Transfer of ownership as security
A transfer of ownership as security is contractually and intentionally agreed between a borrower and a lender for the purpose of securing a loan or a claim. The security is a movable item or an aggregate of goods in the form of objects whose ownership rights pass from the security provider (debtor) to the security taker (creditor) until the claim is repaid.
The security taker is then obliged to return the ownership rights. Unlike a pledge under §1205 BGB, the security in the case of a transfer of ownership as security remains in the debtor's possession and can continue to be used. A transfer of ownership as security is an economic form of beneficial trust ownership.
Procedure and significance of a transfer of ownership as security
If a natural or legal person needs a loan, they can agree with a lender to transfer ownership of a specific item to the lender as collateral. On the legal basis of the transfer of ownership pursuant to §929 BGB by agreement for the purpose of transferring ownership, together with the agreement on the specific possessory constitution under §930 BGB, the creditor becomes the indirect possessor of the secured assets in a transfer of ownership as security, while the debtor remains the direct possessor.
Example: A farmer takes out a loan and transfers ownership of the tractor in his possession to the lender as security. The tractor is not handed over to the lender but remains in the farmer's possession. The farmer can continue to work with the tractor and carry out the upcoming harvest.
If the agreement on a possessory constitution for a movable item to be used as security between borrower and lender is concluded before the borrower acquires possession, this is an anticipated possessory constitution. The transfer of ownership as security binds the security taker contractually in the internal relationship with the security provider, whereby the security taker assumes the position of a fiduciary owner.
The lender, as security taker, may only use or dispose of the ownership if the borrower violates the terms of the security agreement or is unable to repay the owed claim.
Legal provisions on transfer of ownership as security
The transfer of ownership as security itself is not separately regulated in the German Civil Code (BGB). Securing a claim by means of a pledge is often not possible because it requires delivery of the movable object or transfer of possession to the lender. When movable items such as a motor vehicle or machinery are used as collateral for a loan, they may be necessary for a business owner to continue operating the business and at the same time to generate revenue to repay the loan.
In practice, the transfer of ownership as security has become established, has long been recognized by case law and has increased in economic importance. The transfer of security constitutes a transfer of ownership with the agreement that the transferred movable items used as collateral will only be exploited in the event of non-fulfilment of the claim.
Types of transfer of ownership as security
A transfer of ownership as security can concern either a single movable asset or an aggregate of assets. The assets intended for the transfer of ownership as security must be sufficiently specified. The principle of specificity in property law requires that it be precisely identifiable which collateral asset is involved.
For this purpose, various types of security transfer agreements have become established in practice, particularly with regard to an aggregate of assets and the requirement of specificity. These include the room-based transfer of ownership as security (Raum-Sicherungsübereignung), the marking-based transfer of ownership as security (Markierungs-Sicherungsübereignung) and the umbrella transfer of ownership as security (Mantel-Sicherungsübereignung). These are generally used especially for large quantities of goods in storage rooms or factory halls.
The room-based transfer of ownership as security
A room-based transfer of ownership as security covers all collateral assets that are located in a contractually specified room. The room or premises are part of the transfer-of-ownership-as-security agreement in the form of a sketch with precise and up-to-date details. Collateral assets stored in the room whose inventory is constantly changing cease to be liable as soon as they leave the room. When new goods are stored in the respective room, the transfer of ownership as security automatically applies to them.
Security providers (borrowers) must always present the security taker (lender) with current inventory lists. Case law has determined that goods still subject to a supplier's retention of title do not have to be distinguished from those that are the property of the security provider or security taker. The security provider can transfer his expectancy right to acquire ownership (Anwartschaftsrecht) to the security taker in the transfer-of-ownership-as-security agreement.
In a room-based transfer-of-ownership-as-security agreement, ownership of the goods located in the room is transferred to the creditor, as are any co-ownership rights and expectancies. A large number of collateral assets intended for the transfer of ownership as security but stored together with non-collateral goods are defined and determined by the marking-based transfer of ownership as security. In this case, each individual collateral asset is specially labeled or marked.
The manner in which future collateral assets are to be transferred is regulated in an obligatory umbrella transfer-of-ownership-as-security agreement. The contracting parties agree that movable goods arriving at the security provider (borrower) in the future will be listed and that the transfer of ownership takes place upon sending the list to the security taker (lender).
Requirements and economic handling of a transfer of ownership as security
A transfer of ownership as security imposes various requirements on both the security provider and the security taker. A transfer of ownership as security must:
- be seriously intended by the creditor and the debtor
- sufficiently specify the items being transferred
- where items are not yet owned by the security provider, possibly transfer an expectancy right to the security taker
A transfer of ownership as security is considered problematic if it conceals the true financial circumstances and does not fully satisfy the publicity principle in property law. Likewise, an overcollateralization that exists from the outset is considered a transaction contrary to public policy pursuant to § 138 paragraph 1 BGB. If overcollateralization occurs afterwards, the borrower has a contractual claim for release or return of the unnecessary securities.
If the economic independence of the debtor is endangered by a so-called gagging contract, this is also considered contrary to public policy. This can occur, for example, when an entire warehouse of goods is transferred as security. If other creditors not belonging to the transfer-of-ownership-as-security agreement are deceived or misled by it, this constitutes credit deception.
In the event of insolvency of the debtor, the lender can demand segregation (Absonderung) pursuant to § 51 No. 1 InsO. The advantages of a properly executed transfer of ownership as security for the borrower are, on the one hand, that they make it possible to obtain a loan and thus bridge liquidity shortages, and that the borrower can continue to use the collateral. Lenders, among other things, benefit compared with a pledge from the fact that they do not have to store the collateral.
Transfer of ownership as security for private individuals and businesses
The transfer of ownership as security applies to both private individuals and companies or the self-employed. Under German commercial law pursuant to §§ 242, 246 HGB, merchants must include their assets in their balance sheets. Since the security provider (borrower) is, from a commercial law perspective, the economic owner, the debtor records the collateral in their accounting. The lender (security taker) records the secured claim in its financial statements.
Under German tax law, the collateral from the transfer of ownership as security is also attributed not to the legal owner (lender) but to the borrower as the economic user.