Real estate finance law in Luxembourg

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

Yes in both cases.

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

Luxembourg recognises and regulates mortgage certificates according to the Belgium model whereby securities issued by the owner of the real estate give the certificate owners the right to a part of the rental income and the gains on the disposal of the real estate.

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

Furthermore, the registration of mortgages is an essential element that guarantees the security of property transactions and credit. Mortgages are registered at the Mortgage Office (“bureau de conservation des hypothèques”) in the district where the property subject to the mortgage is situated. In fact, as between creditors, a mortgage, whether legal, judicial or contractual, ranks only from the date of registration by the creditor in the registers of the Mortgage Office, in the form and manner prescribed by law, subject to some exceptions. Registration fees are payable by the debtor. The Mortgage Office must deliver to all those that request it (i) copies of the deeds recorded in its registers and those of the subsisting registrations, or (ii) a certificate that there are none. Registrations preserve mortgages and liens for ten years from the date on which they are made; they cease to have effect if they are not renewed before the expiry of this period. However, expiry only affects the registration, not the mortgage right of the creditor, which may make a new registration. The new registration will only rank on its (new) date and will thus be subject to all other mortgage registrations made on the same property prior to that date.

Second ranking security can be taken in Luxembourg. It is registered with the Mortgage Office. However, the mortgage deed will not expressly state that the mortgagee will rank second. The rank is determined by the day on which the mortgagee registers its mortgage with the Mortgage Office. Mortgages registered on the same day will rank equal.

Yes. If the debtor sells the property while it is still encumbered by a mortgage, the creditor will have a “droit de suite” against the third-party purchaser; in other words, the creditor will be able to enforce the property from parties other than the mortgagor. A mortgagee can enforce the mortgage even though the property is no longer owned by the original mortgagor. In practice, a mortgage deed includes an agreement not to sell (or grant rights in or to) the property except with the prior written approval of the lender. In practice, “droit de suite” is rarely used. When a property is sold, the notary checks whether it is encumbered, and the buyer can either release the real property or use the purge procedure.

The preferred creditors are:

1. the seller of the real property for the payment of the price;
2. the persons that have provided the buyers with the money to purchase the real estate;
3. the co-heirs;
4. the architects and persons that have built, rebuilt and/or repaired the real estate and/or the persons that have lent the money to pay such architects and persons.

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

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

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

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

All rights created by real estate related agreements and listed under Luxembourg law have to be registered. This includes sales of land, creation of ownership splits, certain judgments, leases with a term exceeding nine years, public expropriations, certain gifts and other operations (transfer of rights in rem, i.e. the sale, gift, exchange contribution of a property to a company and the transfer of inheritance rights relating to one or more properties forming part of an estate or expropriation in the public interest).

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

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

Non-registered mortgages will not bind third parties.

Mortgages must be signed and authenticated by two notaries or by a notary and two witnesses, otherwise the mortgages are null and void (except certain loans granted by the Banque et Caisse d'Épargne de l'État).

The notary fee varies depending on the principal amount lent to the borrower but are capped (i.e. approximately EUR 3,000).

The cost of property registration is 6 percent of the property value.

An additional 1 percent mortgage tax (transcript tax) is also required.

If the real estate is located in the municipality of Luxembourg, a municipal surcharge corresponding to half of the registration duty (thus 3 percent of the property value) is due to any dwelling that is not for personal use, with the exception of future sales or future sales in a state of completion (“vente future en l’état d’achèvement”, VEFA). Other costs may apply in other municipalities.

Some of these costs may be reduced under conditions, one of which is that the buyer undertakes to make the purchased real estate his/her principal residence and to live there for two years.

Finally, an annual property tax (“impôt foncier”) is due in various municipalities.

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

Contractual mortgages are valid for ten years and must be renewed before that period expires to continue to be valid for another ten years.

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

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

Luxembourg security interest cannot exist without a secured obligation. Difficulties may arise when the third party holding the security interest as trustee does not itself have a claim against the issuer.

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

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

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

Therefore, if the transfer is made by novation of the creditor or by delegation of the creditor, while novation or delegation between lenders does not result in the transfer of a claim, it creates a new relationship of obligations between the debtor and the new creditor. Thus, the new creditor has a new claim, which extinguishes the old claim by the effect of the novation. The extinction of the old obligation extends to all its accessories, including the mortgage, except if otherwise provided for in the new agreement. Then, according to normal practice, the parties have to be notified that the existing security remains in place and bears the same priority rank. If they develop a more complicated system, the documentation for the transfer will contain provisions enabling the new lenders to take over the rights (including security) granted to the former lenders. In this event, the mortgage agreements will only be modified to show the replacement of the former mortgagee.

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

The landlord can enter into an agreement with the tenant to restrict the transfer of the lease. It is usual in commercial leases to restrict the transfer of the lease by a tenant. Any assignment or sublease or partial sublease must be notified to the lessor, together with a full copy of the assignment or sublease contract, and the lessor may refuse the sublease or partial sublease (Article 1762-6 of the Civil Code, introduced by a law of 18 February 2018). The tenant as assignor remains jointly and severally liable with the assignee or sublessee for all obligations arising from the lease. In general, the rents paid to the lessee by the sublessee may not exceed the rents paid by the lessee to the lessor.

Hence, if the original tenant assigns the lease to a new tenant, the landlord will have no claim against the original tenant.

Luxembourg law recognises foreign courts and/or an arbitration tribunal’s jurisdiction, even if Luxembourg parties are involved, if the dispute in question does not involve:

1. immovable property located in Luxembourg;
2. insolvency proceedings of Luxembourg companies.

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

1. the decision is not contrary to Luxembourg public policy;
2. the necessary requirements and guaranties have been given to the defendant so he/she can defend himself/herself, such as the serving of documents in sufficient time, unless the defendant has failed to commence proceedings to challenge the judgment when it had the opportunity to do so;
3. the decision is not contrary to a judgment given in a dispute between the same parties in Luxembourg;
4. the decision is not contrary to an earlier judgment given in another member state or in a third state involving the same cause of action and between the same parties, when the earlier judgment fulfils the conditions necessary for its recognition in the member state addressed.

Luxembourg courts are willing to recognise and enforce arbitral awards and/or foreign judgments, provided that:

1. the judgment is final according to the law of the state where it was rendered;
2. the court that rendered the judgment had jurisdiction to do so;
3. the judgment can be enforced as a matter of law in the state of the court that has rendered the judgment;
4. the right to seek enforcement of the foreign judgment has not expired under Luxembourg laws;
5. the courts of the country that has rendered the decision will reciprocally enforce Luxembourg court decisions; and
6. there is evidence that the legal proceedings have been properly served in accordance with the laws of the state where the decision was rendered.

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

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

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

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

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

1. transferred to the mortgagee as a result of its appropriation of such asset; or
2. transferred from the mortgagor to a purchaser as a result of the sale of the mortgage property by public auction.

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

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

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

Specifically:

1. enforcement of a mortgage in Luxembourg is subject to Luxembourg procedural laws and has to be carried out under Luxembourg court supervision;
2. there are certain spoiling tactics the borrower can use, such as (i) opposition to enforcement, (ii) application to open insolvency proceedings and (iii) starting fiscal enforcement proceedings; and
3. under Luxembourg law, insofar as the loan is accompanied by a mortgage, which required the intervention of a notary, it can be considered as a writ of execution. As such, a Luxembourg bank can directly apply to enforce the claim documented in the writ of execution without any examination by the court on the merits of the claim. However, it is not clear whether a loan agreement governed by a foreign law and documenting a loan granted by a foreign bank to a Luxembourg borrower would be recognised as a writ of execution in Luxembourg. Therefore, there is the possibility that examination by the court on the merits of the referred claim is required before it will be enforced in Luxembourg.

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

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

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

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

The privilege will only remain on the pledged collateral if such collateral has been and has remained or shall be deemed to have remained in the possession of the pledgee or an agreed third party. If financial instruments are pledged, the transfer of possession of such financial instruments from the collateral provider and the enforceability of the pledge against third parties may be effected as follows: The transfer of possession of book entry financial instruments will be validly effected by (i) the conclusion of a pledge agreement if the custodian of such financial instruments is the pledgee; (ii) an agreement between the collateral provider, the pledgee and the custodian or by an agreement between the collateral provider and the pledgee notified to the custodian according to which the custodian will act in compliance with the pledgee’s instructions relating to these financial instruments and without any further agreement of the collateral provider; (iii) the book entry registration of these financial instruments to an account of the pledgee; (iv) the book entry registration of these financial instruments, without number specification, to an account maintained by a custodian in the name of the collateral provider or a third party to be agreed acting as third-party custodian, the financial instruments being designated, in the custodian’s books, individually or collectively, by reference to the relevant account in which they are registered as pledged.

The enforceability of the security over shares in a public limited liability company is subject to its registration in the shareholders’ register of the company. This entry in the register concerns the creditor's lien and only determines the enforceability of the pledge contract against third parties. It does not affect the conclusion or validity of the pledge.

To the extent the word “execution” means “enforcement” and not “signing”, then upon the occurrence of an event of default, the pledgee is immediately able to enforce the security over the shares without any prior notice to the pledgor or other formalities. There are, therefore, in principle, no particular costs for the execution of the security over the shares in Luxembourg. However, in the event of public auction, the costs and fees of the auctioneer may be borne by the pledgee, the debtor or the pledgor.

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

According to Article 11 of the Law of 5 August 2005 on financial collateral arrangements, if an enforcement event occurs, the pledgee may, unless otherwise provided for, without prior notice:

1. appropriate the pledged collateral or have the pledged collateral appropriated by a third party at a price determined, before or after their appropriation, by the agreed valuation method; or
2. assign or cause the pledged collateral to be assigned: (i) by private sale in a commercially reasonable manner; (ii) on a trading venue on which it is admitted to trading; or (iii) by public auction; or
3. cause a judgment to be issued ordering that it retains the pledged collateral as payment up to the amount of its claim, in accordance with an expert valuation; or
4. proceed with netting in accordance with Part V “Netting and insolvency proceedings”; or
5. appropriate the pledged financial instruments or have the pledged financial instruments appropriated by a third party: (i) at the market price, where such instruments are admitted to trading on a trading venue; or (ii) where they are units or shares of an undertaking for collective investment, at the price referred to in point (i) or at the price of the last net asset value published by or for this undertaking for collective investment, provided that the last publication of the net asset value does not exceed one year; or
6. request the redemption of the pledged units or shares of an undertaking for collective investment at the redemption price in accordance with the instruments of incorporation of this undertaking for collective investment; or
7. exercise all the rights arising under the pledged insurance contract, including, in the case of a life insurance contract or a capital redemption operation, the right to surrender, or request the insurance undertaking to pay any sums due pursuant to the insurance contract.

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

The Luxembourg Civil Code provides that commercial leases and leases for residential use may be concluded for a fixed or indefinite period. Commercial leases are usually concluded for a period of nine years.

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

The lessee has two main obligations: (i) to use the leased property as a good father of the family, and according to the purpose given to it in the lease, or according to the purpose presumed according to the circumstances, in the absence of an agreement; and (ii) to pay the lease price on the agreed terms. If, during the term of the lease, the leased property is completely destroyed by an act of God, the lease is automatically terminated. If the lessee uses the leased property for a purpose other than that for which it was intended, or which may result in damage to the lessor, the lessor may, depending on the circumstances, terminate the lease. If the repairs are of such a nature as to render the property uninhabitable for the lessee and its family, the lessee may have the lease terminated.

Regarding a commercial lease, the fixed-term lease is terminated automatically when the term lapses. The notice period for terminating the lease may not be less than six months.

The lessee (and the sublessee, if the lease does not prohibit a sublease) may request renewal of the lease at least six months before the expiry of the lease. Any clause to the contrary in the written lease agreement denying the lessee or sublessee this option is automatically null and void.

The lessor may terminate the lease with immediate effect if the lessee fails to perform its contractual obligations. The lessor may terminate the lease with notice or refuse to renew it (i) for the purpose of personal occupation by the lessor or its first-degree descendants; (ii) in the event of abandonment of any tenancy for the purposes of an identical activity; or (iii) in the event of reconstruction or conversion of the rented property.

In the event of the sale of a leased property, a tenant whose lease has been running for at least 18 years has a right of pre-emption over the leased premises (subject to conditions).

The lessor may always terminate the lease or refuse to renew it after the lessee has occupied the leased premises for at least nine years, without having to provide any justification, (i) if the lessor pays the lessee eviction compensation before the end of the lease; or (ii) if a third party pays the eviction compensation before the end of the lease.

Regarding a lease on real estate, the period for terminating a residential lease is three months, unless the written lease provides for a longer period. The lease ceases by operation of law on expiry of the fixed term, where it has been made in writing, without it being necessary to give notice, but a residential lease is deemed to be for an indefinite period if the written lease agreement does not specify the duration for which the parties intend to enter into the agreement. The lessor cannot terminate a fixed-term lease, even if it declares that it wishes to occupy the rented house itself unless otherwise agreed. The residential lease may be terminated in the event of fault of the lessee. In the specific case where the residential lease pertains to the main residence of the lessee, that is an individual, lease agreements may be concluded for a fixed or indefinite period. If it is not in writing, it is presumed to be for an indefinite period. Any lease agreement, which is terminated for any reason, will be extended unless (a) the lessor declares that it needs to occupy the rented premises itself or a relative up to and including the third degree needs to occupy them; (b) the tenant does not fulfil its obligations; or (c) the lessor has other serious and legitimate reasons. The transfer of ownership of the property does not constitute a serious and legitimate reason. The period of notice is six months.

Unless otherwise specified, all leases contain a notice period. If the lessor does not send such notice in accordance with the terms of the lease agreement, the lease is tacitly extended.

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

1. in the event of non-performance of its obligations by the lessor in virtue of article 1719 of the Civil Code (i.e., obligation to deliver the leased property; to maintain the property in a condition suitable for the use for which it was leased; to ensure the lessee's peaceful enjoyment of the property for the duration of the lease);
2. in the event of destruction or partial destruction of the leased property;
3. the impossibility of using the premises according to their purpose, due to an administrative decision made during the term of the lease.

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

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

The lessor is obliged, by the nature of the contract, and without the need for any specific stipulation, (i) to deliver the leased property to the lessee; (ii) to maintain the leased property in a fit and proper condition for the purpose for which it was leased; (iii) to allow the lessee to enjoy it peacefully for the duration of the lease. The lessor is obliged to deliver the property in a good state of repair. During the term of the lease, it must carry out any repairs that may become necessary, other than those required for rental purposes. The lessee is liable for all defects in the leased property that prevent its use, even if the lessor was not aware of them at the time of the lease. If such defects result in any loss to the lessee, the lessor is obliged to compensate the lessee.

Rent is usually paid monthly or quarterly in advance.

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

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

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

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

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

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

In general, the landlord is responsible for repairs to the heating system, major repairs (such as repairs to the roof) and necessary repairs resulting from “force majeure”, etc.

The tenant has to be prudent and diligent (“en bon père de famille”) with regard to the leased premises. Leasehold repairs to doors, windows, electrical installations, etc. are payable exclusively by the tenant. Unless otherwise stipulated in a clause, the tenant is obliged to carry out any repairs or minor maintenance required by the use of the premises: hearths, counter-hearths, architraves and fireplace mantelpieces, repointing of the bottom of the walls of flats and other dwellings to a height of one metre; paving stones and tiles in bedrooms, when only a few are broken; windows, unless they are broken by hail, or other extraordinary accidents and force majeure, for which the tenant cannot be held responsible; doors, cross-pieces, partitions or shop closing boards; and hinges, pins and locks. Tenants are not responsible for any repairs that are deemed to be tenant's repairs when they are caused solely by obsolescence or force majeure. Tenants are liable for any damage or loss that occurs during their enjoyment of the premises, unless they prove that such damage or loss occurred through no fault of their own. The lessor is liable for all defects in the leased property that prevent its use, even if the lessor was not aware of them at the time of the lease; if such defects result in any loss to the lessee, the lessor is obliged to compensate the lessee.

See point 3.1.

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

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

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

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

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

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

See point 3.1.

For residential leases, only certain expenses expressly provided for by law can be claimed from the tenant. These are expenses that are attributable to the tenant due to the use of the rented property. Expenses that are related to the enjoyment of the dwelling are to be borne by the tenant (energy consumption, routine maintenance of the dwelling and common areas, minor repairs, taxes and fees related to the use of the dwelling) while those with a conservatory character are to be borne by the landlord.

For commercial/professional leases, the allocation of charges between the landlord and the tenant results exclusively from the agreement of the parties.

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

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

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

The above-mentioned access to information includes the distribution of held environmental information, free on-site or online consultations, supply of copies and a report’s publication. The establishment of an energy performance certificate (“certificat de performance énergétique” – CPE) is mandatory when selling, leasing, renovating, extending or constructing a residential building. The CPE for a residential building must be requested from construction experts such as (i) architects; or (ii) engineering consultancy firms; or (iii) experts approved by the Ministry of Energy and Spatial Planning. The persons authorised to establish CPE for residential buildings and who have taken the specific training course (optional) organised by the Ministry of Energy and Spatial Planning are indicated in a public list.

No.