Choice of law in land security rights – an impossible solution?

• Pages: 443-468
• Author: Afonso Patrão

CHOICE OF LAW IN LAND SECURITY RIGHTS

– AN IMPOSSIBLE SOLUTION?

Afonso patrão*

Universidade de Coimbra

SUMMARY: I. SCARCITY OF INTERNATIONAL MORGAGES IN THE EUROPEAN

UNION.— II. LEGAL DISPARITY IN MORTGAGE LAW AND SITUS RULE: AN

UNAVOIDABLE OBSTACLE TO THE EUROPEN MORTGAGE MARKET?—

III. THE FOUR MAIN GROUNDS OF THE SITUS RULE: 1. Lex rei sitae as a

consequence of territorial sovereignty: 1.1. Imposition of (public) international law;

1.2. Effectiveness reasons; 1.3 Economic sovereignty and economic policy reasons;

2. The nature of things; 3. Third party protection: 3.1. Do third parties really need

protection?; 3.2. Protection of third parties in mortgage: Land Registry, more than

the applicable law; 4. International Consistency.— IV. CONCLUSIONS.

I. SCARCITY OF INTERNATIONAL MORTGAGES

IN THE EUROPEAN UNION

«Less than 1% of European mortgage credit is cross-border» 1. It

was these statistics that alerted me to the existence of an obstacle for

the creation of a European market of land security rights. Within the

European Union, which is supposed to guarantee free movement of

capital, the volume of international mortgage credit is surprisingly

low, contrary to what we would be led to believe by the progressive

European integration (i) and by the importance of mortgage credit in

* Professor of Private International Law at the University of Coimbra; Member of the

UCILeR — University of Coimbra Institute for Legal Research

1 M. jarDiM, «A euro-hipoteca e os diversos sistemas registais europeus, Boletim da Fa-

culdade de Direito da Universidade de Coimbra, LXXXV, 2009, pp. 743-763, p. 743.

PRIVATE INTERNATIONAL LAW ON RIGHTS IN REM IN THE EUROPEAN UNION

DERECHO INTERNACIONAL PRIVADO SOBRE DERECHOS REALES EN LA UNIÓN EUROPEA

Maria Font-Mas (dir.)

ISBN: 978-84-1381-849-8

Madrid, 2024

pp. 443-468

DOI: 10.37417/PILRIRUE/18

Marcial Pons Ediciones Jurídicas y Sociales

Editado bajo licencia Creative Commons Attribution 4.0 International License

444 AFONSO PATRÃO

domestic transactions (ii). In fact, 99% of all mortgage-backed credit

is exclusively domestic.

If mortgages are considered the most important security rights in

internal transactions, for some reason they don’t enjoy the same status

when it comes to international transactions (even intra-European). Eco-

nomic actors shy away from mortgages and prefer other security rights.

To put it in concrete terms: if a Portuguese company wants to take out a

loan from a German bank 2 and offers a mortgage on the premises of its

head ofce (in Coimbra) as security, the most likely reaction from the

German bank will be to refuse such security right; or, at the very least,

to set the cost of the loan so high as to make the contract unviable.

As a result, the company will either get nance from a national bank

(creating internal mortgage credit); or it will offer the German bank

a different security right; or it will be prevented from taking out the

loan, perhaps giving up a certain investment it was planning to make.

This is unexpected, because of the quality of mortgages and

hypothecs as security rights. If a loan is associated with the risk of

debtor’s failure, security rights have historically arisen in this context,

giving the lender greater condence. When it comes to long-term loans,

Land security rights are usually preferred, because the durability and

the stability of value of immoveable property tend to be greater than

those of personal assets 3.

In fact, mortgages or hypothecs offer important advantages to both

parties: for the debtor, it allows to keep possession, using the asset,

enjoying its utilities and allowing it to be used in an economic activity;

for the creditor, it provides the security of assigning immovable pro-

perty (which tends to be perennial) to guarantee a certain sum, gran-

ting the right of being satised at cost of the property with preference

over other creditors. The mortgage has thus taken on enormous social

importance: it favours economic development by allowing access to

credit for investments, since the property built or acquired will itself

provide as a security right for the loan and, at the same time, the asset

can be put at the debtor’s control. For this reason, it is traditionally

considered the «queen of security rights» and it is directly related to

property investments 4.

2 In fact, most mortgages are held by banks — cfr. M. B. aalBerts, «The Globalization

and Europeanization of Mortgage Markets», International Journal of Urban and Regional

Research, vol. 33, n.º 2, 2009, pp. 389-410, p. 394.

3 Cf. B.Foëx, «L’Eurohypothèque», L’Européanisation du droit privé: Vers un Code civil

européen?, ed. F. werro, Fribourg, Editions Universitaires Fribourg Suisse, 1998, pp. 481-496,

p. 482 («en raison de la stabilité de la valeur des biens qu’ils grèvent, les gages immobiliers

sont des garanties particulièrement sûres»).

4 Cf. joão an tunes Varela, “Constituição de Hipoteca a favor de bancos prediais”,

Colectânea de Jurisprudência, Ano XVI, Tomo III, 1991, pp. 47-54, p. 50; lauren t aynès e

pierre croc q, Les Sûretés — La publicité foncière, Editions juridiques associées, Paris, 2003,