Understanding the essentials of the contractual mortgage in Luxembourg

The contractual mortgage remains the cornerstone security for real estate financing in Luxembourg. It enables a borrower to obtain a loan by using an existing property as collateral, without being dispossessed of ownership or enjoyment of the asset.

In return, the lender benefits from two decisive rights in the event of default:

• the right of follow-up, allowing the creditor to pursue the property into whosoever’s hands it may pass; and
• the right of preference, ensuring priority payment from the sale proceeds of the property.

What a mortgage covers… and what it cannot secure

A contractual mortgage may only be granted over immovable property existing at the time of its creation. This includes land and buildings, as well as usufruct or bare ownership interests and, for their duration, real rights such as emphyteusis or rights of superficies. The mortgage also extends to fixtures deemed immovable and to any subsequent improvements made to the encumbered property.

Conversely, future property cannot be mortgaged, nor can strictly personal rights such as rights of use or habitation.

By nature, a mortgage is indivisible: it encumbers the property as a whole and continues to affect each part thereof, even following subdivision or partial transfer.

Practical conditions for validity: deed, precision and specialisation

As it directly affects property rights, a contractual mortgage is subject to strict formal requirements. It must:

• be granted by a person having legal capacity to dispose of the property;
• be created by way of an authentic notarial deed;
• clearly identify the nature and location of the immovable property currently owned by the debtor; and
• secure a certain and determinable amount.

Where the secured claim is conditional or variable, an express valuation must cap the amount registered. The deed must also describe the secured claim and, where applicable, its cause, thereby enhancing legal certainty for both the mortgagor and third parties, in line with the principle of specialisation.

Registration and ranking: why chronology matters

A mortgage is fully enforceable against third parties only once it has been registered with the competent Mortgage Registry, usually by the notary who executed the deed.

The registration file includes:

• the authentic instrument;
• two registration forms setting out, in particular, the parties’ identities, the date and nature of the instrument, the secured amount and the identification of the encumbered property.

The date of registration determines priority: where mortgages cover the same property, ranking follows the chronological order of registrations. As long as the debtor remains the owner, registration remains possible, subject to specific events such as bankruptcy, which freezes the ability to register.

Duration, renewal and discharge: the life cycle of a mortgage

A mortgage registration remains effective for ten years from the date of registration.

Before expiry, it must be renewed in order to preserve its ranking. Failing this, the registration lapses, and any subsequent registration will rank only as from its own date. In practice, mortgage deeds usually provide for systematic renewal until the secured debt has been fully repaid.

Discharge generally occurs by way of an authentic deed of release following repayment. In the absence of the creditor’s consent, a judicial discharge may be ordered in cases provided for by law, notably where the secured obligation has been fully extinguished.

A mortgage is also extinguished by extinction of the principal obligation, waiver by the creditor, statutory purging by a third-party acquirer or by limitation.

In the event of default: sale of the property and distribution of proceeds

If the secured obligations are not fulfilled, the creditor may exercise the mortgage enforcement action to have the property sold and to be paid by preference.

Two routes are available:

• judicial foreclosure, a structured but burdensome court-led procedure;
• extra-judicial enforcement (voie parée), where expressly provided for in the notarial deed and mentioned in the registration, allowing sale through a notary following a formal demand for payment and statutory publication requirements.

In both cases, the sale proceeds are distributed among creditors according to their respective rankings.

Key takeaways

The contractual mortgage is a secure and well-regulated instrument underpinning real estate financing. Careful drafting, a well-planned registration strategy and diligent monitoring of renewals are essential to avoid unpleasant surprises.

Remember to check the renewal date of your mortgage to avoid losing priority.

Are you considering a mortgage-backed financing? Contact our team today.

MOLITOR Avocats à la Cour
Your Real Estate, Construction and Urban Planning Team