Purchase Security Legislation Amended - International Law Office

Registered Mortgages for Real Property
Several Mortgage Registrations in Each Property
Execution of Pledged Mortgage Certificates
Excess Security
General Business Mortgages
Transitional Period

In June 2003 the Swedish Parliament made changes to the Swedish insolvency legislation that will enter into force on January 1 2004. The changes will have an impact on the securities used to finance the purchase of real property.

The main security for financing the acquisition of real estate is a mortgage on the real property in question, and the system of registered mortgages for real property used to pledge real estate as such, remains unchanged in the new rules. However, to understand the impact of the changes it is necessary to begin with an overview of the system for registered mortgages for real property.

Registered Mortgages for Real Property

The Swedish registered mortgage system for real property operates differently from the system employed in most other countries. The Swedish landowner requests from the Land Registration Authority a mortgage registration for a particular amount in his real property. The Land Registration Authority will register the mortgage and will issue to the property owner a certificate of the mortgage registration. This is referred to as a mortgage certificate. Traditionally, mortgage certificates were issued as paper documents that were actually sent to the property owner, but increasingly these physical documents are being replaced by entries in the Land Register's computerized Mortgage Certificate Register.

To perfect a pledge, the mortgage certificate is handed over to the pledgee (if it has been issued in physical form). If the certificate exists merely as an entry in the computerized Mortgage Certificate Register, the pledge is perfected by an entry in the register to the effect that the certificate has been pledged to the pledgee.

Once a mortgage certificate has been issued, the landowner may use the certificate any number of times without paying any stamp duty to the Land Register. If the mortgage certificate has been issued in physical form, there is no need to register the pledge of the mortgage certificate.

Several Mortgage Registrations in Each Property

The nominal amount of each mortgage certificate corresponds to the amount registered. The landowner may request an unlimited amount of mortgage registrations (which will be evidenced by a corresponding number of mortgage certificates in physical or computerized form), each representing the amount requested by the landowner. The landowner may request the registration of any amount for each registration, but will not want to request more registrations than are absolutely necessary because of the stamp duty payable on such registration, equal to 2% of the amount registered.

This means that there are several mortgage registrations in each real property, each represented by a mortgage certificate. The priority of these different mortgage certificates (and corresponding mortgage registrations) in case of enforcement of the security will depend on the date of each mortgage registration, with earlier registrations taking priority over later registrations. This means that each mortgage registration has a nominal value and a fixed priority in relation to earlier registration(s). Consequently, mortgage registrations are usually referred to as having the value of 'X within Y', where X is the nominal value of the relevant mortgage registration and Y is the aggregate value of all prior mortgage registrations including the registration in question. For example, if a mortgage registration for Skr50,000 was made in 1950 and a second registration for Skr100,000 was made in 1970, the first mortgage certificate would be referred to as 'Skr50,000 within Skr50,000' and the second as 'Skr100,000 within Skr150,000'.

Execution of Pledged Mortgage Certificates

With regard to the execution of pledged mortgage certificates, there is a complete set of statutory provisions governing the relationship between pledgees with different priority to payment from the real property. For instance, there are restrictions on the ability of a holder of a low-priority mortgage certificate to force the sale of a real property for a price lower than the value of those mortgage certificates with higher priority. This also means that, in simple transactions, there is less need for an inter-creditor agreement in Sweden than in most other countries, even if all lenders have been provided security in the form of a mortgage over the real property. Further, there is normally no need for a senior lender, with security in the highest-ranking mortgage certificates with a value corresponding to the senior loan amount, also to secure its loan with pledges over lower-ranking mortgage certificates.

Excess Security

As a consequence of each mortgage certificate having a nominal value, the debt for which a mortgage certificate was originally pledged will eventually decrease to less than the amount of the mortgage certificate. As the other mortgage certificates in the property have fixed priority, a gap in value will build up between the mortgage certificates. The reason for this is that mortgage certificates with lower priory do not automatically shift upwards to absorb the gap in value. Instead, the owner of the property is primarily entitled to this unused gap in value, known as 'excess security', and this may normally be used by the landowner as security for new loans.

However, this consequence of the amortization by the landowner of senior loans secured with the highest-ranking mortgage certificates in the property may be offset. The main method for this is a second-ranking pledge to the junior (or other subordinated) lenders of the highest-ranking mortgage certificates (in addition to a first-ranking pledge over the second-highest-ranking mortgage certificates with a value corresponding to the amount of the subordinated loans). Such second-ranking pledge will, as usual, mean that the highest-ranking mortgage certificates will act as security for the subordinated loans to the extent that their value is not required to secure the senior loan.

Unless such measures are taken to offset the effect of excess security, the excess value of each mortgage certificate will benefit the landowner or, in the case of his bankrupcy, his debtors in general. This is where the new rules concerning insolvency come into play.

General Business Mortgages

One of the main novelties in the new insolvency rules that will take effect on January 1 2004 is the introduction of general business mortgages, which will replace the present system of floating charge securities.

A general business mortgage is registered in the same way as mortgage registrations are made in relation to real estate. In the case of a company registering several general business mortgages, they will have priority among themselves according to the same system as several mortgage registrations in real property.

A general business mortgage will have general preferential right in 55% of all the debtor's remaining assets, including all real and personal property of the debtor (eg, cash, shares and real estate) after all claims with superior preferential rights have been paid. The preferential rights that will be superior to the general business mortgage are (i) all preferential rights in respect of specific property (particularly liens, mortgages on real property and on site-leaseholds, and preferential rights based on seizures), and (ii) general preferential rights in the assets of the debtor for claims relating to the cost for petitions by creditors and company reorganization, and costs for the company's accounting and auditing in its last six months. The 45% of the debtor's remaining assets which are not covered by the general business mortgage will be distributed to all creditors of the debtor, including those that have no security for their claim (eg, regular suppliers).

One of the key differences between the new general business mortgage and the present floating charge is that the holder of a floating charge certificate only has preferential rights in the debtor's movable assets (ie, not, for instance, in the excess security in mortgage certificates for real property), excluding company shares and cash. By contrast, the new business mortgage provides the possibility of pledging through one instrument not only the movables (eg, inventory and receivables) of the borrower, but also all the borrower's cash, shares in its subsidiaries and all excess security relating to the mortgage certificates in real property.

Although the simplicity of the general business mortgage undoubtedly has some advantages, it also has disadvantages when compared to placing particular liens over specific property and placing second-ranking pledges over the highest-ranking real property mortgage certificates to offset the excess security problem. Unlike a lien over the shares of the debtor's subsidiaries, the general business mortgage does not prevent the debtor from selling the shares without encumbrances. To the contrary, the whole idea of the general business mortgage is to pledge the assets of the debtor as they are from time to time, without restricting the ability of the debtor to dispose of them. Unlike a second-ranking pledge over the highest-ranking real property mortgage certificates, which is stamp duty free and effected without registration with the authorities, general business mortgage registration entails a stamp duty cost corresponding to 3% of the amount registered. However, registration may be used an indefinite number of times without further stamp duty cost.

Transitional Period

During a transitional period from January 1 2004 to January 1 2005, creditors with loans secured by floating charges will have a statutory right in certain circumstances to call in these loans for renegotiation of the security package. This may cause some turmoil for real estate owners, among others. At the end of the transitional period, floating charges issued under the present rules will be treated as general business mortgages under the new rules.

The transition period will raise a large number of questions, and lenders as well as borrowers with loans secured by floating charges should review their agreements as soon as possible.

For further information on this topic please contact Johan Hessius or Magnus G Graner at Advokatfirman Lindahl by telephone (+46 8 670 58 00) or by fax (+46 8 667 73 80) or by email (johan.hessius@lindahl.se or magnus.graner@lindahl.se).