Italy: Fondiario Mortgage Loan: A Sudden Change Of View Of The Italian Supreme Court

Last Updated: 26 January 2018

Introduction

The purpose of this Newsletter is to (i) provide a brief overview on the concept of "finanziamento fondiario" (being a peculiar type of real estate mortgage loan under Italian law); and (ii) discuss the legal consequences triggered if the ratio of (a) the amount of a "finanziamento fondiario" to (b) the value of the underlying real estate asset securing the "finanziamento fondiario" exceeds 80 percent.

The Italian Supreme Court recently issued a judgment (no. 17352 of 13 July 2017) which supersedes its previous case law and raises relevant issues to be taken into consideration by lenders and players in the securitization/NPLs sector, in light of its potential consequences (which might even include voidness of loan and loss of mortgage).

1. The concept of "finanziamento fondiario" under Italian law

Italian law provides for two types of mortgage loans ("finanziamenti garantiti da ipoteca"):

(a) ordinary loans secured by mortgage ("finanziamento ipotecario"). Such type of loan is regulated by common rules provided for in the Italian Civil Code and under generally applicable laws;

(b) loans qualifying as "finanziamento fondiario" pursuant to articles 38 et seq. of legislative decree no. 385/1993 (the "Consolidated Banking Act").1

Pursuant to article 38 of the Consolidated Banking Act, a "finanziamento fondiario" has as its object the provision of medium-long term financing (i.e., exceeding 18 months) secured by a first-ranking mortgage over real estate assets. Based on the resolutions of the Interministerial Committee for Credits and Savings (CICR), the Bank of Italy determines the maximum threshold for the purposes of qualification of a real estate loan as "finanziamento fondiario", by reference to the value of the mortgaged asset(s) and/or the work(s) to be developed on such asset(s).

Currently, such threshold is set at 80 percent of the ratio of (a) the amount of "finanziamento fondiario" to (b) the value of the underlying real estate asset securing the "finanziamento fondiario" (the "Limit").

Notably, pursuant to case law of the Italian Supreme Court the Limit needs to be complied with when the loan is drawn down, but not all through the whole term of the loan; this is quite obvious, because qualification as a "finanziamento fondiario" shall not depend on the changes in value of the underlying real estate asset from time to time (which are quite normal during the term of a loan).

Generally, we note that "finanziamento fondiario" is very frequent in case of financings granted to consumers (typically, to buy home), quite frequent in the case of financings made to companies and rather rare in the case of financings made to funds.

Upon execution of a loan agreement, the lender and the borrower are free to determine whether the financing shall qualify as "fondiario" or not. However, material consequences may arise from such a choice. In fact, qualification of a mortgage loan as a "finanziamento fondiario" for the purpose of articles 38 et seq. of the Consolidated Banking Act involves the application of certain specific rules set out in the Consolidated Banking Act which differ from the provisions generally applicable to ordinary financings secured by mortgage.

For the purpose of this Newsletter, we can summarise the main features of a mortgage loan qualifying as a "finanziamento fondiario" as follows:

(a) the mortgage securing the loan is not subject to risk of clawback after expiry of a very short term (10-day period);

(b) a payment made to the lender under a "fondiario" loan cannot be clawed back; and

(c) even in case of opening of bankruptcy proceedings, the lender will be entitled to a separate enforcement of its security (while general bankruptcy rules, although allowing and acknowledging security right(s), prevent separate enforcement by lenders).

2. Case law on consequences of breach of the Limit before 2012

Before 2012, there was quite limited case law in respect of consequences triggered by breach of the Limit. Different approaches were taken by different courts, namely:

(a) pursuant to the Court of Rome (judgment of 2 February 1989), breach of the Limit will trigger voidness of the "finanziamento fondiario" only in respect of the portion exceeding the Limit; such exceeding portion ought to be converted into an ordinary loan secured by mortgage;

(b) pursuant to the Court of Milan (judgment of 26 October 1995), breach of the Limit will trigger voidness of the "finanziamento fondiario" entirely; the loan ought to be converted into an ordinary loan secured by mortgage only if the prescribed requirements are met;

(c) according to the former view of the Italian Supreme Court (judgment no. 9219/95), breach of the Limit would have triggered voidness of a portion of the "finanziamento fondiario" only, if it emerged that the parties would, in any case, have opted for a "reduced" contract. In any case, the portion exceeding the Limit might not be converted into a mortgage loan;

(d) according to a different opinion of another judge of the Court of Rome (judgment of 9 April 2000), even in case of breach of the Limit, the loan will qualify as a "finanziamento fondiario" if the parties to the loan agreement opted for the application of the relevant provisions. The sole consequence might be liability of the directors vis-à-vis the lender and of the lender vis-à-vis the Bank of Italy (which may order sanctions at the lender's charge), due to the breach of the rules prescribed by Bank of Italy in respect of a "finanziamento fondiario". This approach is, clearly, the most favourable to the lenders.

3. Case law of Italian lower courts in 2012 and 2013

In the context of insolvency proceedings opened in Italy during the recent economic crisis, there was in 2012 and 2013 a substantial number of judgments issued by lower courts (including Venice and Cagliari) which took a more detrimental approach to banks (fostered by receivers willing to maximize recovery), as they stated voidness of a "finanziamento fondiario" granted in breach of the Limit.

In addition, due to certain procedural rules that such courts declared to be applicable (but which were not met by the relevant lender in the relevant case), including:

  • the fact that the lender bears the burden of proving that the Limit has been met;
  • the need for the expert's evaluation of the value of the underlying property to bear a "data certa" (date certain at law) under Italian law for the purpose of being enforceable vis-à-vis the receiver; and
  • the need for the lender to raise proof of claim ("insinuazione al passivo") also for the case that the loan does not qualify as a "finanziamento fondiario",

the relevant lender was neither able to rank as an ordinary creditor secured by mortgage, nor even as an unsecured creditor(!).

This raised a debate among Authors, most of whom underlined that such view is very detrimental to the banks which, in addition to (already) experiencing default by many of their borrowers, were exposed to the risk that many "finanziamenti fondiari" granted by them be declared void, which would give rise to relevant losses in the banks' already ailing balance sheets.

4. The view of the Italian Supreme Court in 2013

At the end of 2013, the Italian Supreme Court adhered to the most favourable approach (see letter d) above) and (in judgment no. 26672/2013, a case which attracted much attention in the Italian banking community) stated that violation of the Limit does not trigger any consequence on the underlying "finanziamento fondiario" and/or on the mortgage. The sole consequence of the breach of the Limit is, therefore, the potential application of sanctions by Bank of Italy to the lender.

5. Case law of Italian lower courts and Italian Supreme Court between 2013 and 2017

While some lower courts expressly refused to adhere to the view of the Italian Supreme Court2 (which is possible because under Italian law a judge is per se bound to follow the view of the Italian Supreme Court only in the specific case in respect of which the Italian Supreme Court issued a judgment: for the rest, the view of the Italian Supreme Court has only a "guidance" function (so-called "nomofilachia"), but it is not binding on the other courts; i.e., in the Italian legal system the "stare decisis" principle does not apply), between 2013 and 2017 most lower courts followed the principles set by the Italian Supreme Court in the 2013 judgment.3 In addition, the Supreme Court itself reaffirmed this view in two further judgments in 2015.

6. Reversal of the Italian Supreme Court's position – judgment no. 17352 of July 2017

Last July, to the great surprise of the Italian banking community, the Italian Supreme Court fully reversed the view expressed in 2013 and stated that breach of the Limit triggers voidness of the "finanziamento fondiario", which voidness may be only partial if the requisites of an ordinary mortgage loan are, in any case, met (in which case, the financing may be converted into a "normal" mortgage loan instead of being declared void).

7. Consequences of the new position of the Italian Supreme Court – Some practical tips

Needless to say, the new position of the Italian Supreme Court may trigger relevant difficulties for lenders (which, to their utmost astonishment, years after the execution of a loan agreement, may discover that their financing is void, just because the Limit was breached by mistake); but also for players in the securitization/NPLs sector (which must pay great attention, when purchasing receivables arising from a "finanziamento fondiario", to carry out a due diligence covering also compliance with the Limit).

As a first comment, it is important to reiterate that the Limit needs to be complied with when the financing is drawn down, but not for the whole term of the financing.

In order to reduce the risk of a court declaring a "finanziamento fondiario" null and void, it is strongly advisable to:

1) expressly clarify, in the "fondiario" loan agreement, the criteria underlying the assessment of the asset value, so that the court might at a subsequent stage verify correctness of the evaluation process;

2) attach to the "fondiario" loan agreement the real estate evaluation or, in any case, provide the evaluation with date certain at law ("data certa") under Italian law for the purpose of being enforceable against the receiver;

3) insert a "safeguard clause", expressly providing that the parties would have opted for an ordinary mortgage loan, should the

"finanziamento fondiario" regulation not be considered applicable;

4) carefully draft the deed of mortgage; and

5) in case of envisaged acquisition of receivables arising from a "finanziamento fondiario", carry out a due diligence to verify compliance with the Limit.

Footnotes

1 Recently, the Italian Parliament approved a bill which empowers the Government to, inter alia, amend the finanziamento fondiario rules.

This Newletter does not consider the envisaged changes (whose entry into force is, in any case, not sure).

2 See, e.g., Court of Florence (judgment no. 15335/2014 of 30 October 2014) which, by adhering to the most restrictive case law preceding the 2013 judgment of the Italian Supreme Court, stated voidness of a "finanziamento fondiario" granted by a bank in breach of the Limit.

3 E.g. Court of Cagliari (which reversed its previous view), Court of Monza, Court of Udine.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions