GERMANY Law and Practice Contributed by: Michael Josenhans, Anouschka Zagorski and Christina Banz, Freshfields
tions – such as pre-emption or redemption rights – are less common but could be included in the articles of association. German insolvency law provides for certain harden- ing periods that would especially need to be consid- ered in release-and-retake scenarios and distressed financings. For further details, see 7.5 Risk Areas for Lenders . 5.6 Release of Typical Forms of Security All types of security mentioned in 5.1 Assets and Forms of Security can be released by way of a release agreement, which can be executed by simple signa- ture (ie, no notarisation is required in respect of the notarised security rights). The release of a land charge/mortgage needs to be entered into the land registry in order to become effec- tive. All other security rights cease to exist at the time agreed in the release agreement. The release of the pledges and assignments is usually (but need not be) notified to the relevant debtors (if they have also been notified of the pledge or assignment). 5.7 Rules Governing the Priority of Competing Security Interests Certain security interests (in particular, security trans- fers of movable assets and assignments of receiva- bles) can only be established once and can there- fore only exist in one rank. However, it is possible to ensure that the proceeds of such security be applied in a different order to groups of creditors, by provid- ing the security to a security agent and contractually agreeing on the order of application – for example, in an intercreditor agreement. Such arrangement will, however, not have an in rem effect on the ranking of said security interest but will survive the insolvency of the borrower. Security interests over shares/interests/stocks, bank accounts and land can be provided multiple times in different ranks. Such security interests will rank in the order of the timing of their valid establishment (prior- ity rule). Nonetheless, in non-distressed financings, usually only one rank of security is established, and the order of application is agreed in an intercreditor agreement, as described above. In deviation thereof,
in scenarios in which different secured claims face different insolvency claw-back rights, it is common to provide individual, different-ranking security rights to different creditor groups. Further, lenders may require security confirmations and junior ranking pledges when doing an upsize or amend/extend transaction. With regards to add-on acquisitions financed by incremental debt, borrower’s counsel should ensure that securing such incremental debt is pre-baked into the security documents to the extent legally possible. 5.8 Priming Liens There are two types of security that, in practice, usu- ally rank prior to the contractual security rights of lenders. Pledge by the Account Bank Account banks usually have a right of pledge over the accounts opened with them based on their general terms and conditions for any claims arising against the pledgor. Account pledge agreements therefore usually request the pledgor to undertake reasonable efforts such that the account bank waives or subordinates such pledge. A strict requirement for such waiver or subordination is usually not included, given the limited scope of the secured obligations under such pledge pursuant to the general terms and conditions. Landlord’s Right to Movable Assets on Leased Premises A landlord of leased premises has a statutory right of pledge over the lessee’s assets brought onto the premises for any claims arising in connection with the lease. Given the limited scope of the secured obliga- tions under such pledge, it is unusual to include a requirement that such pledge be waived. However, recent transactions have sometimes seen a require- ment for the lessee to regularly provide proof of rent payments, in order for lenders to be able to assess the risk associated with the prior ranking pledge of the landlord.
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