Pledge and mortgage rights

Pledge and mortgage rights

Pledge and mortgage rights are common forms of security in financing transactions. The holder of a mortgage right has the right of summary execution in the event that the counterparty is unable to meet its payment obligation or goes bankrupt. Furthermore, the mortgagee (usually the bank) is a secured creditor in the event of bankruptcy. As a result, the mortgagee can execute the collateral outside of the bankruptcy proceedings for the benefit of the outstanding claim.

A mortgage right differs from a pledge right in that a mortgage right is established on registered immovable property, whereas a pledge right is established on non-registered immovable property (such as a car or a claim). A mortgage right is established by a notary, whereas this is not required for a pledge right. Pledge rights come in various forms, namely:

• pledge right
• non-possessory pledge
• public pledge
• silent pledge

Do you have questions regarding pledge and mortgage rights? We have the knowledge and expertise to assume various roles: from advice to dispute resolution. We have an experienced team of lawyers and legal experts in the field of pledge and mortgage rights. Contact us to discuss the possibilities.

Pledge and mortgage rights within property law

Pledge and mortgage rights are limited rights: security rights that rest on the property of another and give the creditor priority over other creditors. Within property law , they form the final link in a chain running from possession and ownership through transfer and delivery to the provision of security. Unlike a personal right (such as suretyship), a security right is a property right that is effective against everyone and that, in principle, remains valid upon transfer of the encumbered property and in the event of the debtor's bankruptcy. Both the baker on the corner taking out business financing and the international group pledging a portfolio of receivables will encounter these concepts.

Establishment of pledge and mortgage rights

A security right does not arise automatically; it must be validly established. The method of establishment depends on the type of asset:

• A mortgage right is established on registered property (such as commercial premises, land, ships, or aircraft) by notarial deed, followed by registration in the public registers (Article 3:260 of the Dutch Civil Code).
• A possessory pledge on movable property arises by placing the property in the possession of the pledgee or a third party (Article 3:236 of the Dutch Civil Code).
• A non-possessory pledge on movable property (whereby the property remains with the pledgor) is established by authentic or registered private deed (Article 3:237 of the Dutch Civil Code).
• A public pledge on a claim is established by deed with notification to the debtor of the pledged claim (Article 3:236 paragraph 2 read in conjunction with Article 3:94 of the Dutch Civil Code).
• A silent pledge on a claim is established without notice, by means of an authentic or registered private deed (Article 3:239 of the Dutch Civil Code). A future claim may be pledged silently insofar as it arises directly from a legal relationship already existing at the time of establishment.

A defect in the establishment — a missing registration, an unauthorized pledgor, or an overly broadly defined claim — can render the security right worthless. Our lawyers and in-house counsel review pledge and mortgage deeds and master pledges for these pitfalls.

Pledging of claims and the powers of the pledgee

The silent pledging of accounts receivable is the most important security for financiers in the SME sector. As long as the pledge remains silent, the pledgor retains the right to collect. By notifying the debtor, the silent pledge is converted into a public pledge, and the right to collect shifts to the pledgee (Article 3:246 of the Dutch Civil Code). In addition, the pledgee of a claim has the authority, among other things, to demand performance in and out of court, to receive payments, and to recover the pledged claim. In the case of disputed or reluctant debtors, timely and proper notification is often decisive for recovery.

Execution, summary execution and ranking

The strength of a security right becomes apparent in the event of default. Both the pledgee and the mortgagee possess the right of summary execution: they may realize the collateral without a prior judgment (Article 3:248 of the Dutch Civil Code for pledges, Article 3:268 of the Dutch Civil Code for mortgages). The public sale and the distribution of the proceeds are further regulated in Articles 3:249 to 3:253 of the Dutch Civil Code. In bankruptcy, the pledgee and mortgagee are considered separatists (Article 57 of the Bankruptcy Act): they may exercise their right as if there were no bankruptcy. When multiple security rights rest on the same asset, the order of priority determines who is satisfied first — in principle, according to the time of establishment. Maintaining this order of priority and the power of execution is of great importance in restructurings and in financing and securities

Frequently asked questions about pledge and mortgage rights

What is the difference between a pledge and a mortgage?
A mortgage is secured by registered immovable property and is established by notarial deed; a pledge is secured by movable property and claims and does not always require a notary. In substance, both are security rights with priority and summary execution.

What does it mean that a claim is pledged “silently”?
With a silent pledge (Article 3:239 of the Dutch Civil Code), the debtor is not notified; the pledgor continues to collect. Only after notification does the pledge become public and the right to collect pass to the pledgee.

Will my security hold up in bankruptcy?
Yes. Pledgee and mortgagee are secured creditors (Article 57 of the Bankruptcy Act) and can recover their debts outside of bankruptcy proceedings, provided the right has been validly established and in a timely manner.

Can I pledge future claims?
Silent pledging of future claims is only possible insofar as they arise directly from an already existing legal relationship. That basis requirement does not apply to public pledging.

SME Lawyers: from advice to enforcement

Whether you are a financier seeking to establish and safeguard security, an entrepreneur facing a pledge or mortgage, or a party contesting the validity of a security right — our mixed teams of lawyers and in-house counsel are here to assist you. We advise on drafting and reviewing pledge and mortgage deeds, guide notification and foreclosure, and litigate regarding priority, validity, and execution. From the local baker to the international corporation: contact us to discuss your position without obligation.