossessed himself of the pledged goods, he remains their
owner, while the secured creditor merely becomes their holder
- Pledges primarily make sense only for goods which the debtor does not immediately
need for industrial or trade purposes but which are dispensable for the time being, such
as securities, precious metals, luxury goods, jewellery etc.
- No problem of ostensible ownership
- Main problem / disadvantage: if the debtor transfers possession to the creditor, he is not
in possession anymore (e.g. he cannot use the machine anymore)
- → hinder the economy!!!
- the assets can not be used any longer (since the creditor now has possession),
- you can not pledge future assets,
- you can not pledge a single asset more than once (relevant when the asset is
worth more than the secured claim of the first creditor (surplus value)) and,
- last, the pledgee is often not in the best position to store the assets in the most
efficient way.
- Solutions:
- German law - allowing a transfer for security purposes without any
publicity requirement
- Dutch and French law solve it by introducing a new way in which a right of
pledge can be established, namely by a deed and subsequent registration

of that deed (establishment without dispossession).

- E&W follow the same solution as Dutch en French law, but through a right
of charge.
- NL, France, Germany, England and Wales

- Traditionally required
- Principle of ostensible ownership
- If your debtor physically possesses an asset, you might assume that you can
seize that asset, sell it and enforce your claim on the proceeds of the sale
- Principle of publicity: transparency and protection for other unsecured creditors
- {A creditor should be able to rely in good faith on the possession of his debtor,
i.e. that the assets which are possessed by his debtor are subject to his
execution rights if the debtor is in default. If these assets are pledged to a bank,
then the assets are subject to the execution rights of the bank and not of the
other creditors. Security rights thus undermine this theory and to make both of
them compatible to each other, security rights must be published}
Non-Possessory Security
- = same right as possessory Pledge however established with a deed and subsequent
registration of the deed in a public register
- NL, France
- not Germany (fiduciary transfer); England has the right of charge
- all those forms of security where the encumbered corporeal movable assets are not
delivered to the creditor or else to a third person (therefore non-possessory), but remain
in the debtor's hands
- → economically of overwhelming importance in our time
- Advantage of non-possessory security therefore is that the debtor may retain the
encumbered asset for daily course of business: An industrialist may use machinery and
other equipment; he may process raw material or semi-finished goods
- E.g. Appropriate to collect the debts / receivables themselves
Advantages non-possessory pledge:
1. Debtor can still use the object for his business
2. Debtor in better position to store and administer pledged objects
3. Multiple pledges on one object
- Relevant when the value of the pledged object exceeds the value of the secured claim
(‘surplus value’)
- Debtor can use the surplus value to obtain more credit
4. Ability to establish pledge on future assets
- Assets that still need to come into existence
- Example: a Lamborghini in manufactory
- Disadvantage for other creditors: cannot see from the outside → principle of
transparency
- Other creditors might be misled by virtue of the pledgor’s physical
possession of the object → problem of ostensible ownership

Perfection of the Pledge

How to establish a security right
● Asset must be transferable (to sell it) → movable
● Why is this necessary?
○ Right to sell, sell process is difficult if its not transferable
■ Not a significant requirement
■ However: non-transferability base on contractual clauses
Possessory Pledge Non-Possessory Pledge
1. Legal ground (credit agreement between 1. Legal ground (credit agreement between
creditor and debtor) creditor and debtor)
a. often a deed / credit agreement a. often a deed / credit agreement
b. pledge based on the b. pledge based on deed (not notarial)
dispossession of the pledgor in and registration of the deed
favour of the pledgee
2. Delivery / Establishment 2. Delivery / Establishment
○ In case of security rights also ○ In case of security rights also called:
called: establishment establishment
○ establishment through actual ○ establishment through deed and
delivery registration → principle of publicity
○ Transfer the possession of ○ ‘Publication’ of pledge occurs through
property as debtor to the creditor registration
or third party ■ Continued usage
○ No problem of ostensible ■ Storage issue
ownership – debtor / pledgor no ■ Multiple pledges
longer in physical possession ■ Future assets
○ debtor transfers the
possession of his asset to the 3. By someone with authority to dispose (owner
creditor → principle of publicity of the asset)
3. By someone with authority to dispose

(owner of the asset)
Establishment Right of pledge / PUBLICITY of the pledge

● Pledge is enforceable against third party due to the publicity attached to it
○ French law Article 2337 French Code civil
○ “A pledge is enforceable against third parties due to the publicity attached to it”
● Establishment of a security right requires disclosure of that security right
● Security rights affect the position of other creditor rights
○ Secured creditor has a right of priority → Prior Tempore Rule

● Problem of ostensible ownership

“Clow thus articulated what came to be known as the problem of ostensible ownership - the
making of credit or other investment decisions in reliance on the potentially misleading
appearance that a debtor has rights in property by virtue of physical possession” (Hamwijk
2014, p. 37)
- E.g. you see fancy cars in someones garage (which belong to the bank) but youre
mislead by virtue of physical appearance
- Car has been pledged of the guy’s bank and the bank has a right of priority and you
cannot just seize the car
- Property security rights affect the position of other creditors because those creditors
have priority over unsecured creditor
➔ Solution: property security rights need to be disclosed to the public
➔ That's why property security rights need to be published: other creditors need to know
what to expect back from a certain claim
“Real rights must be known to third parties, otherwise no justification exists for their binding
nature vis-à-vis these third parties. To put it differently, transparency is required: it must be clear
upon which object a real right will rest and both object and real right must be visible to the
outside world.” (Hamwijk 2014, p. 38)
● Principle of publicity (sub-principle of principle of transparency)
● ‘Publication’ through establishment requirements
● Goals: So creditors can better estimate the credit-worthiness of their debtor
Multiple Rights of pledge: priority conflicts

● Establish multiple non-possessory pledge over one asset → priority conflicts
between the pledgees (creditors)
● General rule: principle of anteriority (prior tempore)
● Anteriority is determined by moment of publicity (security right that was published first
has the first priority)
● → person has priority if the pledge is registered and public first → prior
tempore
Non-possessory pledge
● Dutch law:
○ abolishes fiduciary transfer, but introduces non-possessory pledge in 1992
(article 3:237 DCC)
● German law:
○ does not have a non-possessory pledge, but case law allows fiduciary transfer /
Transfer of ownership for security purposes without actual delivery (next week)
○ General development: principle of publicity is in decline
● French law:
○ non-possessory pledge (article 2338 Cciv) (as well as fiduciary transfer – next
week)
● England & Wales:

○ non-possessory security right in the form of a charge
➔ The possessory pledge is in decline
In Civil law: It is possible to establish a right of Pledge on receivables

● German law:
○ receivable can only be pledged with notification to debtor of the claim
● Dutch law: & French law:
○ pledge on receivable also possible without notification to debtor (‘silent pledge’),
registration is required
○ Registration of pledge in a (public) register
● England & Wales:

○ Only have possessory pledge: charge on receivables (common law)
○ Notification to debtor of the pledged receivable is not required for the
establishment
○ Registration of charge in a public register
● In all jurisdictions: Notification to the debtor has (other) important legal effects
● After notification, the debtor can no longer discharge himself by paying the pledgor
● Example: article 3:246 DCC
2. Common Law Charge

England and Wales
● A charge is England & Wales’ version of a non-possessory pledge
● = non-possessory security right
● Different from non-possessory pledge: charge can be established on movables and
immovables→ pledge can only be established on movables
● a transfer or vesting of a security right over an incorporeal such as a claim is not
possible at common law
● a charge does not involve any transfer of title to an asset and is therefore an equitable
interest
● Further distinction between fixed charge and floating charge → difference in control

Fixed Charge
Fixed charge: chargee (creditor) is in control

● The chargee is given control over the chargor's ability to deal with the charged assets. This
means that the chargor cannot dispose of the asset without the consent of the chargee.
○ Spectrum Plus case
● While non-possessory, you have the same problem as with the possessory pledge: impedes
the chargor’s business, “would paralyse its business” Brumark-judgment
● Economic Solution: floating charge
● Distinction is illustrated in the Brumark-judgment:

“The thinking behind the development of the floating charge was that compliance with the terms of
a fixed charge on the company’s circulating capital would paralyse its business. (…) A fixed
charge gives the holder of the charge an immediate proprietary interest in the assets subject to the
charge which binds all those into whose hands the assets may come with notice of the charge.
Unless it obtained the consent of the holder of the charge, therefore, the company would be
unable to deal with its assets without committing a breach of the terms of the charge. It could
not give its customers a good title to the goods it sold to them, or make any use of the money they
paid for the goods (…).”
fixed charge:
gives holder of the charge an immediate interest in asset
● In short: fixed charge impedes chargor’s business (Loof and Berlee, p. 11)
● Issue: Gives chargee (creditor) a proprietary interest in those assets
○ Control: creditor / chargee
○ E.g. to give bank a security, you establish a fixed charge on your assets
○ Gives creditor an immediate interest in those assets
○ If you want to sell those assets where you established a fixed charge, you need prior
permission from the bank
○ Hinders daily course of business
○ Solution: floating charge
● Need for right of charge that did not impede business
● Equivalent to equitable non-possessory
● advantage of a fixed charge over a pledge is that it is a non-possessory security, meaning,
the chargor is still able to use the object for its business
● possible to create such a charge over future assets
● Disposal of a good subject to a fixed charge, however, requires the consent of the chargee
● subjecting all the property of a business to fixed charges would in fact paralyse the
undertaking’s dealings

● Under a fixed charge, which a chargor will usually grant over its more permanent assets →
land and fixtures and fittings, the charge immediately attaches to the assets
Floating charge
Floating charge: chargor remains in control

● A charge is a common law security right that does not require dispossession
● Security right that does not attach to the subject matter of the charge until a crystallisation
event occurs
● Chargor (debtor) remains free to use or transfer the assets until that event
● Crystallisation: chargee gains control → fixed charge
● Crystallisation event: default or insolvency
● Lower priority ranking to protect other creditors
= need for a charge that does not impede a daily course of business
“The floating charge is capable of affording the creditor, by a single instrument, an effective and
comprehensive security upon the entire undertaking of the debtor company and its assets from
time to time, while at the same time leaving the company free to deal with its assets and pay its
trade creditors in the ordinary course of business without reference to the holder of the
charge. (…) If the chargor is free to deal with the charged assets and so withdraw them from the
ambit of the charge without the consent of the chargee, then the charge is a floating charge.”
(Brumark-judgement)
= charge, often on a large class of assets, that does not attach to those assets until a
contractually specified event occurs → specified in contract between chargor and
chargee
● Chargor remains in control of the assets
● Chargor not impeded during the normal course of business
● Chargor can dispose the charged assets without consent from the chargee and free from the
charge (no droit de suite)
● Contractually agreed event occurs → ‘crystallisation’
○ Floating charge becomes fixed charge if this specific event occurs
○ Then this moment is the default / insolvency of the chargor
○ Asset goes to the creditor (chargee)
● Difference to fixed charge: you as the debtor are on control over your own assets
○ No prior permission from the creditor to sell e.g. car or machine
○ Control: debtor / chargor
● Under a floating charge attachment is deferred. The chargee's rights attach in the first
instance not to specific assets but to a shifting class of assets, including future assets.

● The chargor is left free to manage and dispose of assets in the class of charged assets in the
ordinary course of business until an event occurs which causes the floating charge to
crystallise
● Upon crystallisation, the floating charge converts to a fixed charge and attaches to all the
assets within the charged class which the chargor currently owns (or afterwards acquires) and
the chargor's authority to deal with those assets comes to an end
"I certainly think that if a charge has the three characteristics that I am about to mention it is a floating
charge. (1.) If it is a charge on a class of assets of a company present and future; (2.) if that class is
one which, in the ordinary course of the business of the company, would be changing from time to
time; and (3.) if you find that by the charge it is contemplated that, until some future step is taken by
or on behalf of those interested in the charge, the company may carry on its business in the ordinary
way as far as concerns the particular class of assets I am dealing with. “ (Romer LJ – Loof and
Berlee, p. 12)
Floating charge has three distinctive characteristics

1. Charge on a class of (present and future) assets
- Often an entire undertaking = entire company or asset of company
- ability to charge classes of assets at once (company) without having to
denominate or specify every asset in the agreement → principles of specificity
- At the moment a security right is exercised, it should be sufficiently clear which assets
are subject to the security right (wants to protect third parties)
- Not a strict requirement !!!
-
2. Class changes during the normal course of business
- Different reasons: Assets are sold, new assets are manufactured, claims are paid off, new
claims arise, etc.
3. Chargor remains in control of the assets.
- Main distinction to fixed charge: chargor remains in control of assets, no consent of charchee
is needed to e.g. sell
- Until a crystallisation event occurs:
- the company may carry on its business in the ordinary way as far as concerns the particular
class of assets that are subject to the charge
- Chargor can dispose the assets free from the charge (no droit de suite) and without consent
from the chargee
- Appropriate to collect the debts / receivables themselves
How do we determine if a charge is fixed or floating?

➔ Answer ultimately comes down to who is in control of the subject matter Brumark-judgment
● Charge on book debts: fixed or floating?
● Spectrum-judgment (Loof and Berlee, p. 14-15)
“(…) Spectrum (JL: the chargor) was free to draw on the account. Its right to do so was
inconsistent with the charge being a fixed charge and the label placed on the charge by the
debenture cannot, in my opinion, be prayed-in-aid to detract from that right.”

- Spectrum was free to draw on the account on which the claims were paid
- Its right to draw the account = means they were in control
- = that specific charge was a floating charge
Brumark-judgment
“(…) the proceeds were not at the company’s (JL: chargor’s) disposal. Such an arrangement is
inconsistent with the charge being a floating charge, since the debts are not available to the
company as a source of its cash flow”
- The proceeds (when the claims were paid) were not at the chargers disposal
- Means the creditor is in control and therefore it is a fixed charge
Criticism of Floating charge (Loof and Berlee, par. 3.1.3)

1. The charge does not attach to the assets until crystallisation -> no publicity attached to it
because of ostensible ownership (property security rights affect other creditors)
● Solution: compulsory registration in a public register to secure The Principle of Publicity
○ Publish a floating charge in public register
2. Floating charge grants the ability to instantly exhaust chargor’s entire estate
● Floating charge often exists on entire company which means that the creditor / charee has the
security right over the entire undertaking and affects other creditors
● Chargee has effectively exhausted the entire state of the debtor by establishing a security
right on the company
● Other creditors end up with an ‘empty shell’ → company’s money goes to chargee
with priority
● Solution: low(er) priority ranking
● Prior tempore-rule not applicable
■ The floating charge has a lower priority ranking
■ Preferential debts, such as debts to the workers, are paid first from the
proceeds of the floating charge.
● Fixed charges rank higher
● Preferential creditors (employees) rank higher
● Ring-fenced fund for unsecured creditors (Loof and Berlee, p. 13) → part of
proceeds will be distributed among unsecured creditors without security right
3. Right of Hypothec
Right of Hypothec
● Only in civil law: security right
● The right of hypothec applies to immovables
● In Dutch law: also to registered movables, such as certain ships or aircrafts
● Civil law hypothec ≠ common law mortgage
● Functional equivalent of civil law hypothec in common law is legal charge on land

Establishing a right of hypothec

Preliminary question: is the asset transferable?
➔ Hypothec entails a right to sell, so the subject matter of the hypothec must
be transferable → immovables are transferable
➔ Non-transferability clauses can hinder establishment of security right!
1. Legal ground
○ The underlying credit agreement
○ Obligation to establish right of hypothec
2. Delivery/establishment
- Hypothec: notarial deed + subsequent registration in public registers
- For hypothec: publicity is needed through registration of at the public register: nototail
deed and subsequent registration of that deed
- Formal nature
- Notarial deed
- Subsequent registration of notarial deed in public register
- Registers are public
- Priority ranking in case of multiple hypothecs depends on the registration date
Date of its registration in public register
3. Power to dispose (authority)
Principle of Specificity
● Specificity is a sub-principle of the principle of transparency
principle of transparency = other property security rights affect other creditors →
there must be transparency with regard to the property security right
Two specificity-requirements
1. Specificity of the subject matter of the security right = asset on which the security right is
established must be sufficiently specific that parties now on which asset the security
right exist
● Specificity of subject matter of the security right
● Not a strict requirement for pledge
○ Significance also in further decline
○ Floating charge: ability to charge classes of assets at once (company) without
having to denominate or specify every asset in the agreement
○ Dutch case law on receivables: ‘It is sufficient for the deed to contain such
information as to be able to determine, possibly later on, which claims are
pledged’ (Loof and Berlee, p. 6) → sufficient to do it afterwards with the
bookkeeping of the debtor

○ Advantage: Efficient for secured creditors because they do not have to

denominate every asset (time consuming)
○ Disadvantage / Risk: less transparency for other creditors and risk of total
exhaustion of debtor’s estate by one creditor
● Stricter for rights of hypothec
● Specific immovable as subject matter
2. Specificity of the secured claim (the claim for which the security right is established) =
that parties know how much money the pledgor / debtor still owes the creditor / pledgee
● Specificity of the secured claim in the credit agreement
● Different specificity requirement than previous sheet
● Secured claim must be determinable at moment security right is realised
● → should be transparent how much the secured creditor can recover from the proceeds
of the subject matter of his security right
● For other creditors important how much the amount of loan has to be paid
Both the subject matter and the secured claim should be sufficiently specified
● “Real rights must be known to third parties, otherwise no justification exists for their
binding nature vis-à-vis these third parties. To put it differently, transparency is required:
it must be clear upon which object a real right will rest and both object and real right
must be visible to the outside world.” (Hamwijk 2014, p. 38)
Right of priority favours creditor

● Affects position of other creditors
● Secured creditor has right to sell the burdened asset and subsequent right of priority
● Consequently, seizing that specific burdened asset is worthless for an
unsecured creditor, because the secured creditor will get paid first anyway →
lower chances of recovery
Protection of unsecured creditors
● Part of the solution is transparency! → Principle of specificity
● So that unsecured creditors are in a better position to estimate the credit-worthiness of
their counterparties and determine which (unburdened) assets they can seize in case of
the debtor’s default
● With regard to the burdened asset (subject matter – on which)
○ So that other, unsecured creditors (or the insolvency administrator) know exactly
which assets are burdened by a security right
○ And, a contrario, which assets are not burdened and on which no priority right
exists
○ Unsecured creditors are then in a better position to estimate the chances of
recovery and to decide whether they want to do business or not

● With regard to the secured claim (for which)

○ So that other, unsecured creditors know how much money the secured creditor
can recover with his security rights
■ Link with prohibition of unjust enrichment
■ Secured creditor can never recover more than his secured claim
○ Also not a strict requirement
■ General clauses are often sufficient
■ “the security rights are established to secure all existing and future claims
from the creditor (bank) against his debtor (zucchini farmer)”
■ Secured claim is determined afterwards when the zucchini farmer is
insolvent/in default (and when the security rights are enforced)
In most legal systems two specificity requirements not a strict requirement

● Strict requirements are time-consuming and require lots of paperwork for the creditor
(bank) and debtor (zucchini farmer)
● Dutch case law on claims: “as long as afterwards it can be determined which claims are
involved”
● Consequently, Dutch practice: general (non-specific) clauses
● “(…) establish a right of pledge on all existing and future claims from the debtor (zucchini
farmer) against his own debtors”
● The subject matters are determined afterwards when the zucchini farmer is insolvent or
in default
● In practice: parties use general clauses
Droit de suite
● = what happens when the hypothecor sells the asset that is burdened by the right of
hypothec
● Droit de suite: concerns the burdened asset = subject matter of security right-‘on which’
○ Right to follow
○ Applicable to all limited property rights
○ If burdened asset is transferred, limited property right
(pledge, hypothec, charge) remains in existence
○ ! The right of pledge/hypothec will follow this and remains in existence and
continues to burden the ownership right, even though the __ is transferred
○ Stems from nemo plus principle
● Principle droit de suite = applies to subject matter of any limited property right; if the
subject matter is transferred, the security right still burdens the subject matter
● If claims are transferred: need a (valid) legal ground, authority to dispose and a delivery.
● Claims were initially pledged

Principle of Accessority
● = what happens when the bank sells a secured claim (hypothec, pledge,...) to someone
else
● Accessority: concerns the secured claim ‘for which’
○ Secured claim = loan
○ If loan ceases to exist, then hypothec ceases to exist
○ → Extinction of the secured claim also entails extinction of the security
right
● property security rights tend to follow the proprietary status of the secured claim
● right of hypothec will automatically be transferred to the …
○ the right of hypothec will also be ‘assigned’ automatically to the party
● security right follows status of claim
● Accessority right: pledge, hypothec and charge always follow the proprietary status of
the secured claim
● Property security rights (including pledges) are accessory to the claim for which they
have been established.
● the right of pledge will automatically transfer to the new ‘owner’ (or at least someone with
equivalent entitlements) of the claim for which the right of pledge was established.
● → If those claims are transferred, then the right of hypothec will follow these
claims and be transferred too
● → if there is an assignment, the initial creditor loses its entitlements
● Accessory nature of security rights:
○ Security right follows proprietary status of the secured claim
○ If the secured claim is assigned, the security right is also assigned
○ Invalidity of secured claim also affects validity of the security right
○ Example: BGH, 18 March 1968
‘It is correct that if a causal legal act is declared void (…) this also entails the voidness of
the proprietary legal act, in this case the pledge (…)’
● If the claim is assigned to another party = assignment, it needs a (valid) legal ground,
authority to dispose and a delivery (deed and subsequent registration)
on claims/receivables
1. The claim for which the security right is established (the claim from the creditor against
the debtor – the secured claim)
- To this claim, the principle of accessority applies
2. The claim on which the security right is established (the claims from the debtor against
his own debtors – the subject matter of the security right)
- To this claim, the principle of droit de suite applies
Enforcement / Realisation of Security Rights

● How security right holder exercise the right

● hypothecee has right to sell the subject matter of the security right when debtor is in
default
○ sell the subject matter of the security right
● Subsequent right of priority on the proceeds of the forced sale of the subject matter
of security right → prohibition of unjust enrichment
○ subsequently he has a right of priority on sale proceeds
● Priority over other creditors → Prior Tempore Rule
● In short: enforcement through a forced sale, which leads to a right of priority on the
proceeds of the sale (in discharge of the secured debt)
Different from a pledge on receivables

○ Not efficient to sell receivables to third parties
○ Pledgee will normally collect the receivable instead of the pledgor
○ Only collect, not selling to third parties
Prohibition of Unjust Enrichment

● The enforcement of the security right cannot end up more favourable for the
secured creditor than the position in which he would have been if the secured
claim had been paid voluntarily. → Specificity requirement
Several issues:
● Prohibition of self-help
○ = security right holder needs prior judicial authorization in order to
initiate the forced sale of the subject matter of the security right; only
initiate if the pledgor is in default with repaying the claim of right
holder ( → only in France v the rest (not the case))
■ Prior judicial authorisation necessary to initiate forced sale
■ Advantage: To protect the pledgor
■ Judge verifies if pledgor is indeed in default
■ Disadvantage: Time-consuming and extra costs → security right
worth less
○ In France
■ Only prevalent in France
■ Court order is necessary → protects the pledgor (debtor)
■ Double check whether the pledgor is in default
■ there is a prohibition of self-help: you need prior judicial authorisation if
you want to realize your right of pledge
■ main disadvantage of this prohibition is that it could diminish the
economic value of a right of pledge, which could lead to less access to
credit. This is because judicial authorisation costs time and money for the
pledgee (creditor) – it can be burdensome

■
○ Not in Dutch law and German law, but contract can provide otherwise
■ See article 3:248(2) DCC
○ Not in England & Wales: The Odessa v. The Woolston-case
● Prohibition of pacta commissoria

○ Parties can not decide that the creditor (security right holder) becomes owner of
the subject matter of the security right without judicial authorisation
○ security right holder has the right to sell the subject matter of security
right in case of pledge / charge / hypothec; agreement is prohibited in
which creditor and debtor could also agree to sell the subject matter
that the creditor does not sell it but becomes owner of the subject
matter (→ not the case in France v the rest)
■ Disadvantage: Less flexibility for the pledgee, pledgees are forced to sell
the asset, while they would like to become owner of the asset themselves
■ Protection pledgor: disadvantaged in case of surplus value
■ Parties can not decide prior to the debtor’s default and without judicial
authorisation that the pledgee becomes owner of the asset
■ Why?
■ Pledgee would be enriched in case if the asset is worth more than the
secured claim (‘surplus value’)
○ Applicable in every jurisdiction, except France (since 2006)
■ it does not prohibit that there is an agreement in which the creditor and
debtor could also agree that the creditor does not sell it but becomes
owner of the subject matter
■ This is of an advantage to the economy and does not restrict the
creditor’s freedom over the secured asset.
○ Exception in article L311-32 French Consumers Code: voidness
○ France has rules to counter the aforementioned enrichment
■ Taxation of the asset by an expert is required
■ In case of surplus value: payment of value to the pledgor
● How to sell the assets?

○ In all legal systems: through a public sale (auction)
○ In some legal systems: derogations available, possibility of private sale
○ Public versus private sale
○ Everyone can bid vs. cheaper + private buyer sometimes offers more
➔ Every aspect intends to protect the pledgor but leads to higher costs and less flexibility
for the pledgee (or vice versa)

Principle of publicity
= concerns question if a security right is visible to other creditors form the outside
= security rights give right holder priority (they are paid first) before other creditors
= only after the secured creditor is paid → important for other creditors that
security rights are paid because only then they can determine if debtor is
creditworthy
Ways of publicising:
1) Possessory Pledge: dispossession is required; debtor transfers the possession of his
asset to the creditor
2) Non-Possessory Pledge: by deed and registration in a public register (in France, in NL
not public = principle is in decline)
➔ Together with the principle of specificity, these principles should ensure that
security rights are transparent to third parties. In practice, however, that is often not the
case
- it is based on the idea that property rights (should) only have effect vis-à-vis third parties
if they are actually public, i.e. can be known by such third parties
- Property rights should be public
2 reasons
1) ‘problem solving’
- the need for public information is based on the presumed existence in practice of
a problem, often referred to as ‘the false appearance of creditworthiness’, ‘the
false appearance of wealth’, or ‘the false appearance of ownership’
- the problem of ‘ostensible ownership’
- a doctrine that finds its roots in Clow vs. Woods
- “(...) as a result of the non-possessory pledge, the possibility arises that third parties can
be deceived by a false appearance, (...) because now the outsider cannot see that the
movable tangibles that he [the debtor, DJYH] has in his possession are encumbered
with a security right, so that a false appearance of creditworthiness arises.”
⇒ focus on whether one can or cannot see that a security right is created
2) ‘dogmatic approach’
- third parties have a duty to respect property rights (including security rights) and
should therefore be able to be aware of their existence.
- property rights have third party effect, whereas personal rights do not
- because third parties are expected to respect proprietary rights, i.e. are bound by
these rights, they must at least know what or which rights they should respect,
i.e. what they are bound by
⇒ describes the transfer of physical possession as having the purpose of
(contributing to) providing that information

Week 6 - Limited property rights: Security rights
The Right of Ownership

● = most extensive right one can have on an asset
● is used as a means to secure a claim
● A right over property (right in rem) is either a right of ownership (dominium), or a limited
right (ius in re aliena)
= the owner is exclusively entitled to enjoy, manage and dispose of this right for his own benefit
Ownership for security purposes

● Creditor-debtor relationship
● The most extensive right, but for a limited purpose
○ Creditor obtains ownership to secure his claim
○ In some legal systems: regarded as odd
■ E.g. the Dutch stance on fiduciary transfers (article 3:84 (3) DCC)
■ Principle of numerus clausus
● Unlike usually, the ownership right is conditional
○ Debtor has a right of redemption = creditor will have the obligation to retransfer
the right of ownership back to the debtor
○ Ownership (re)transferred by creditor upon (re)payment of claim
● Ownership is delivered constitutum possessorium = physical possession of asset and
control remains with the debtor (economic benefits and use profits from daily course of
business to pay off creditor’s claim)
○ Factual control remains with debtor (detentor) & creditor obtains right of
ownership
○ Comparable to non-possessory pledge: difference to non-possessory pledge is
that the creditor does not obtain a limited property right but a full right of
ownership
○ Creditor becomes indirect possessor withholding though the debtor
No Establishing necessary
● no enforcement of security right is necessary by the creditor / owner, the owner-
secured creditor can remain at the status quo
○ The owner-creditor is still the owner if the transferor-debtor is in default and an
owner can do what he pleases with his assets
○ there is no restriction to a right to sell and of priority → different to
pledgee or hypothecee (only right to sell and subsequent right of priority)
● Creditor is owner: creditor can remain at status quo if debtor is in default
■ Limited property rights: if debtor is in default, the creditor has a right to
sell (actively sell asset to get the money back, subsequently he has a
right of priority)
■ Not the case when the creditor is the owner: remain at status quo =
creditor is already the owner & rights of the owner are not limited to the

right of sell and the subsequent right to priority (more rights as an owner
than from a pledgee)
○ As owner, he is not obligated to sell – choose to remain owner (sell it or not)
○ However: ownership for limited purpose – contractual or statutory limitations
■ E.g. obligation to sell and/or to return surplus value
■ the secured creditor is only owner for security purposes
■ He might be owner, but his ownership has limited purpose similar to a
pledgee or hypothecee
● Therefore: should his rights be limited to protect the transferor-debtor?
○ De Groot, p. 162 → limitation of the owner’s rights
● Common ground: most extensive property right
○ Theoretically, an owner can do whatever he/she pleases
○ Statutory limitations
■ Zoning laws
■ Protection of natural reserves
● Debtor (re)pays: ownership must be retransferred
Transfer of Ownership for Security Purposes

● - Fiduciary Transfer for Security Purposes
= Debtor transfers ownership of assets to creditor, but without actual delivery (Delivery
constitutum possessorium)
○ Debtor remains in factual possession → debtor becomes detentor (he
holds possession for the benefit of the new owner who is the creditor of
a claim against the debtor)
○ Debtor remains in control
■ Functional equivalence to non-possessory pledge (De Groot, p. 162)
→ because the debtor remain in control and is able to use those
assets in his daily course of business while at the same time
having transferred ownership to the creditor only for a security
purpose
■ Fiduciary transfer: creditor obtains ownership
■ Pledge transfer: creditor obtains right to sell and right of subsequent
priority
● No publicity requirement → creditor or debtor does not need to register the
transfer in a public register
● The creditor becomes owner for security purposes
○ Debtor in default → creditor enforces his claim on his right of
ownership
■ Ownership is the most extensive right = unlimited
■ However: creditor’s ownership has a limited purpose
■ Therefore: contractual or statutory limitations of the creditors ownership
right

● Germany: restriction to an Absonderungsrecht (De Groot, p. 168)

● England & Wales: ‘equity of redemption’ (De Groot, p. 166)
● Ownership right of creditor is conditional – debtor has right of redemption

○ Similar to the principle of Accessority: as soon as the debtor pays off his claim,
a right of pledge or hypothec ceases to exist because the secured claim also
ceases to exist
■ Same applies to Fiduciary Transfer: ownership right of the creditor is
conditional: as soon as the secured claim is paid off, the debtor has a
right of redemption = right to reclaim the ownership
○ For creditor: obligation to re-transfer the ownership → in that sense it is
conditional
Civil Law
● the transferor (debtor) is entitled to a proprietary interest
● Fiduciary transfers in civil law are generally divided into two types:
○ the fiducia cum creditore (security device) and
■ → all systems show a tendency to protect the economic position
of the transferor as an acknowledgment of the fact that the
transfer of ownership is used for management and security
purposes, when suitable legal substitutes are lacking
○ the fiducia cum amico (management/administrative device)
Advantages / Disadvantage of ownership as security over (limited) property security rights

Advantage
● Ownership is a more comprehensive right than the mere right to sell
○ Especially in case of claims: e.g. security ownership of a claim = ability to
negotiate with the debtor of the claim, do settlements
○ Example: security ownership of a claim
○ Ability to grant delay to the debtor, to reach a settlement or to waive the debt
○ → you cannot do that with a pledge
● Sales process is not regulated: choose for private sale
● No priority conflicts: creditor always has the highest priority as owner → there
can only be one owner of an asset at the time (no fragmented ownership, Numerus
clausus)
Disadvantages (for the debtor)

● You cannot establish multiple security ownerships over an asset → only one
owner of an asset
○ Debtor can not use the ‘surplus value’ to obtain extra credit
○ This is possible with non-possessory pledges
● Possible over-protection of the creditor: creditor has more rights than necessary to
secure his claim

○ Contractual or statutory limitations in e.g. Germany or England & Wales
Fiduciary transfer for security purposes

German law: yes, allowed: fiduciary transfer (creditor obtains ownership) acknowledged in case
law
● Does not have a non-possessory pledge → Which is important to have in
every economy = fiduciary transfer
● Flexible application of numerus clausus: pledge not conceived as exclusive security
device
● Legal-economic background: corresponds to need for non-possessory security
right → Debtor remains in physical possession and can use the asset
● based on 930 BGB (transfer without actual delivery – delivery constitutum possessorium
(enabling transfer without actual delivery))
● No publicity requirement
● (contractual or statutory) limitations to protect the transferor/debtor
French law: traditionally prohibited, but need for more modern security device → yes,
since 2007
● Article L313-23 of Monetary and Financial Code (inserted in 1981)
● Fiduciary assignment of professional claims of a debtor
● Article 2011 Cciv (inserted in 2007)
● Generalisation of fiduciary ownership
● Current situation in France: non-possessory right of pledge and fiduciary
transfer without actual delivery → both are used
Ducth law: abolished fiduciary transfer in 1992 (article 3:84(3) DCC); no, not a valid legal ground
for the transfer (article 3:84 (3) DCC)
● A transfer for security purposes is not a valid legal ground for the transfer of ownership
under Dutch law (see article 3:84 (3) DCC)
● Fiduciary transfer not a legal ground for transfer of ownership
● Strict application of numerus clausus
● Replaced by non-possessory pledge
○ You cannot use the right of ownership as a substitute for the right of pledge
○ Therefore: parties should use a limited property right (pledge/hypothec), which is
sufficient to secure repayment, instead of ownership
● For a transfer of ownership to be valid under Dutch law, there must be a valid legal
ground for transfer (causal system)
● However, in this case you could argue that the transfer occurs for security purposes
(fiduciary transfer).

is this a transfer for security purposes?

● BUT: Sogelease
○ Reintroduction of narrow concept of fiduciary transfer through case law
○ The transfer is valid if parties are operating an ‘actual transfer’, a
fiduciary transfer is not a valid legal ground → security intention is not
of relevance
○ Most important to determine whether ownership is valid:Of importance when
deciding which transfer it is: Substance of the creditors ownership is the deciding
factor
○ → if the ownership right is unlimited, then the transfer is valid and legal
ground for transfer of ownership
○ ⇒ Fiduciary transfer is possible as long as the creditor obtains an

unlimited ownership right
■ Is the ownership right limited (conditions?) → no fiduciary
transfer & no valid ground
■ If the ownership is not limited → fiduciary transfer is possible
actual transfer → not prohibited
○ The debtor and creditor agree that the ownership right is limited to a right to
sell → parties are establishing a quasi-pledge → prohibited by article
3:84(3) DCC
○ Intention of the parties is irrelevant

● NL does not allow limitations of the ownership right (Sogelease)
● Fiduciary transfer not a valid legal ground for the transfer
○ no transfer (proprietary effect) will take place
○ Anything that was exchanged should be reversed (unjustified enrichment or
revincidation)
○ Same goes for consensual transfer system
England and Wales: right of mortgage

● Functionally equivalent to fiducia cum creditore = fiduciary transfer for security purposes
● = mortgage is the conveyance or assignment of property by a mortgagor to a mortgagee
as security for the repayment of a debt or the performance of some other obligation (De
Groot)
● legal interest of the mortgagee is protected by an equitable right; the ‘equity
of redemption’ → guarantees that the ‘mortgagee’s interest shall be effective
only as a security interest, and that the economic benefits of ownership shall
remain in the mortgagor’ (De Groot)
● “the ‘mortgagee’s interest shall be effective only as a security interest, and that the
economic benefits of ownership shall remain in the mortgagor” (De Groot, p. 166)
● Mortgagee (creditor) has conditional ownership of mortgaged assets

○ Mortgaged assets can be both movables and immovables → fiduciary

transfer in civil law concerns movables
○ Not a limited property right → mortgagee gets conditional ownership,
so therefore mortgage ≠ civil law hypothec
○ Hypothec is a civil law security right = limited property right that is limited to
immovables
○ Holder of a right of mortgage will obtain the conditional right of ownership and
mortgage is on movables and immovables
● Mortgagor has right of redemption as soon as he pays off the claim (‘equity of
redemption’ – De Groot, p. 166)
● Mortgagee must re-transfer title to the assets to the mortgagor / debtor after his claims
are paid off
● Public registration system for non-possessory mortgages on movables
● Publicity requirement
● have (contractual or statutory) limitations to protect the transferor/debtor
Retention of Title Clause

= contractual clause that often exists in the sale of goods (seller and buyer)
● entails that the transfer of ownership of the sold assets is made dependent upon the
fulfilment of a condition precedent
● In order to bypass the vesting of any fixed charge on movables and retain some form of
security for themselves, suppliers (sellers) frequently include a clause in their supply
contract, by which they retain the title to the goods until the full purchase price has been
paid
● Regular transfer of ownership = ownership passes at moment of consent

(consensual system) between the parties or at the moment of delivery
(tradition systems) → depends on the system of transfer that is used
● Retention of title clause = passing of ownership is delayed → happens at a different
moment than normally
○ Seller of goods transfers possession of the asset to the buyer
○ Buyer obtains physical possession
○ Buyer uses the asset in course of business
○ Seller remains owner, despite consent between seller and buyer or delivery of
the goods
○ Passing of ownership depends on fulfilment of contractually agreed suspensive
condition
■ = transfer of ownership is suspended until a certain condition is fulfilled
■ seller remains owner of the assets that he sold
■ Nature of suspensive condition depends on the contractual agreement
■ Seller’s ownership right is conditional

■ Subject to an extinctive condition

○ If the Condition is fulfilled → the ownership transfers automatically to
buyer
■ Requirements for transfer have been fulfilled earlier
■ Automatically transfers to buyer as soon as suspensive condition is
fulfilled
■ Only the transferring effect of the transfer is suspended
→ Transfer of ownership from seller to buyer

3 requirements for a transfer:
1. Legal ground
2. Authority to dispose (transfer the ownership)
3. Form of delivery (buyer is in factual possession to make profit with those assets)
● Transfer requirements have been fulfilled

○ Delivery ⇒ factual control of asset already with buyer
○ Buyer becomes detentor with physical possession, seller indirect possessor (hold
rights of ownership through the buyer)
● Normally: ownership passes to buyer
○ At moment of consent (consensual systems)
○ At moment of delivery (traditio systems)
Significance of retention of title clauses:

● Seller remains owner of his goods despite requirements for transfer being fulfilled and
the buyer can already use those assets for his business
○ Until suspensive condition is fulfilled
■ = condition is usually the payment of the purchase price of this asset
○ Sellers’ ownership is conditional: subject to resolutive condition
● Retention of title clauses are effective in insolvency: even if the buyer goes
insolvent, the seller remains owner of the assets until insolvency
administration of the buyer fulfills the suspensive condition, if not → the seller
can exercise right to vindicate (claim the assets back because they are still his
assets)
English law:
The (simple) reservation of title is available to creditors by virtue of S. 19 of the Sale
of Goods Act 1979 → does not extend to produced or commingled goods
● Extending the reservation of title clause beyond the original goods supplied may
however result in the clause being characterised as a charge, which means that it should
be registered. This is not a requirement for a simple retention of title clause.
How does a title retention clause protect against the non-payment / default from the buyer?
(buyer goes into insolvency and claim of the seller has not been paid off by the buyer)

● Delivery has taken place: Asset is physically under control of the buyer – buyer became
detentor and he can use asset for daily course of business
● Seller is, however, still the (conditional) owner and remains owner until buyer fulfils the
suspensive condition: payment of the purchase price
If the buyer is insolvent: how does the seller get his assets back?
● Seller is still the owner
● Protection of the seller against the insolvency of the buyer: because seller has a
right of vindication (rei vindicatio)
○ = Seller can ask assets back (or insolvency administrator pays the remaining
rest)
○ Legal action by which the owner demands that the detentor (in our case: the
buyer) returns an asset of the owner
○ BUT: specificity requirement, the owner must be able to prove precisely
which assets are (unpaid and consequently) still owned by him → easy
when items are stored separately
○ Seller must point them out → GoldCorp-case
● Specificity requirement is difficult in situations of commingling
○ = e.g. coffee beans
○ Cannot distinguish between them (2 types) even though they are separate
○ Difficult for the seller to point put which assets were delivered by him
● Seller can not enforce his right of vindication. What is the consequence?
○ Buyer who is insolvent is detentor of the assets
○ The law presumes that a detentor is possessor and, consequently, that the
possessor is owner
○ this presumption can be refuted, in this case when seller proves which asset was
supplied by him
○ Therefore: seller loses his legal position if he cannot point put which assets are
his
● Conclusion: buyer can claim ownership of (or equivalent title to) the asset. This is
because the seller, unfortunately, can not prove that the asset is his.
Bonus: how can parties prevent a situation like this?

→ keep assets separate
Function of Retention of Title Clause:

● To protect against buyer’s insolvency → Title retention clause is functionally
equivalent to a security right
● Seller has right of vindication in case of insolvency (claim the assets back because they
are still his assets)
● Therefore: functionally equivalent to right of pledge or hypothec:
○ Same goal: to protect against someone’s insolvency either through
■ Limited property right or

■ Right of ownership (retention of title clause)
Which claims can be secured with a retention of title clause / which claims can be part of the
suspensive condition
● The suspensive condition (secured claim) is usually payment of the purchase price for
certain goods
● German law: article 449 BGB, seller can secure any claim against the buyer, but
restrictions in case law
● England & Wales: secure any claim (‘all monies clause’ – Armour and Another v.
Thyssen Edelstahlwerke AG)
● French law: article 2367 Cciv, only secure the claim that is related to the
specific transaction - the purchase price for the specific supply → only for e.g.
a specific car, not from the past
● Dutch law: article 3:92(2) DCC, you can secure the purchase prices for past and/or
future supplies, claims for services related to those supplies or for damages for the
breach of those contracts
○ allows creditors to retain ownership of a good that is transferred to the debtor
until the debtor performs an obligation that is owed to the creditor
Is the ownership right of the seller a full ownership right or a security right?
○ Security rights are generally published → ownership is not (principle of
publicity does not apply)
○ Security rights are accessory to the secured claim → ownership is not
(principle of accessority does not apply)
● Title retention clause is functionally equivalent to a security right
○ Same function = protects against buyer’s insolvency
● But conceptually different
○ Security right: debtor grants priority rights on his assets in favour of one specific
creditor
○ Retention of title: contractual clause between seller and buyer deferring the
passing of ownership
○ Armour and Another v Thyssen Edelstahlwerke AG: ‘and goes to show that the
retention of title provision is not one creating a right of security’
● Is the functional or conceptual criterion decisive?
○ conceptual criterium decisive: the seller ownership right is seen as full ownership
right
● Ownership of seller generally regarded as full (but functional) ownership right
Consequences of retention of title as a full ownership right:

● No publicity requirement
○ Illustrates the decline of the principle of publicity

○ Ownership right of seller ‘concealed’ for third parties (‘problem of ostensible

ownership’) → buyer is already in physical possession
● Ownership right not accessory to the secured claim
○ When the seller assigns his claim against the buyer to a third party, the
ownership right is not automatically assigned with it at the same time to the third
party
○ Exception: France (article 2367 Cciv) ownership right is accessory to the
secured claim
○ Semi-exception: Germany, ownership right is non-accessory, but assignor of
the claim/seller is presumed to have an obligation to transfer the non-accessory
rights to the assignee
● No prohibition of unjust enrichment
○ Surplus value (also) belongs to the unpaid seller, nothing to return to the buyer
Analysis in Exam
1. What does the title retention clause entail?
a. In order that ownership passes, a contractually agreed suspensive condition
must be fulfilled and only then transfer of ownership of the sold items will occur
b. This means that the person remains owner until the condition (of paying the
purchase price) is fulfilled
c. Condition is the payment of the purchase price
2. Is the person still the owner of his supplies?
a. yes, due to the retention clause as the suspensive condition is not fulfilled due to
bankruptcy as the price has not been paid
i. → the person has still ownership
b. Because the company did not pay the person fully, there is an outstanding
amount that is owed to the person (thus still having ownership)
3. How is the person protected?
a. Right of vindication? Can he enforce it?, retrieve the goods
i. Protection of the seller against the insolvency of the buyer
b. Requirement of right of vindication: In order to exercise the right of vindication:
prove the goods that are yours
c. Specificity requirement (principle of specificity) to prove precisely which items are
his and owned by him
d. Re Goldcorp Exchange Ltd [1994] UKPC 3)
e. French Pogic v Astral-case (Cour de cassation, 9 January 1990, Van
Erp/Akkermans 2012, p. 480)
f. Texeira de Mattos-case
g. If this is a case of commingling (items not distinguishable)
i. Why the case of commingling? → stored with other items that
are indistinguishable from the goods by the person
h. then Right of vindication is most likely not enforced by him

i. If he cannot prove his items

4. What is the consequence?
a. Detentor: company with physical possession of the items
b. The law presumes that a detentor is possessor and, consequently, that the
possessor is owner
c. The items are under the company’s factual control
d. Law presumes that the company is owner of the items due to possessing them
i. → can be refuted by person with specificity requirement if the
person proves which items are his, impossible due to
commingling
ii. If not, the person will lose its legal position regarding the items
e. It is presumed that the goods are owned by the company
Two common problems for the seller under a title retention clause:
Problem 1: the buyer re-sells the goods (still owned by the seller) to a third party (in his
normal course of business)
Buyer = wholesaler
Zucchini supplier = still owner of the zucchini
→ in the meantime the buyer resells the goods
I transfer zucchinis to a wholesaler under a title retention clause. The wholesaler re-sells the
zucchinis to a local supermarket, but does so before payment. I am still the owner.
Is my claim against the wholesaler (payment of the purchase price) still secured, now that the
ownership of the zucchinis has passed by the wholesaler to the supermarket?
Is my claim against the wholesaler still secured?

● German law: yes
○ Verlängerter Eigentumsvorbehalt
○ Anticipatory (fiduciary) assignment of the sub-sale claims from the wholesaler
against the local supermarket to the initial seller
■ Wholesaler will assign his claim against supermarket for payment of
purchase price to the initial seller of zucchinis
■ initial seller of zucchinis loses ownership, however the wholesaler will
assign his claim against the supermarket to the initial seller

● England & Wales: unclear

○ ‘presently a maze if not a minefield’ (Staughton J)
○ According to Romalpa-case: yes, but the case seems to be a peculiarity (Loof
and Berlee, p. 17)
● French law: partly

○ Article 2369 Cciv: ‘the retention of title of a fungible thing (…) attaches to things
of the same nature and quality detained by the debtor or on his behalf’
● Dutch law: no
Problem 2: the buyer uses the goods to manufacture a new asset (specificatio)
Seller = still the owner of those assets
I transfer cotton to a tailor under a title retention clause. The tailor uses the cotton and
manufactures a suit, but does so while I am still the owner of the cotton and before payment.
Is my claim (payment of the purchase price) against the tailor still secured by an ownership
right?
Analyse first the title of retention clause:

1. What does the title retention clause entail?
a. In order that ownership passes, a contractually agreed suspensive condition
must be fulfilled and only then transfer of ownership of the sold items will occur
b. This means that the person remains owner until the condition (of paying the
purchase price) is fulfilled
c. Condition is the payment of the purchase price
● ! The cotton disappears as an identifiable asset → the initial ownership of the

cotton disappears (SPECIFICATIO)
● ! The rules on specificatio determine who becomes owner of the new asset: A
new right of ownership originates, namely the ownership of the new thing
● = cotton is a different entity than the suit
● → if goods ‘lose their identity’ the supplier’s retention of title is lost as well,
and he cannot trace
● if the goods have been processed but retain their identity, then the right also remains

However: am I now owner of the suit by virtue of the title retention clause? - no
● General rule in most jurisdictions: the legal rules on specificatio are the sole and
mandatory rules that determine who becomes owner of the suit
● ⇒ I could become owner of the suit but only if the rules on specificatio
determine so
● Those mandatory rules on specificatio can not be by-passed by agreeing an extended
title retention clause
○ You cannot agree with the buyer that I will become owner of the materials (suit)
that is made out of the cotton
● Conclusion: claim is no longer secured by an ownership right
● I could become owner of the suit, but only if the rules on specificatio determine so
One Exception: German law

● Germany allows an extended title retention clause (L’ = enables a seller to extend his
retention of title to a product of manufacturing)
● Buyer and seller can agree that the seller becomes owner of (a fraction of) the product
of manufacturing
● Leather shoes-case (BGH, 19 October 1966)
‘that the supplier (..) can retain his title through a so-called ‘transformation clause’ and can
claim title on the basis of paragraph 950 BGB in the (JL: manufactured) product, is not
contested.’‘(..) suppliers do not claim title to the entire final product, but only to the part of the
raw materials, such as in this case ‘to the extent of the value of the raw materials it supplied
(..). It must therefore be clear from the agreement extending the retention of ownership for
which fraction the supplier (..) is to become co-owner of the finished product.’
● German law: possibility to become owner of a fraction of the new asset

● Parties can decide that the supplier / seller can retain his title to a transformation
clause and can claim title on the basis of §950 BGB in the manufactured product
● §950 BGB that the manufacturer of a new product will become the owner of that
product
● despite the mandatory law of §950 BGB, parties to the supply contract can decide
themselves who will be regarded as the manufacturer
● Raw materials = in this case cotton
● To decide who becomes owner of the chairs, we must decide who is manufacturer of
these chairs (in light of §950 BGB)
● To decide who is manufacturer of these chairs, we must, according to German case
law, first decide an insider’s (public) opinion.
● According to the contractual clause (‘Verarbeitungsklausel’) between Nathaniel Wood
and RENOVATE, Nathaniel Wood becomes co-owner of the chairs that are crafted
from his wood.

● This contractual clause would most likely lead to an insider’s opinion that both
RENOVATE and Nathaniel Wood are to be seen as manufacturers of the chairs.
● !both to be seen as manufacturers → they will both become co-owner under
§950 BGB !
● ! Leather shoes-case (BGH, 19 October 1966) !
○ Possible that parties are able to decide who is becoming manufacturer
and whether co-manufacturer is appropriate
● ! most likely become co-owner of the chairs to the proportion that the value of his
materials bear to the value of the final product. RENOVATE will become co-owner for
the remaining proportion of the value !
● Only co-owner / fraction !!
How does this translate to our example?

● I would become owner of a fraction of the suit if buyer and seller agree on an extended
title of retention clause
● Value of that fraction of the suit is equal to the value of my cotton that I supplied
● Fraction should be clear from the agreement which contains the extended title of
retention clause
What if the buyer uses the goods (in this case: gold) to manufacture something new before
paying the seller and fulfilling the suspensive condition?
● Example: gold to manufacture watches
● Case of specificatio (= use certain assets to create something new)
○ Problem for the seller if the gold is manufactured: he sold gold to the
buyer under title of retention clause as he is protected against his
insolvency → he can enforce right of vindication to ask his gold back
● Does the seller lose his ownership of the gold now that it has disappeared?
○ Yes, the gold disappears as separate and identifiable asset
■ Ownership right of the gold disappears
● Solution: extended title retention clause: agree with the buyer to become owner of a
fraction of the watch
■ Legal systems: rules on specificatio determine who becomes owner of the
watch (mandatory in many systems)
● General rule: gold disappears → ownership right disappears → rules on
specificatio determine who becomes owner of the watch
○ By-passing the rules with an extended title retention clause not possible
● Exception: Germany allows extended title retention clauses
○ Seller becomes owner of a fraction of the watch
Ownership as security vs limited rights as security
Ownership as security Limited property rights as security

● Fiduciary transfer: transferee (creditor) ● Security rights: debtor grants a priority right on
obtains a full ownership right instead of a his own assets in favor of a creditor
limited property right
○ However: in some legal systems the
ownership right is limited by contract
or statute
● Asset can only be used once to give a creditor ● Multiple security rights on one asset possible
security (enables usage of surplus value)
● There cannot be multiple (full) owners
● → numerus clausus (no fragmentation of
ownership)
● No priority conflicts ● Priority conflicts in case of multiple security

rights
● Less protection for the debtor but more ● More protection for the debtor but less
flexibility in favor of creditor: rights are not flexibility for the creditor: rights of creditor
limited to right to sell and subsequent limited to the right to sell and subsequent
priorities priority
● Fiduciary owner of house: owner can sell, but ● Hypothec: hypothecee can only sell the house
can also choose to remain owner and rent out and has subsequent priority right on the sales
the house proceeds
● No prohibition of self help or prohibition of ● In some jurisdictions, prohibition of self-help

pacta commissoria or prohibition of pacta commissoria
● Sales process is not regulated by legislation ● Sales process regulated by legislation:

general rule is a public sale and in case of
immovables sometimes mandatory
intervention by the notary
● The ownership right is generally not Security rights must be published

published, not accessory and there is no ● Principle of ostensible ownership and publicity
prohibition of unjust enrichment ● Transfer of possession or deed + registration
→ no principle of acessority
○ Non-possessory pledge: deed (not
→ no principle of publicity
→ no prohibition of unjust enrichment: keep notarial) + registration of deed in
surplus value register
○ Right of hypothec: deed (notarial
deed) + subsequent registration of the
deed
● However: these principles are in decline (e.g.
Dutch register)
→ principle of acessority
→ principle of publicity
→ prohibition of unjust enrichment
➔ a creditor would most likely favour ownership as security, while a debtor would most likely
favour limited property rights
➔ right of ownership offers more flexibility to the creditor because rights are not restricted to the
right to sell, also use assets for other things

➔ limited property rights: better protection for debtor
⇒ same goal: protection of debtor against insolvency
Week 7 - Trusts
● Trust = a legal concept through which rights can be held by one person (the trustee) on
behalf of another (the beneficiary)
● A trust allows more than one person to own property at the same time: multiplicity of
ownership
Theory of trusts in common law jurisdictions

Definition of Trust:
“A trust is a situation in which property is vested in someone (a trustee), who is under legally
recognised obligations, at least some of which are of proprietary kind, to handle in a certain
way, and to the exclusion of any personal interest.” - Gardner
● Legal owner (trustee) manages the asset on behalf of the beneficiaries
● Relationship of management in terms of property
● Why not a management agreement?
○ → you also want someone else to benefit from it
○ Traditional set up:
■ Settlor: transfers asset to trustee (legal owner and holds legal
title) → not holding any type of ownership!
■ Trustee holds asset for the benefit of the other party: Beneficiary
People who own the property enter into a legal relationship:
● Trustee: who owns property for the benefit of… (other people)
● Beneficiary
Settlor ⇥ Trustee (legal owner) ⇥ Beneficiary (beneficial owner)
For elements of trust

1. Equitable: trust needs to be equitable (acting with conscience, beneficial to all
people)
2. Gives the beneficiary rights in property to the beneficiary
3. Imposes duties / obligations on the trustee
4. These duties / obligations are fiduciary in nature

Westdeutsche Landesbank Girozentrale v Islington LBC [1996]

○ Lord Browne-Wilkinson
○ 4 elements origin
Three main types of trust

❖ Express trusts: inter vivos trusts
● ‘Transfer in trust’
● ‘Declaration of trust’
❖ Implied trust:
● Constructive trusts
● Resulting trusts
○ Mother sets up trust for whole family, benefit is within the family
❖ Constructive trust
Why use trusts?

● Wills:
○ settlor is the person who died
○ Trust is activated and settlor is not involved
○ Trustee is obliged to monitor that the money is divided as in the will
● Business
○ Corporate finance: to attract capital
○ Relationships between 2 companies
○ They don't know each other: create ‘trust’
● Tax avoidance
main features of the trust

● split of ownership
○ Rights are split up into: ⇒ Legal ownership and beneficial ownership
○ Both have some form of ownership: asset comes to trustee and any benefits with
the asset are for beneficial owner
● is that it enables beneficiaries to separate assets from the personal estate of the trustee
and all assets of a debtor should be available for its creditors→ trustee's insolvency =
fundamental rule
● Trustee is legal owner, if he goes bankrupt, the asset does not fall within the bankrupt
assets; beneficiaries can claim their assets (full recovery of the claim);
○ beneficial ownership has strong protection in bankruptcy
● If a beneficial owner would go bankrupt: Can they claim trust property? → no
because legal ownership is with trustee
Trustee’s duties, powers and rights

● Property in the trust is not beneficially ● Array of powers to facilitate

his own management
● Legally recognised duties ○ Personal to the trustee
● Duty: bestowal of right of enjoyment ● What is the impact of a bankruptcy of
● Duty: stewardship trustee
○ Trust property
○ Beneficiaries
Express Trust
● 3 key roles:
○ Settlor
○ Trustee
○ Beneficiary
● Settlor: person who owns the property in first instance and creates
trust
● → splitting up ownership: more than one owner (allows more than one
person to own property at the same time)
○ Legal title goes to the Trustee
○ Equitable interest goes to the Beneficiary
● Trustee and Beneficiary do not live completely separate from each
other
○ Relationship between the owner: fiduciary relationship
Settlor:
- Starts with the absolute title to the property:
- Legal and beneficial title exists within one person
- Once the trust is set up, the settlor does not then have any
subsequent role to play
- Afterwards he can be Trustee or Beneficiary
- In most situations: Settlor disappears once the Trust is established
Trustee:
- Has the legal title vested in them
- Duties / obligations are set put in the trust document
- Bare trust: single beneficiary and they ultimately have the
beneficiary interest in that property
- Fixed trust: more than one beneficiary + agreement
→ both: property is held for the benefit of more person

in a trust
- Discretionary trust: trustee taking an active relationship with
beneficiaries; monetary decisions
What is a fiduciary relationship?

A relationship based on:
● Loyalty
● Good faith
● = legal relationship between people e.g. doctor and patient
→ trustee and beneficiary have a fiduciary relationship
Dependent on the role that the other person is performing

● And social role of the people playing at this time
● e.g. doctor and patient: doctor needs to give advice on health and not
on unrelated topics
Beneficiary:
- Has an equitable interest in the property
- Rights are dependent on the type of trust in question
- Vested rights vs continent rights
- Saunders v Vautier (1841)
- Absolutely entitled beneficiaries (single beneficiary
under a Bare Trust) can direct the trustee to deliver up
the trust property → that person would become the
absolute owner in terms of legal title and beneficial
title
- Trust relationship can be dissolved in this way
Legal Roles and relationships

➔ One person could have all three roles
➔ Settlor can set up trust, within the family → beneficiary is the
family and trustee is father
there is de facto a trustee that holds the asset for the benefit of one or more
beneficiaries
Resulting Trust Can be implied by the courts in two situations:

1. Where it is not clear where the equitable interest lies, that interest
results back to the settlor
2. Where a person has contributed to the purchase price of the property
- E.g.: house 100.000 EUR, you contribute 25.000 EUR →
then you have a 25% share under resulting trust
Constructive Trust Imposed by the courts where a person has acted unconscionably
- E.g. you get paid 1000 EUR by a company and instead they
pay 10.000 EUR → then as soon as you see the error, you are
the trustee and have obligation to show overpayment

Financial Markets
Use of trust in financial law
Examples:
● Trustee holding security for a large bank syndicate
● Trustees holding security in bond issues for a large group of bond holders
● Trustee holding security for different groups of lenders (bank syndicate, bond holders,
junior lenders)
Syndicated loan
● syndicate banks may run an insolvency risk against the security agent holding the
security interest which secures their claims against the borrower - a risk that would not
exist if the security is deemed to be held in trust by the security agent for the benefit of
the syndicate banks as beneficiaries
● One bank cannot bear the risk → many banks are involved
○ loan of 500 Mio EUR and the company goes bankrupt = that's why there is a
syndicate of banks
○ 10 banks are involved: 50 Mio each
● Facility agent: facilitates that more banks come together and provide the
loan → facility agreement
● What kind of security rights:
○ Civil law: right of pledge
○ Common law: charge (floating or fixed)
● Will you give security rights to all banks? Do all 10 banks get a pledge?
○ It is possible but not of advantage
○ BUT: ranking of security rights → ranking and recovery is made by 1st
pledge → create separate pledged for every bank
■ Bank would not accept 2nd or 3rd raking (may not receive anything) due
to Prior Tempore Rule
● Solution = Trust:
○ security trustee will hold security rights (all security rights are given to him, holds
legal title; beneficial owner will be the banks of security rights, fees will be paid to
him)
Bonds
● Governments (at all levels) and corporations commonly use bonds in order to borrow
money
● Can be traded
● fixed-income securities
● issued by companies and securitized as tradable assets

● A bondholder = an investor or the owner of debt securities that are typically

issued by corporations and governments → lending money to the bond
issuers
● In return, bond investors receive their principal—initial investment—back when the
bonds mature
● In the Bond market are 100’s of people

● If bonds are secured through security rights 100’s of bonds → possible but no
security rights for so many people
● Traceability is important for bonds
● Security trustee is very helpful: very similar to syndicated loan
● Beneficial owner keep changing
● If no work with trustee but work with bonds, then you would do each security right
Leveraged finance transaction

- Private equity firms use them
- Intercreditor agreement: conditions of different groups of lenders
Difficulties in civil law jurisdictions

Reasons for unitary ownership
● False impression of wealth on insolvency
● Simplification of the law
● Facilitation of capitalism: trusts laws as well
● Ownership as an absolute right of enjoyment, no fragmentation possible →
numerus clausus doctrine
The Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition
(The Hague Trust Convention)
● Trusts as a ‘unique legal institution’
● → Convention is helpful for recognising a trust if the borrower is e.g. in
England and the other in NL
Can a Modern Legal System Do without the Trust?

- Reinout M. Wibier
Main points
- almost impossible to keep the trust out of private law in modern jurisdictions
- introducing a trust in a non-trust jurisdiction may lead to even greater problems

Civil law country Common law country
- private law is codified in a civil code

- It is possible that one person is the owner of a - it is conceptually difficult that one
contractual claim but another person is entitled person is the owner of a contractual
to receive payment → because the civil code says claim but another person is entitled to
so receive payment because ownership of
- Dutch law: a claim and entitlement to payment are
- a claim can be legally transferred without giving in fact one and the same thing
notice to the debtor - English law: statutory assignment
- No trust concept in the Netherlands requires giving notice to the debtor
- common law solutions are often very
- civil code which purports to solve all (potential) practical and business friendly
legal issues may often lead to solutions that may - often allows the person with the
seem a bit odd: → impossible in civil law due to „real‟ or economic interest in an
the hostility to trusts and trust-like concepts that the asset to pursue its rights against a
person with the „real‟ or economic interest in an asset to person that happens to be the
pursue its rights against a person that happens to be the legal owner even if the latter is
legal owner even if the latter is bankrupt bankrupt → not in civil law
- Without a trust concept there will be unjust results and a
civil law jurisdiction very often is only able to partially ● Perhaps a common lawyer would have
mitigate these unfortunate results the means to separate the monies held
- civil law (Dutch law) would seem to be insufficiently for clients by concluding that these
flexible to deviate from strict ownership analysis monies are in fact held on trust, no
to reach just and equitable results → the such option would exist under Dutch
beneficiary of the relevant asset runs an law
insolvency risk against the legal owner
- Numerus clausus doctrine: no fragmentation of
ownership whereby ownership is an absolute
right → held by one person
● Obstacles for introducing trust in Dutch law:

○ As a consequence of article 84(3) of book 3 of
the Civil Code, a transfer of an asset for security
purposes or a transfer to a trustee for an asset to
be held on trust would be void as a matter of
Dutch law due to lack of a valid legal title
○ article 277(1) of book 3 of the Civil Code:
prevents the creation of separate estates
■ main features of the trust is that it enables
beneficiaries to separate assets from the
personal estate of the trustee and all
assets of a debtor should be available for

its creditors→ trustee's insolvency

= fundamental rule
■ Main problem under Dutch law: trust
assets are not available for the trustee's
general body of creditors
= violates fundamental rue
● Syndicated loans
○ Without trust: syndicate banks may run an
insolvency risk against the security agent
(trustee) holding the security interest which
secures their claims against the borrower
○ → a risk that would not exist if the security
is deemed to be held in trust by the
security agent for the benefit of the
syndicate banks as beneficiaries
Due to the numerus clausus doctrine in civil law systems, ownership cannot be split because it is an absolute right. Civil law
systems are considered to be not flexible enough but address instances where economic and legal interests do not run parallel
with codified private law. Thereby, the civil code allows attempting to solve those instances as there is no trust concept as
found in common law systems. In case of bankruptcy and especially when intangible assets are concerned, the person with an
economic interest in the property cannot enforce their rights against the person with the legal title, which can lead to an
immense increase in risk for beneficiaries and in a wrongful outcome as the latter can only be partially solved by the civil
code. This gives rise to considering the incorporation of similar concepts of trust into the civil law systems because both
interests often do not run parallel and there is a need to secure protection of the economic interest.
It can be argued that common law trust is an appropriate response as they offer certain protections if the trustee is insolvent.
With the concept of trust, the beneficiary, who has an economic interest in an asset, is able to claim their assets in case of
bankruptcy; a claim of recovery is possible. This means that in the case of bankruptcy, the rights held by the beneficiary can be
enforced against the person holding legal ownership over the property. This is so since the assets are kept separate between the
beneficiary and trustee due to the split of ownership and therefore constitute protection for the economic interest. This is also
reflected in the notion that common law systems are friendly regarding businesses.
Week 8 - Global Finance

❖ ‘securitization’ = a key debt capital markets instrument to attract large sums of money for
business purposes
➢ disputed arrangement → role in global finance crisis in 2008
Crisis of credit = worldwide financial fiasco including

● Sub-prime mortgages
● Collateralized debt obligations

● Frozen credit markets

● Credit default swaps
→ everyone is affected
● Credit crisis brings two groups together:

○ Home owners: represent mortgages → houses and
○ Investors: represent money → large institutions
■ Institutions: Pension funds, sovereign funds, mutual funds, insurance
companies etc
○ Groups are brought together to the financial system: Wall Street (banks on Wall
Street are closely connected to houses)
● Investors looking for opportunities to invest their money in
○ Banks can borrow money for 1 % interest rate from the US Federal Reserve +
surplus from Japan, China,...
○ = Cheap and easy credit
○ Banks can go crazy on leverage
■ leverage= borrowing money to amplify the outcome of a deal
● Normally: Someone who has 10.000 EUR buys box for 10.000
EUR; sells it for 11.000 EUR
● With leverage: someone with 10.000 EUR would borrow
990.000 EUR → with 1 Mio EUR he buys 100 boxes and
sells for 1 Mio 100.000 EUR; paying back 990.000 EUR +
10.000 EUR interest
○ Initial 10.000 EUR → he is left with 90.000 EUR
profit
○ The way banks make their money
○ Wall Street takes out many credits: investors wanted to be part
● Wall Street: connected home owners with investors through mortgages
○ Family wants house
○ Mortgage broker connects family to lender who gives mortgage
○ Family becomes homeowners
○ Investment banker buys the mortgage from lender
○ Investment banker borrows more money and buys many more mortgages
○ Investment banker receives payments from homeowners of all mortgages:
immense surplus form all the houses (box)
■ Divided into:
● Safe
● Okay
● Risky
■ = Collateralized Debt Obligation (CDO)
● Works like three cascading trays
● When money comes in from homeowners: first tray fills first

● If some don't pay and default, on their mortgage then less money
comes in and the bottom tray may not get filled (Risky)
○ Top tray is safer
○ Bottom tray is riskier
● To compensate for higher risk: the bottom tray receives a higher
rate of return
● To make the top tray more safe: banks insure it for small
fee → Credit Default Swap
● Credit Rating Agencies: mark top as a safe AAA = safe as can be
■ Due to AAA: investment banker can sell the Safe to investors
■ Investment banker sells Okay to other bankers
■ Investment banker sells Risky to hedge funds
○ Investment banker repays loans
○ Investors found investment that is better than 1 % Treasury Bills →
they want more CDO slices
○ Investors → Investment banker wants more mortgages → lender →
broker → homeowner
■ No homeowner who need mortgage anymore
■ If homeowner default on their mortgage, then the lender gets house
(houses are increasing in value)
■ Lender is covered if homeowner is in default → lenders can add
risk to new mortgages
● E.g. not requiring proof of income, down payments, no documents
…
○ Turning point: Instead of lending to responsible homeowners a ‘Prime Mortgage’
→ started to get less responsible homeowners a ‘Subprime Mortgage’
○ because lenders issuing the loans passed them along to big banks for
securitization, they were no longer at risk if the homeowner defaulted
○ subprime borrowers → were able to secure risky loans
○ Normal Procedure:
1. Mortgage broker connects family to lender and mortgage (commission)
2. Lender sells mortgage to investment banker: turns it into CDO
3. Sells slices to the investors and others
○ As soon as someone sold mortgage to the next guy: his problem

■ If homeowners are in default: selling off their risk to someone else
■ Homeowner default on their mortgage owned by the investment banker:
Too many houses on sale
● = creates more supply than demand
● House prices plummet
● Creates problem for homeowners paying their mortgages when all
other houses go up for sale, their house goes down
■ Why pay 300.000 when the house is only worth 90.000! →
default as well

○ Investment banker holds worthless houses: investors wont buy CDO anymore
○ Investment banker cannot pay back the loans from the bank, same as lender and
broker investors
○ Whole financial system is frozen: bankruptcy everywhere and homeowners
investment is worthless
‘Subprime Mortgage’
- a type of home loan extended to individuals with poor, incomplete, or nonexistent credit
histories
- Borrower present a higher risk for lenders
- subprime mortgages typically charge higher interest rates than prime mortgages
- Structured finance dispersed subprime mortgage risk so widely that there was no clear
incentive for any given investor to monitor it
- Structured finance generally diversifies and reallocates risk
- As issuing CDOs was very profitable to the investment banks involved – they received a
fee for structuring bond issues – they were encouraged to create (in banking terms,
originate) as many new mortgage claims as possible that could subsequently be
structured into new CDOs
- Subprime Mortgage: New mortgage loans were also granted to financially less sound
debtors for the sole purpose of securitising these debts and making a profit on them
- Policy rules for granting mortgage loans were adjusted (meaning that less strict
standards were applied: no down payment or proof of income was required) and
subprime mortgages entered the scene
SPV:
The issuer of mortgage-backed and other forms of asset-backed securities in structured finance
transactions is typically a special-purpose vehicle, or “SPV”
→ securities are categorized as
● mortgage-backed securities (“MBS”),
○ are securities whose payment derives principally or entirely from mortgage loans
owned by the SPV
● asset-backed securities (“ABS”),
○ are securities whose payment derives principally or entirely from receivables or
other financial assets—other than mortgage loans—owned by the SPV
● collateralized debt obligation (“CDO”), or ABS CDO
○ CDO securities are backed by a mixed pool of mortgage loans and/or other
receivables owned by an SPV
➤ transactions in which SPVs issue MBS or ABS = “securitization”
Securitization
Reasons for Securitisation

● Often influenced by the regulatory framework

● Banks have minimum capital requirements (e.g. EU 25.000)
● No risk for capital adequacy reasons (regulatory)
● In terms of capital adequacy rules the banks assets are seen as risks triggering the need
to hold capital, i.e. exposures that run the risk of not performing
● Better rating for transaction means cheaper credit
● Banks act as financial intermediaries: money comes in (deposits, current accounts,
bonds, share capital) and is used for various purposes
Securitization: transaction structure

● Traditional securitization means securitization involving the economic transfer of the
exposures being securitized to a securitization special purpose entity which issues
securities. This shall be accomplished by the transfer of ownership of the securitized
exposures from the originator credit institution or through sub-participation. The
securities issued do not represent payment obligations of the originator credit institution
● Tranche means a contractually established segment of the credit risk associated with an
exposure or number of exposures, where a position in the segment entails a risk of
credit loss greater than or less than a position of the same amount in each other such
segment, without taking account of credit protection provided by third parties directly to
the holders of positions in the segment or in other segments
● Credit enhancement means a contractual arrangement whereby the credit quality of a
position in a securitization is improved in relation to what it would have been if the
enhancement had not been provided, including the enhancement provided by more
junior tranches in the securitization and other types of credit protection
○ Examples include:
■ – insurance provided by third party (hedging or insurance);
■ – more junior tranches going out of pocket first;
■ – the originator providing additional cash flow if things go south (Credit
Crunch!!)
Securitization and the Financial Crisis

- Securitization = packaging of assets into a financial product; conversion of a loan into
marketable securities that are sold to investors
- The securitization of mortgage debt, particularly subprime mortgages,
in mortgage-backed securities (MBS) and collateralized debt
obligations (CDOs) → major cause of both the U.S. real estate bubble
- Supreme mortgages = turning point
- → higher interest rate + less qualified borrowers
- Securitisation helped to repackage asset, CDOs were sold to Investors
- the subprime mortgages in MBS and CDOs made them attractive to big investors
because they generated higher returns due to the higher interest rates subprime
borrowers were paying

- Banks and other lenders who issued mortgages to homebuyers then sold those
mortgages to bigger banks for repackaging into mortgage-backed securities and
CDOs
- Securitization of home mortgage fueled excessive risk-taking that brought many
major financial institutions on Wall Street (banks) and around the world to their
knees when the U.S. real estate bubble burst
- → ongoing selling off the risk to someone else
What is securitisation?
I. Securitisation is when a pool of assets, in this case, a pool of mortgages, is securitised to be sold to investors in the
Secondary Market. Thereby, the mortgage debt of the pool of assets is repackaged into Collateralized Debt Obligations
(CDOs), sold through the SPV to the Investor later on. Consequently, tradable securities are created, which creates a
stake in the pool of mortgages as fixed bond-like investments that are issued by the SPV. This securitisation, so the
conversion of the mortgage debt into securities, contains different levels of risks that are sold to Investors
(Collateralized Debt Obligation (CDO)). Hereby, higher risk means a higher interest rate for investors, represented by
mortgages with Subprime borrowers, which was insured by banks in exchange for a fee (Credit Default Swap).
How did securitisation contribute to the financial crisis?
II. There is risk-taking by the lender since he receives the house if the homeowner is in default. The fact that Subprime
borrowers paid higher interest than Prime borrowers, contributed to the interest for investors to buy them. However, the
securitisation of mortgages is considered a contribution to the financial crisis because the risk of issuing Subprime
Mortgages crystallised when Subprime borrowers went into default. Supreme Mortgages contained a higher risk
compared to Prime Mortgages, the latter having less risk of default. The resulting stagnation led to the fact that banks
could not sell mortgages anymore, Investors would not buy securities of the mortgages that went into default and the
Issuer who created the MBS was left with a big debt.
→ pile debt on debt
Corporate finance
● Equity finance: e.g. shares, warrants, options
○ Private equity (PE)
○ Equity capital markets (ECM)
● Debt finance: e.g. bonds, notes, loans

○ Bank loan
■ Bank loans: bilateral or syndicated
■ Asset finance: e.g. aircraft finance, shipping finance, sale-and-leaseback
■ Receivables finance, factoring
○ Debt capital markets (DCM)

■ Bonds
■ Notes
■ Securitization: CDOs
■ Derivatives

You are advising a company for funding of investment for an acquisition: what are the options to
get funding?
- Loan from a bank
- Selling claims → receivable finance
- Liquidize assets for profits → sell assets
- If its a private company: go to capital market ro raise funding → IPO (shares
are listed)
The credit crunch and Islamic Finance - Shari’ah-compliant finance against the backdrop of the
credit crisis (Reinout M. Wibier, Omar Salah)
- Islamic finance and conventional finance are rooted in different principles
- Islamic finance must comply with the principles of Islamic law, the Shari’ah
Financial Crisis
- (1) securitisation, (2) collateralised debt obligations (CDOs), and (3)
derivatives, in particular credit default swaps (CDSs) → they put additional
strain on the financial system
- Securitisation
- A bank can use this instrument or process to raise money
- It does so by selling the thousands of mortgage loans it has advanced to its
clients to an entity expressly created for this purpose, a special purpose vehicle
(SPV)
- The bank then transfers debt claims to the SPV and the SPV pays for these debt
claims by issuing bonds to investors
- As these bonds give the investors a claim to the cash flows from the mortgage
loans sold to the SPV (interest and principal), they are usually called mortgage-
backed securities (MBS)
- Collateralised debt obligations
- What happened next was that structured investment vehicles (SIV) bought up
different series of long-term SPV bonds to obtain a mix of bonds. They financed
the purchase of these bonds by issuing short-term bonds, CDOs. Interest and
principal payments on these bonds were conditional on the payments on the
bonds bought from the SPVs, but the CDO holders were at an even further
remove from the original mortgage-backed claims. The financial system grew
increasingly complex and non-transparent as the CDOs in turn were bought up
by SIVs that, for their part, issued bonds (CDO-squared) that were in turn bought
up by other SIVs that issued bonds (CDO-cubed) to finance their purchase, and
so on and so forth.
- Credit default swaps (CDS)
- CDSs also played a major role in precipitating the credit crisis. A CDS is a kind of
insurance policy against a third party debtor, the reference entity, defaulting.
CDSs were frequently used alongside securitisations and CDOs. So in the
examples given above, the SIV as the protection buyer might enter into a CDS

contract with a bank, the protection seller, and pay a premium on mortgage-
backed bonds issued by the SPV, the reference entity. Should the SPV fail to
meet its payment obligations, for instance because of homeowners defaulting on
their mortgage payments, the bank (the protection seller) would pay that amount
to the SIV. These structures, known as synthetic CDOs,12 ultimately allow
investors to speculate on mortgage claims without actually having to buy them.
Week 9 - Islamic Finance
- Islamic finance is in many ways similar to conventional finance

- The main difference is that Islamic finance structures are reviewed for conflict with the
principles of Islamic law, the Shari’ah
- = not a legal system but set of religious duties by which adherents believe they
must abide
- Islam, in principle, recognises contractual freedom, and all contracts and contract
provisions are allowed, unless explicitly prohibited in the religious texts
- religious texts identify three explicit prohibitions: (1) the ban on receiving and paying riba
(often incorrectly translated or interpreted as „interest‟, see below); (2) the ban, to the
extent possible, on gharar (uncertainty) in contracts; and (3) the ban on mayseer and
qimar (speculation and gambling, respectively)
Explicit Prohibitions
Riba = interest Gharar = uncertainty Mayseer & Qimar
- The Qur‟an forbids asking for - Avoiding contractual uncertainty - prohibition of speculation &
and paying riba - = risk and uncertainty, but also gambling
- When trading in tangible asset future options (contemporary - forbidden by the Shari’ah
= profit not interest forwards and futures are not - Mayseer = transactions
- Receiving money over money permitted under Islamic law) whose return is purely the
when issuing loan with interest - Important to knowing the result of speculation
= interest prohibited important elements of the - Qimar pertains to yields
- two forms are distinguished: contract that depend solely on luck
- riba al-fadl and - = Gharar is the sale of probable or chance, such as
- riba al-nasi’a items whose existence or gambling
- Profit-and-loss-sharing characteristics are not certain, - → does not apply to
- Bai al-dayn: prohibition due to the risky nature which ordinary
of trade in makes the trade similar to entrepreneurial risks
receivables/intangibles gambling - Conventional derivatives
- Ex. sale of fish in the sea, birds contracts (such as CDSs,
riba al-nasi’a in the sky, an unborn calf in its see above) contain
- is the most relevant here, mother’s womb, a runaway mayseer elements

because it prohibits animal, the semen and - not all transactions

compensation for one-sided unfertilized eggs of camels,.. of this kind are
delays in monetary - the gharar ban only concerns forbidden
transactions essential elements of contracts,
- = paying or receiving interest such as price, quality and
on a loan is forbidden quantity, etc
- Improper to make profit out of - the delivery of future property is
loan problematic, as it is often
- unlike interest payments, uncertain whether the vendor
charging for funding-based will actually be able to deliver
project participation can be the property
justified - → the essentials of a
- Shari’ah-compliant bonds contract
(sukuk) must be backed by may not remain unspecified
tangible assets
- sukuk certificate holders have
a claim to one or more tangible
assets
- the sukuk holders must acquire
ownership rights in the
underlying tangible assets of
the sukuk for the sukuk to be
tradable
Applying Islamic finance structures to securitisations, CDOs and CDSs
Islamic securitisation
● conventional securitisation transaction may clash with Islamic law on three counts
(1) an essential component of securitisation transactions: is the sale of debt claims to an
SPV followed by the issue of bonds that are subsequently traded by the investors
● amounts to is a trade in debt claims → forbidden
(2) interest is paid on bonds that are issued as part of a securitisation process, and this
appears to be at odds with the Shari’ah ban on riba.
(3) the sale of debt claims on borrowers, usually homeowners, to an SPV that issues bonds.
The borrowers pay interest on the debt claims that have been transferred to the SPV
● This too is a violation of the riba ban
● prerequisite of an Islamic securitisation: transactions are Shari’ah-compliant

● the financial constructions underlying the loans that are to be sold to the SPV must be
Shari’ah-compliant
CDOs
- CDOs are SIV-issued bonds
- Islamic securitisation and sukuk issues always require a direct link with tangible assets.

- There is no such direct link to CDOs, because the underlying assets

themselves are bonds (or possibly sukuk) → under the Shari’ah CDOs are
forbidden
- clash with the bans on gharar (uncertainty in transactions), mayseer (speculating) and
qimar (gambling)
CDSs
- CDSs can be bought for the sole purpose of speculating on entities that have issued
debt securities
- Generally conflicts and is forbidden
- CDSs must be linked to tangible asset
- prohibition of speculation puts a brake on speculative CDSs.
Islamic Finance Conventional Finance
rooted in the principles set by Sharia

→ prerequisite of an Islamic
securitisation: transactions are
Shari’ah-compliant
CDS prohibition of Mayseer & Qimar conventional derivative contracts,

- conventional derivative contracts, such as CDSs, are mostly allowed
such as CDSs, are mostly
prohibited in Islamic law due to
speculation or gambling
- CDSs must be linked to a tangible
asset
Interest of bonds principle of Riba - the interest of bonds and

- prohibits the interest of bonds and hence the profit of a loan is
hence the profit of a loan allowed
- bonds (sukuk) need to be backed - Bonds do not need to be
by a tangible asset backed by a tangible asset
- interest is paid on bonds that are -
issued as part of a securitisation
process, and this appears to be at
odds with the Shari’ah ban on riba.
- the sale of debt claims on
borrowers, usually homeowners, to
an SPV that issues bonds. The
borrowers pay interest on the debt
claims that have been transferred

to the SPV
● This too is a violation of the
riba ban
Subprime - it is not possible to issue Subprime - High risk allowed: replacing

Mortgages Mortgages due to the high risk and Prime Mortgages with
uncertainty as prohibited by the Subprime Mortgages is
principle Gharar allowed
- Subprime Mortgage borrowers
represented a higher risk to default
- Therefore, it can be argued that the
turning point of replacing Prime
Mortgages and the subsequent
likelihood that homeowners would
default on their mortgage debts
would not have occurred
CDOs - Fewer opportunities to pile debt on - Repackaged asset of the debt:

debt, CDOs could not be sold to CDOs could be easily sold to
Investors Investors
- Islamic securitisation and sukuk
issues always require a direct link
with tangible assets.
- There is no such direct link to
CDOs, because the underlying
assets themselves are bonds
(or possibly sukuk) → under the
Shari’ah CDOs are forbidden
- clash with the bans on gharar
(uncertainty in transactions),
mayseer (speculating) and qimar
(gambling)
What can we learn from Islamic finance about the credit crunch?
- the crisis would have been less serious if the entire financial system had been designed
in accordance with the Shari’ah.
- Many of the contracts that we discussed and that were part of the mechanism that
started and intensified the crisis are prohibited by the Shari’ah.
- transactions must be backed by tangible assets
- → Islamic financial transactions offer far fewer opportunities to pile debt on debt, which
is what happened with CDOs (CDOs could not have been sold to Investors under
Sharia)

A Basic Guide to Contemporary Islamic Banking and Finance

Mahmoud Amin El-Gamal1 Rice University
- the forbidden financial transactions commonly used in conventional finance, and their
Islamically permitted counterparts
- the Muslim needs to ensure that the contract he signs with the lessor or lessee agrees
with the conditions of the lease contract (‘aqd al-’ija rah
̄ or ‘aqd al-’ ıj̄ ar)
̄ in Islamic
jurisprudence
- not contain elements of Rib a ̄ or Gharar, which are forbidden in Islam
- “Islamic banks” or “Islamic financial institutions” try to ensure that all their contracts
adhere to Islamic legal requirements as well as state requirements
- Alla h ̄ (swt) did not deny the similarity between Islamic and conventional (or west- ern)
finance
Prohibitions of Rib a ̄ and Gharar

- many of the conventional financial tools currently available in North Amer- ica (and most
of the rest of the world) are legally prohibited in Islam
- Using the tools of finance for good rather than evil is – of course – of primary concern in
the “Islamic” vs. “un-Islamic” distinction
- two fundamental Islamic prohibitions which render financial contracts invalid (b a.til) ̄ and
forbidden (h. ara m)̄
- prohibition of Rib a ̄ in the Qur’a n ̄
- H. ad ıth̄ enumerates six goods which are eligible for Rib a. ̄ Since barter trading
(e.g. dates for dates, as in the second H. ad ıth)
̄ is rarely of concern today
- makes it clear that there are two conditions for ̄
- exchanging money for money: hand-to-hand, and in equal quantity. This is what
is known as a currency exchange contract (‘aqd al-.sarf), where money is traded
at the current exchange rate. However, any violation of the H. ad ıth ̄ will result in
one of two forms of forbidden Rib a ̄
- unlike the prohibition of Gharar (risky or ambiguous sales) the prohibition of Rib a ̄
is unequivocal
- Islamic financial contracts (e.g. leases and credit sales) result in debts or liabilities (duyu
̄n) on the party for whom the acquisition of an asset is financed
- Charging an increase for further deferment of the payment of such debts as a function of
time (e.g. a late rental payment in a lease, or a late installment payment in a credit sale)
would constitute Rib a ̄ al-ja hiliyyah,
̄ the worst form of Rib ā condemned in the Qur’a n ̄
- = The “defer and increase” rule is in fact selling the current debt to the debtor,
where the price is an even larger debt with a longer deferment period
- the potential of selling debts to third parties. In conventional “asset-backed
securitization”, a mortgage company or bank sells its “accounts receivable” from its
mortgages or other financing instruments to third parties
- Islamic banks will have “accounts receivable” corresponding to lease or installment
payments (in leases and credit sales, resp.)
- Debt re-sale has been used extensively in the Islamic financial

The Prohibition of Gharar

- numerous H. ad ıths ̄ forbidding Gharar sales
- = risk and uncertainty, but also future options (contemporary forwards and futures are
not permitted under Islamic law)
- = Gharar is the sale of probable items whose existence or characteristics are not certain,
due to the risky nature which makes the trade similar to gambling
- Ex. sale of fish in the sea, birds in the sky, an unborn calf in its mother’s womb, a
runaway animal, the semen and unfertilized eggs of camels,...
- it is in the best interest of the trading parties to be very specific about what is being sold
and for what price
- Found in: insurance and financial derivatives
- the insured may also make many monthly payments without ever collecting any
money from the insurance company
- prohibition due to Rib a ̄ since insurance companies tend to invest significant
portions of their funds in government bonds which earn them Rib a ̄
Permissible Financing Methods

- permissible vehicles that would allow Mus- lims to acquire capital to finance purchases
of equipment
- Most types of trade (buying and selling) are permitted in Islam
- Rib ā sales being a strictly forbidden exception
- any financing conducted through valid trading by mutual consent is permissible
Contracts in Islamic Finance

- Cost-plus sales
- the buyer knows the price at which the seller obtained the object to be financed,
and agrees to pay a premium over that initial price
- no harm in declared lump-sum or percentage profit margins
- it is not Rib a ̄ if the sale satisfies the conditions of mura baha
̄
- the Islamic bank or financial institution must own the item at the time the
customer buys it from them with the specified profit margin
- Credit sales (bay‘ bi-thaman ’ ajil)
̄
- rarely is mura bah.̄ a used by Islamic banks with the price paid immediately by
the customer
- no financing included, and the Islamic bank would simply be a middle-man or
broker-agent
- When a customer approaches an Islamic bank to finance a purchase through
mura bah.
̄ a the payment of the price is usually deferred, and most commonly
paid in instalments
- mura bah. ̄ a component determines a profit margin (even as a percentage of the
original price)
- increasing the price due to deferment is indeed permissible

- avoid interest-bearing loans

- Leasing (’ij arah
̄ or ’ ıj̄ ar)
̄
- sale of the usufruct (the right to use the object) for a specified period of time
- Permissible
- ownership of the financed item remains with the lessor for the entire lease period
- In many cases, the dealership will in-fact use a bank or other financial
intermediary to provide a loan for the present value of lease payments,
and charge the customer an interest on this loan → constitute the
forbidden Rib ̄a
- If the lease is structured in accordance with the various conditions detailed in
books of jurisprudence, it will contain no Rib a ̄ and will ensure that it cannot
contain such forbidden Rib a ̄ in the future (e.g. in terms of late payment fees,
etc.)
- Partnerships (mush arakā and mud. araba)
̄
- if the Islamic banks and financial institutions
- are careful to abide by the rules of Shar ı‘a, ̄ there is no reason to think that credit
sales are any “less Islamic” than a silent partnership (mud.̄araba) or full
partnership (mush araka). ̄
- form of mush araka ̄ = the financing agency and the customer share the
ownership of real estate
- = mush araka ̄ mutana qi.sah
̄ (diminishing partnership)
- ownership in a diminishing partnership is explicitly shared between the
customer and the Islamic financial institution
- periodic payments of the customer
- Over time, the portion of the asset which is owned by the customer
increases, until he owns the entire asset and needs to pay no more rent.
At that time, the contract is terminated
- they look very much like a conventional mortgage schedule. Early-on, a
large portion of the payment is “rent” (corresponding to “interest payment”
in conventional mortgage), and a small part is “buy-out” (corresponding to
the “principal payment” in a conventional mortgage). As time progresses,
the first component gets smaller, and the latter component gets bigger,
until the rent becomes zero when the customer owns 100% of the asset
- fundamental difference between a mortgage company which holds a
lien on a financed house, and the actual joint ownership of the house
between the client and the Islamic financial institution
- Muslim is not being charged excessively relative to the
conventional market
- compliance with the Islamic Shar ı‘a ̄ & government regulations
- keep the Islamic financial industry from reep- ing excessive profits
at the expense of devout Muslims with few alternative sources of
financing
- Islamic forwards (salam and ’isti.sn a‘) ̄
- the sale of non-existent objects is forbidden due to Gharar.

- Exceptions
- many conditions which must be met for salam or ’istis.n a‘ ̄ contracts to be
valid
Permissible Investment Vehicles
- Investing in equity:
- if the company’s business is legitimate, and its conduct is in compliance with the
rules of Shar ı‘a,
̄ Muslims are allowed to own such common shares (stock
- Other common means of investing in claims on companies’ capital are not
allowed: bonds are explicitly a claim on a portion of the company’s interest-
bearing debt, and preferred stock are a hybrid stock/bond.
- mutual fund possible: group the funds of a number of investors, and “manage”
those funds by investing in a portfolio of permitted stocks + mutual fund
managers collect a fee
- strict rules of Shar ı‘a
̄ will dictate that the individuals should neither borrow nor
lend with interest
- Countries favoring debt financing, make it very difficult to find companies which
neither pay nor receive interest → Shar ı‘ā boards
- “Fixed income” funds
- the vast majority of conventional fixed income investments include forbidden Rib
̄ a
Permissible Insurance Alternatives
- reducing certain types of risk = insurance
- invalid based on the prohibition of Gharar.
- since many insurance contracts also include an investment component (e.g. certain
types of term and life insurance), the insurance companies’ investments in interest-
bearing bonds render such contracts invalid based on the prohibition of Rib a. ̄
- alternative to conventional insurance is the notion of cooperative or mutual insurance
- In cooperative insurance, a group of subscribers contribute to a pool of funds: the funds
in the pool are invested in an Islamic manner
- reduce risks through direct diversification
Week 10 - International Restructuring laws

● Many large cross-border restructurings are implemented using the US Chapter 11
proceeding or the UK scheme of arrangement
● Many countries amended their insolvency laws to facilitate restructurings
● the EU Restructuring Directive is stimulating MS towards a business rescue culture
● complex questions arise on cross-border recognition of foreign insolvency proceedings
● European Insolvency Regulation
● UNCITRAL Model Law

Bankruptcy Basics
● People that have trouble paying off their debts consider bankruptcy as a remedy of their
situation
● Process in which you can deal with your debts but no longer pay them
● By filing for bankruptcy, debts may be discharged / get more time to pay them / wipe out
the debts
● Once the process begins, creditors cannot try to collect debts from the bankruptcy
debtor or sue the debtor + creditors do not have a claim on debtors future income /
assets
● There are also alternatives
● Being unable to pay debts and going towards liquidation problem = company is not liquid
enough to repay debts (Illiquidity)
● Appointment of a trustee by court in order to liquidate assets to the company: bankruptcy
proceedings are opened
● Chapter 11 on proceedings under US Bankruptcy Code allows a company or individual
to
○ Declare bankruptcy
○ Reduce debt
○ Reorganise
● Advantages:
○ Not as rigid, no debt limits compared to Chapter 13
○ Chapter 7: most common form of bankruptcy is a liquidation
■ Bankruptcy court appoints a trustee to sell the debtor's assets and
distribute proceeds to creditors
● Chapter 11: reorganisation
→ debtor can protects assets and business operations from disruption by filing for
Chapter 11 e.g. through lawsuits (business operates still as usual)
○ 1. Step to file Petition for Relief with debtor principle
■ Debtor in possession: possesses his assets and in control over them
○ After filing for Chapter 11: debtor can create Reorganisation Plan
■ Identify debts
■ Which debts will be paid in full
■ How debt will be paid
○ + Disclosure Statement
■ Financial information
■ Debtor’s future
○ = classes of creditors
1. Restructuring and insolvency

Insolvency: (losing control, liquidation, attachment)
- Being unable to pay debts and going towards liquidation problem = company is not liquid
enough to repay debts (Illiquidity)

- Appointment of a trustee by court in order to liquidate assets to the company: bankruptcy

proceedings are opened
- Different form of trustee than from week 7: no legal trust is created
- Liquidate assets → sell assets and use the money to repay the creditors
- Purpose: liquidation and paying back
- Attachment:
- Claim and debtor is not paying: assets are transferred in the meantime of creditor
going to court and there is hence no recurse of those assets
- = freeze the assets to have recourse
- Overall attachment by the court → all assets are frozen and debtor has
no longer control
Bankruptcy proceedings, some examples:

● The Netherlands:
○ Faillissement (bankruptcy proceeding)
○ Surseance van betaling (suspension of payments)
○ What about Wet Homologatie Onderhands Akkoord (WHOA or ‘Dutch scheme’)?
● US
○ Chapter 7 proceedings
● UK
○ Company Voluntary arrangement (CVA)
○ UK Restructuring Plan (Part 26A Companies Act)?
Restructuring
- Way to restructure company: before insolvency = seeking for solution
- Purpose: seeking time, making company more efficient, retaining control, getting more
money: safe on expenses (decrease liabilities and increase revenues), limiting damages
- Start with out of court solution = informal restructuring
- If all agree to solution (shareholder, bond holder, banks): no need to go to court
- Can be initiated by creditors such as bondholders
● Informal out-of-court restructurings

● Court-led restructurings, some examples:
● US:
○ Chapter 11 Proceedings
● UK
○ UK Restructuring Plan (Part 26A Companies Act)
○ Scheme of arrangement:
■ A scheme of arrangement is a formal statutory procedure under Part 26
of the Companies Act 2006 under which a company may enter into a
compromise or arrangement with its members or creditors (or any class of
them)

● The Netherlands:
○ Dutch scheme/WHOA
● Singapore: scheme of arrangement
● India: Insolvency and Bankruptcy Code 2016 (IBC)
Chapter 11:
- Restructuring plan can be drafted
- Many companies go to US since it is successful
- Private company: look at equity
- Public company: hedge funds
2. How does a financial restructuring work in practice
● Cross border
● If bank is in US & bondholders are in EU then look at → UNCITRAL Model Law
● How to deal with a global restructuring?
● Recognition of foreign restructuring proceedings?
● Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May
2015 on insolvency proceedings (recast) (European Insolvency Regulation)
● UNCITRALModelLawonCross-BorderInsolvency(1997)(UNCITRALModelLaw)
● What is going on internationally?
● Insolvency Law Reform Throughout The World:Singapore,India,Australia,Myanmar
● – Directive(EU)2019/1023oftheEuropeanParliamentandoftheCouncilof20June 2019 on
preventive restructuring frameworks, on discharge of debt and disqualifications, and on
measures to increase the efficiency of procedures concerning restructuring, insolvency
and discharge of debt, and amending Directive (EU) 2017/1132 (European Restructuring
Directive)
HEMA: UK scheme of arrangement and US Chapter 15

- Dutch companies make use of it
- Chapter 15: framework for recognition of foreign proceedings
- Restructured debt through an English scheme of arrangement or US Chapter 11?
- Back then, the Netherlands lacked a successful restructuring instrument (this changed
with the entering into force of the WHOA on 1 January 2021)
- Subsequently, the scheme of arrangement was recognized as a foreign proceeding
under US Chapter 15 proceeding
- HEMA, low-price homeware retailer headquartered in the Netherlands, used an English
scheme of arrangement for its EUR 600 million financial restructuring
- It incorporated a new entity in the UK, i.e. HEMA UK I Limited
- HEMA UK I Limited launched an English scheme of arrangement for the HEMA group's
debt restructuring
- It also petitioned for the recognition thereof in US Chapter 15 proceeding

- On 14 September 2020, its scheme of arrangement was recognized as a foreign main

proceeding under Chapter 15 proceeding
WHOA: Dutch scheme

- Debtor stays in control over the proceedings
- Cross class cram down → cramping down a class
- On 1 January 2021, the Act for the Court Confirmation of Extrajudicial Restructuring
Plans (Wet Homologatie Onderhands Akkoord) entered into force
- the WHOA introduced a new restructuring proceeding in the Netherlands which is based
on the US Chapter 11 proceeding and the UK scheme of arrangement:
- Allows a debtor to commence a procedure whereby it offers a composition plan
- plan is offered to creditors and/or shareholders
- Cram down against dissenting or absent creditors and/or shareholders, if ⅔ in value in
each class of creditors and/or shareholders votes in favor of the plan
- cross-class cramdown
- moratorium
- Two versions: a public version and a non-public version
- The public version of the WHOA is on Annex A of the European Insolvency Regulation
(Recast) and, as a result, enjoys automatic recognition throughout the EU (excl.
Denmark)
- in cross-border restructurings, the question may arise whether a restructuring
proceeding under the WHOA can be recognized as a foreign proceeding under Chapter
15 in the US
- Based on the definition of "foreign proceeding" in section 101(23) US Bankruptcy Code
and the requirements of section 1517 US Bankruptcy Code, it seems that a WHOA
proceeding (both the public and non-public version) may be recognized as a foreign
main proceeding or foreign nonmain proceeding under Chapter 15 as well
3. Wet Homologatie Onderhands Akkoord

4. Restructuring of Oi Telecom
- The restructuring of one of the largest telecom providers of South America
- 1. Introduction
- 2. 'The story of aggressive hedge funds and bondholders' activism'
- 3. Financial restructuring driven by active hedge funds:
- Bond Restructuring
- Litigation in several jurisdiction
Firstly, in the English scheme of the arrangement, creditors are divided into classes to vote on the arrangement which is not the
case in the Dutch suspension of payments, instead, the latter provides for a resolution mechanism of establishing committees that
represent creditors. This restructuring plan also contributes to the settlement of class actions.

Secondly, another difference is that the Dutch suspension of payments allows for filing a composition plan by the company in
question that is offered to the creditors in order to vote on. This may be an advantage to the company (the debtor) if creditors vote
directly on the plan and cannot be found in the English scheme as the classes vote on the scheme of arrangement.
Lastly, the English scheme does not necessarily give rise to a moratorium whereas the Dutch scheme provides such a moratorium
with a global effect.
Week 11 - Cross border Insolvency Proceedings

● one of the largest restructuring proceedings in recent years: the global restructuring of
the Steinhoff group
○ restructuring involved a
■ UK scheme or arrangement,
■ South African scheme of arrangement,
■ a suspension of payments in the Netherland
O. Salah, “Steinhoff restructuring: The Dutch suspension of payments as an excellent

tool for the restructuring of mass litigation claims”
- The Dutch suspension of payments as an excellent tool for the restructuring of mass
litigation claims
- Steinhoff International Holdings N.V. (Steinhoff NV) entered into a Dutch suspension of
payments to restructure its debt.
- it restructured €14 billion in debt from approximately 66,000 creditors, including mass
litigation claimants
- The Steinhoff group is a retail giant with approximately 90,000 employees in more than
30 countries. Steinhoff NV is incorporated in the Netherlands with its primary listing at
the Frankfurt Stock Exchange and its secondary listing at the Johannesburg Stock
Exchange
- 90% of its share price dropped in value
- Shareholders, investors and other stakeholders commenced legal proceedings against
the Steinhoff group and its managing and supervisory directors in the Netherlands,
Germany and South Africa + class-actions
- over 66,000 litigation creditors filed claims against the Steinhoff group→ large
mass litigation claim
Restructuring proceedings in multiple jurisdictions

- using two English law company voluntary arrangements (CVAs) as well as a South
African law scheme of arrangement
- → provided space to restore value and resolve the mass litigation claims
against it
- The company negotiated with creditors to reach a global settlement agreement
- Steinhoff NV commenced an English law scheme of arrangement
- insolvency proceeding in the Netherlands → global settlement

- the preference of Steinhoff NV for a suspension of payments over a Dutch scheme was
that the former would be recognised in Germany due to European Insolvency Regulation
- The recognition of a Dutch insolvency proceeding in South Africa was not possible
- restructuring also needed to be implemented in South Africa: a scheme of arrangement
under section 155 of the South African Companies Act was commenced to implement
the restructuring in South Africa
The Dutch suspension of payments
- = an insolvency proceeding aimed at the restructuring of a company: to provide the
debtor breathing space to prepare a composition plan which it can offer to creditors
- = debtor that foresees that it cannot continue paying its debts when due, may request a
suspension of payments
- the Dutch court will grant the provisional suspension of payments
- Composition plan can be filed with suspension of payments
- Once the composition plan is adopted by the creditors, a hearing will be scheduled
where the court will confirm the composition plan
- Disadvantage: Under Dutch law, secured creditors and preferred creditors are not
bound by the suspension of payments, can take recourse against the debtor's assets
during the suspension of payments and cannot be impaired or crammed down under the
composition plan
The suspension of payments of Steinhoff NV and the committee of representation

- Steinhoff NV petitioned for a suspension of payments on 15 February 2021—
which was provisionally granted on the same day—and filed a composition
plan with the request to the court to schedule a vote on the composition plan
immediately → creditor’s vote
- The Dutch suspension of payments provides a special scheme for
restructurings with a large number of creditors → 'Brandaris-scheme'
- most important tool is the ability to appoint a committee of representation
- results in creditors losing their individual voting rights;
- the members of the committee of representation have the exclusive right to vote
on the definitive suspension of payments and/or the composition plan
- The Dutch suspension of payments proved to be of immense significance for settling all
claims (66000)
- Advantage:
- The possibility of appointing a committee of representation to streamline the
voting process was a material advantage compared to the new Dutch scheme as
the WHOA does not provide a legal basis in the new Act to appoint a committee
of representation
- it provides for final resolution without an opt-out feature like the WAMCA
- The Steinhoff Dutch suspension of payments provides a ground-breaking precedent for

settling mass litigation claims and class-actions through insolvency proceedings
- the Dutch suspension of payments provides an excellent tool with the committee of
representation being an appealing resolution mechanism to facilitate the process

- The Dutch suspension of payments of Steinhoff NV has ensured that the implementation
of the restructuring has been completed in the Netherlands, allowing for a global
settlement with approximately 66,000 creditors consisting of different creditor groups
- The application of the Brandaris-scheme was an important tool: by appointing a
committee of representation and allowing the members of the committee to vote, the
voting procedure was streamlined setting an excellent precedent
- Dutch suspension of payments not only as a restructuring tool, but also as a tool to settle
and resolve mass litigation claims and class-actions
Scheme of arrangement
- = English mechanisms
- Form of a compromise or arrangement between a company and its members or
creditors (or a class of those)
- Part 26 of the Companies Act 2006
- Can be used to effectuate a solvent reorganisation of a company
- A scheme required approval of by at least 75% in value of each class of members or
creditors
- Permission of the court is required to convene vote on the scheme
- Court will review the classes of creditors
- For each class of creditors there is a separate creditor’s meeting
- English court is supportive in reconstruction process
- Court will sanction the scheme if its fair → binding on all affected members,
creditors & company
- Minority creditor’s objective: court will sanction the scheme nevertheless if,
unless there is something obviously wrong or lacking in relation to the
scheme → In re McCarthy & Stone Plc.
- English scheme process is likely to take less time
- For the court to have jurisdiction to sanction a scheme, it must have jurisdiction to wind
up the company under the Insolvency Act 1986
- Companies that are registered under Companies Acts automatically fall within the
category
- If company is not registered → discretion of the courts to decide
- Requires ‘sufficient’ connection to E&W’ → not necessarily has to be assets
within the jurisdiction
- Whether the scheme of arrangement is recognised beyond the UK depends on the
national law
- E.g. German law did not recognize the scheme as it was not compatible with the
Insolvency Regulation nor the Brussels Regulation

Powered by TCPDF (www.tcpdf.org)

Global Property Law - Master Notes

Uploaded by

Copyright:

Available Formats

Global Property Law - Master Notes

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Global Property Law - Master Notes

Uploaded by

Copyright:

Available Formats

Stuvia.

com - The Marketplace to Buy and Sell your Study Material

Property Law - Principles

● Granting ownership rights to several people would effectively

doctrine of duplex = fragmentation of ownership in civil law systems → feudal

Cujus est solum, ejus = things above and below land

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

duplex ordo Common law system: common law and Equity

Principles of property 1) Numerus clausus

Prior Tempore Rule ● older property rights trump newer rights

The Principle of ● Transparency

The Principle of ●Transparency

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

→ In respect to land, publicity is realized through a land registry

Droit de suite If burdened asset is transferred, limited property right remains in

Week 1 - the concept of property law and property rights

Private law (relation between private individuals (citizens)

Property law in Europe: differences in what can be owned

Property law vs Contract law

Contract law: Property law

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

agreed to it ● Numerus clausus

● Property rights are limited

● property differs from other types of

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

● summa divisio of civil law = the

Contract law Tort law Property law

● Agreements ● Wrongs ● Things

What are the “things” that are related to property law?

- Claims (as an object) a) Movable

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

2) Patent (protect and

! while a vaccine for instance is an

Italian Law: Art. 812(3) Civil Code – Distinction of goods:

Art 817 – Appurtenances/ Accessories (Pertinenze):

French Law: Art 517 Civil Code:

The same applies to paintings and other ornaments.

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

German Law: § 93 BGB - Essential parts of a thing:

§ 94 (2) - Essential parts of a plot of land or a building:

§ 95 (2) - Merely temporary purpose:

Dutch law: Art 3:3 BW:

English law: Property →land

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

Week 2 - The history and principles of property law

Feudal System in Common law

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

○ ⇒ neighbor would be trustee and wife beneficiary

Law of Property Act 1925

Feudal System in Civil Law

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

● Holding of land in exchange for service

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

● Property rights were no longer publicly known

○ ⇒ Storming of the Bastille 1789

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

Superficies solo cedit

Downloaded by: archillin81 | archillin81@gmail.com Want to earn $1.236

■ Affirmative injunction in tort law (personal right)