What Is a Lien on Property?
Financing a property in Switzerland involves large financial commitments. Buyers almost always secure a mortgage loan to make such investments.
However, providing such loans carries risks for the bank. What happens if the borrower becomes insolvent? To mitigate this risk, the lien system was created. A lien grants the creditor the right to force the sale of a property if the owner fails to pay the mortgage interest.
The lien is registered in the land registry, along with the maximum amount secured by the lien. The corresponding agreement must be notarized. Only after the lien is registered will the bank or insurer release the mortgage loan funds.
Types of Liens
In Switzerland, there are two broad categories of liens.
Mortgage Certificate (Schuldbrief)
The mortgage certificate is a type of security that establishes a personal claim secured by real property. It is personal because the debtor is liable not only with the pledged property but also with their entire personal assets. The mortgage certificate can take the form of a registered or paper certificate. Nowadays, the digital version is becoming much more common.
Land Charge (Grundpfandverschreibung)
Unlike the mortgage certificate, the land charge is not a security but simply a document. It serves as proof to secure a future claim. In some cases, such liens may not require registration in the land registry, such as with statutory liens (discussed below).
What Happens if a Claim Secured by a Lien Goes Unpaid?
If a debtor fails to meet their payment obligations, the lienholder can initiate official proceedings. The process begins with a payment order issued by the enforcement and bankruptcy office. The debtor can either acknowledge or dispute the claim.
If the debt remains unpaid, the lienholder may request a forced realization of the lien through the enforcement and bankruptcy office. If approved, this generally leads to a forced sale of the property.
There are alternatives, but these depend on the creditor’s discretion. For instance, the creditor may allow more time for repayment or permit the property owner to sell the property voluntarily to settle the debt. A voluntary sale is often advantageous for the creditor, as properties sold through forced auctions typically sell below market value, especially outside major urban centers.
How Can a Lien Be Canceled?
Once the debt is repaid, the mortgage certificate can be canceled. However, this must be initiated by the debtor at the land registry and requires the creditor’s consent.
Canceling the lien is not always necessary or advisable. If the property owner plans to take out another mortgage in the future, the existing mortgage certificate can be reused, saving fees.
For paper-based mortgage certificates, it is crucial to have the original document to make any changes or cancellations. If the document is lost, it must be officially declared invalid by a court, which can be a lengthy and costly process.
What Can Be Secured by a Lien?
A lien can cover not only an entire property but also condominium ownership, co-ownership, or building rights. The lien also extends to other components of the property, such as plants and trees.
It is important to note that a lien does not grant the creditor any usage rights to the property. This means that while the bank or insurer can request a forced sale of the property, they are entitled only to the proceeds of the sale—never to the property itself. Any contractual clause stipulating that a property will automatically transfer to the creditor in the event of default is unlawful in Switzerland.
How Are Liens and Mortgages Connected?
In Switzerland, the term "mortgage" is commonly used to refer to the loan a property owner receives from a bank to purchase the property. However, a mortgage actually involves two components: the loan itself and the lien. The bank provides the loan—commonly referred to as a "mortgage" in everyday language—and receives a lien on the property in return.
This lien is notarized and registered in the land registry. In the event of default, the lien guarantees that the bank can force the sale of the mortgaged property to recover the outstanding debt.
Further Information: Contractual and Statutory Liens
Under Swiss law, liens are further divided into two categories: contractual and statutory liens. Here are the key differences:
Contractual Liens
Contractual liens are established through an agreement between the creditor and the property owner. In other words, they can only be established with the agreement of both parties. Liens associated with mortgages, like the mortgage certificate mentioned above, fall under this category.
Statutory Liens
Statutory liens can be established without the property owner’s consent. These are divided into:
- Immediate Statutory Liens: These arise without registration in the land registry and take precedence over all other liens. At the federal level, they include liens for costs related to intentional or unavoidable value reductions and necessary expenses to maintain the property. At the cantonal level, there may be additional statutory liens, such as liens applying to unpaid building insurance premiums, fire safety measures, and municipal property taxes.
- Indirect Statutory Liens: These arise only after being registered in the land registry but do not depend on a contractual agreement. An example of an indirect statutory lien is the builder’s lien (Bauhandwerkerpfandrecht).
