Letter of indemnity causing difficulties?
In order to enforce a claim that is in default and overdue, there must be either a so-called general basis for enforcement (judgment, in-court settlement, etc.) or a special basis for enforcement. Special bases for enforcement will vary depending on the asset that needs to be realised.
In principle, the special bases for enforcement should make it easier to conduct an enforced sale of an asset to cover a claim without having to go down the path of obtaining a judgment for the claim.
Section 11-2 of the Norwegian Enforcement Act, which applies to special bases for enforcement when concerning enforced realisation of assets registered in an asset registry (for example, property, ship, aircraft), states that, for example, a petition for the enforced sale of a property can be requested if there is «…a registered consensual security interest, registered letter of indemnity, however only when the scope of the claim is established by judgment or other basis for enforcement…«.
As a general rule, a registered consensual security interest or registered letter of indemnity will be used as security in completely standard financing agreements, which often include mortgages in, for example, properties or other assets that can be registered in an asset registry.
However, is a creditor/mortgagee consciously aware of the differences between a registered consensual security interest and registered letter of indemnity?
Would such a registered security interest or registered letter of indemnity result in a special basis for enforcement as soon as it is registered, or do requirements need to be made for the content in order to achieve a special basis for enforcement pursuant to Section 11-2 of the Norwegian Enforcement Act.
In a ruling from Eidsivating Court of Appeal that was handed down on 22 March 2022 (LE-2022-8197), the Court of Appeal found, among other things, that the Norwegian Mapping Authority’s standardised mortgage deeds were to be deemed a “letter of indemnity”, with the effect that the claim could only be enforced when there was a judgment or other basis for enforcement stipulating the scope of the claim, cf. Section 11-2, paragraph one (a) of the Norwegian Enforcement Act. It was therefore not referred to as a “registered consensual security interest”.
The fact that the court found that the mortgage deeds in the case were to be deemed a “letter of indemnity” underlines the importance of the mortgagee being conscious of the effects of the mortgage deeds that are presented in financing situations where a smooth enforcement process in the event of default may be of decisive importance.
Facts of the case
Briefly summarised, the dispute before Eidsivating Court of Appeal involved Askim & Spydeberg Sparebank having petitioned for the enforced sale of a property based on a defaulted loan granted to person A. It was maintained that person B had furnished a property as a guarantee secured by mortgage for the debt and the basis for the petition for an enforced sale was therefore the mortgage deed provided by B for the property for which an enforced sale was being sought. The mortgage deed was a standardised mortgage deed pursuant to the Norwegian Registration Regulations, and which the Norwegian Mapping Authority had – and still has – available on its website.
The key issue for the Court of Appeal was whether a petition for an enforced sale could be requested «directly» on the basis of the mortgage deed, cf. Section 11-2, paragraph one (a) of the Norwegian Enforcement Act, or whether the underlying claim first needed to be determined by judgment or other basis for enforcement.
The Court of Appeal maintained that this depended on whether the mortgage deed was to be deemed a «registered consensual security interest» pursuant to the Act, and thus made reference to the fact that it was traditionally stated as to whether the mortgage deed was (a) an effective mortgage bond (No.»en reell pantobligasjon«), (b) an accommodation mortgage bond (No «en gjort pantobligasjon«), or (c) a so-called «letter of indemnity».
The Court of Appeal found that the mortgage bond was neither an effective nor accommodation mortgage bond, and since the mortgage deed itself contained no declaration of debt, it had to be considered a «letter of indemnity» because it provided security for an unspecified amount up to a certain maximum amount. In the opinion of the Court of Appeal, this meant that the underlying claim had to be clarified either through a judgment or «other basis for enforcement» before an enforced sale could be requested.
Practical consequences of the ruling
In brief, the ruling highlights what the legislators stated in the preparatory works, but which has since been criticized in legal theory, namely that a mortgage deed that does not include any declaration of debt is not sufficient for initiating enforcement without there being a judgment or “other basis for enforcement” for the claim. Kåre Lilleholt noted as early as 2002 that the new standardised mortgage deeds in real estate potentially did not satisfy the requirement for being deemed a «special basis for enforcement » pursuant to Section 11-2, paragraph one (a) of the Norwegian Enforcement Act.
In purely practical terms, this means that if the creditor, when using the given standard documents, wishes to realise assets that are registered in an asset registry (such as property, ship, aircraft) as a result of a defaulted commitment, the creditor must first obtain a judgment stipulating that the claim is secured under the security interest. This could be remedied through reference to, for example, a loan agreement or other underlying debt arrangement in the actual mortgage deed, declaration of pledge and/or enforceable promissory note, however there is no certainty that this will be sufficient to meet the requirements of Section 11-2, paragraph one (a) of the Norwegian Enforcement Act.
The current financing market uses several types of standardised documents, including mortgages in real estate and maritime liens that do not contain any such declaration of debt or reference to the underlying debt arrangement.
If the Court of Appeal’s ruling stands, this could potentially result in the creditor/mortgagee not having a special basis for enforcement of the claim pursuant to Section 11-2, paragraph one (a) of the Norwegian Enforcement Act. In principle, the security interest will remain, however potential enforcement may be made significantly more difficult by the creditor/mortgagee first having to obtain a judgment for the claim before enforcement can be initiated. A declaration of debt and the specification of the underlying legal arrangement are preferable if prompt enforcement of the claim is important for the creditor/mortgagee.
As indicated above, Askim & Spydeberg Sparebank has appealed the Court of Appeal’s ruling, and was granted leave to appeal in the decision by the Appeals Selection Committee of the Supreme Court of 24 June 2022 (HR-2022-1262-U). The case has yet to be scheduled for hearing.
Regardless of the Supreme Court’s decision, the case demonstrates that the creditor/mortgagee must have a very clear and conscious relationship to the use and content of standard documents.