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"):
- 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;
- 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:
- the mortgage securing the loan is not subject to risk of clawback after expiry of a very short term (10-day period);
- a payment made to the lender under a "fondiario" loan cannot be clawed back; and
- 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:
- 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;
- 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;
- 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;
- 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:
- 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;
- 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;
- 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;
- carefully draft the deed of mortgage; and
- in case of envisaged acquisition of receivables arising from a "finanziamento fondiario", carry out a due diligence to verify compliance with the Limit.
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.