Mortgage deed and prohibited rentals

Due to high demand and limited supply in the property market, buyers are increasingly forced to make an offer without (financing) conditions. In the search for a suitable mortgagee, the focus is almost entirely on the repayment terms and the interest rate; in practice, buyers only sporadically study the contents of the mortgage deed after the mortgagee's approval. Novice property investors generally start by renting out their first property, even though this is not allowed under the mortgage deed. It is good to keep in mind here that the mortgagee has far-reaching rights and powers if the buyers violate the mortgage terms. In this contribution, Glenn Kerver and Jeffrey Strik discuss the letting ban in more detail.

Under Section 3:268 of the Civil Code, the mortgagee has what is known as the right of parate execution, which briefly means that the mortgagee can sell the pledge if the mortgagor fails to fulfil its obligations. The mortgagee has an interest in maximising the proceeds. Because of the far-reaching rent protection in the Netherlands and the restriction of (renovation) possibilities this entails, a property in let condition is often worth less than a property in unlet condition. Mortgagees therefore exclude letting without the mortgage holder's consent in the mortgage deed, unless it is a letting or investment mortgage. Such a provision is also known as a "lease clause" in law. If the lease clause is breached, the mortgagee can claim the full mortgage amount in one lump sum, and -if the mortgagee is unable to pay it- sell the property to pay the mortgage debt with the proceeds. Section 3:264 of the Civil Code stipulates when a mortgagee can successfully invoke a lease clause.

Lease clause

The mortgagee may void the lease prior to the public sale unless:

• The lease was entered into before the relevant right of mortgage was established, or if a lease was entered into after the right of mortgage was established, it was not entered into on terms unusual for the mortgagee;
• Maintaining the lease is in the interest of the proceeds at public sale;
  The property will yield enough to satisfy all mortgage holders even with maintenance of the lease;
• No persons under lease agreement can use the encumbered property at the time of announcement of the foreclosure sale.

It follows from the above legal exceptions that rent protection also extends to the mortgage relationship: if the mortgagee is obviously not restricted in its recourse and the property brings in sufficient proceeds, the lease cannot be annulled. Incidentally, this does not save the mortgagor; the mortgagee is entitled to sell the property in a let state and use the proceeds to pay the mortgage debt.

Right forfeited

Recently, the interim relief judge of the District Court of East Brabant ruled that mortgagee O had forfeited its right to immediate execution because it had tolerated prohibited rentals at an earlier stage (Rb. Oost-Brabant 16 September 2020, ECLI:NL:RBOBR:2020:4534). In this case, the mortgagor had granted a right of mortgage to the mortgagee in 2005; the mortgage deed contained an explicit lease clause. In 2010, O informed the mortgagor that it had let the property without permission, but that it would not take any steps if the mortgagor complied with its obligations. O did reserve the right to subsequently invoke the nullity of the lease.

In 2018, the mortgagor re-let the property. According to O, she had prohibited him from doing so by phone, but O failed to produce documents to prove this claim. O subsequently announced that she would foreclose on the property unless the mortgagor moved into the property herself or paid off the entire mortgage debt (whether or not by refinancing the mortgage). According to O, this stricter stance was necessary because of strict new regulations from the Financial Markets Authority (AFM). At the time of the proceedings, the total mortgage debt was still €168,993; an appraisal showed that the house was worth €197,000 when rented out and €225,000 when unrented.

The preliminary relief judge ruled that because of the earlier correspondence with O, the mortgagor was entitled to assume that O would not take action against prohibited rentals, as long as he complied with the payment obligations. It was established that the mortgagor paid on time and in full and even repaid more than it was obliged to, and that O had sufficient security because of the assessed value. Under these circumstances, the interim relief judge ruled that O had to stop the planned foreclosure of the property.

Although the interim relief judge does not mention it in so many words, the above case appears to involve estoppel. The general principle is that the passage of time by itself is insufficient for a successful reliance on estoppel, even if the mortgagee knew of the prohibited letting from a certain point in time (see, for example, Rb. The Hague 26 July 2019, ECLI:NL:RBDHA:2019:7823, r.o. 4.6 and Rb. Noord-Holland 9 June 2015, ECLI:NL:RBNHO:2015:4709, r.o. 4.7).

Conclusion

This case involved special circumstances, such as the long-standing policy of tolerance. However, in the vast majority of cases, the adage pacta sunt servanda applies; parties should abide by the agreements made. Although many owners choose not to wake sleeping dogs and rent out the property without permission, the risks of violating the rental ban are obvious. We therefore recommend checking with a mortgage broker whether it is possible to take out a rental mortgage or make additional agreements with the mortgage holder.

This contribution was written by mr Glenn Kerver, lawyer at GMW lawyers (g.kerver@gmw.nl/www.gmw.nl) and Jeffrey Strik, (real estate) mortgage advisor and purchase supervisor at Vastgoed Finance.com (jeffrey@vastgoedfinance.com/ https://vastgoedfinance.com/nl/) and Search and Finance (info@searchandfinance.com, /https://searchandfinance.com/).