Due to suspected abuse of the land debt institute, the Slovenian legislator has changed real estate securities' legislation.
History - Land debt between the German and Swiss model
Land debt as a type of security was introduced into Slovenian legislation in 2003 when the new Law of Property Code came into force. It is the right to claim repayment of money from the real estate value before other creditors in a worse position. The basic features that distinguish it from a mortgage are non-accessoriness and easier transferability.
In banking practice, the land debt did not meet with much success
According to the Bank Association of Slovenia, in its 10 years of existence, land debt in the framework of real estate bank collateral did not reach even a 2% share (the rest are mortgages). So the question is how is it that the land debt securities' share of the banking sector started to increase enormously after 2011?
In the opinion of the profession and the public, it was about diversion and fictitious use of land debts. Individuals might have used it to avoid or at least complicate the enforcement of creditors' rights and to prevent recovery of illicit assets.
Reasons for changes to the Law on Property Code
Doubts about the land debt establishment purpose admissibility led to the proposal to abolish it. Of course, it is not the only such institute. In practice, with the same purpose, there is also fictitious conveyance, application of fictitious mortgages and easements, etc.
On the other hand, creditors who believe that they were damaged by such conduct may remedy the abuse by filing for annulment or invalidation, and such violations are also subject to penal sanctions.
However, according to the legislation, the anonymity of the land debt holder poses a problem in abolishing abuses: it is difficult to prove and the procedures are lengthy. In the opinion of the abolishment opponents, the attempt to introduce transparency into the land debt would thwart its transferability and bring it close to the maximum mortgage. The changes would therefore not result in any improvement.
Current situation
In October the Parliament adopted the deletion of that part of Law on Property Code which concerns the land debt. The land debt was deleted from the Slovenian legislation the day after its publication in the Official Gazette, on 6 November 2013. Amendments to the legislation do impact those land debts established before the change. But there are also rumours about possible new variants (implemented in Enforcement and Securing of Civil Claims Act and Assets of Illicit Origin Forfeiture Act), which will prevent abuse of the land debt institute also in cases where the land debt had been already established.
Problem solving correctness
The opinion about many land debt abuses is likely correct. But the question is whether the legislator's solution belongs to the series of too-rapid solutions in recent years. In a well-regulated state of law, abuses of institutes should not be allowed when they are applied contrary to their legal purpose or cause damage to third parties. Such attempts have appropriate legal remedies and penal sanctions.
Quote: The abolishment of land debt represents a decrease of real property rights, which should be judged by the proportionality principle. The change does not impact or solve the question of existing land debts, not even those established for illicit motives.
This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.
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