The Supreme Court confirms that land loan agreements and corresponding mortgages are valid even if the 80% levy on the LTV is exceeded.
On November 16, 2022, in decision no. 33719, the Italian Supreme Court appears to have put an end to the nearly decade-long jurisprudential dispute over the consequences of exceeding the 80% financing threshold of land loan agreements concluded in pursuant to article 38 of Italian law. Consolidated Banking Law (TUB)1.
This decision is of material importance both for banks and for investors in the NPE (non-performing exposures) market who envisaged that their “secured” investment would be considered null and void and therefore totally unsecured.
In short, mutual fondiari are mortgages where the lender and borrower have certain specific rights (eg shorter recovery, enforcement rights, termination limitations). Bank of Italy regulations provide that a founding mutual must have a loan-to-value (LTV) ratio at drawdown of no more than 80%; the question that the Supreme Court considered concerned this specific point. The borrower in the case claimed that because the LTV had been exceeded, the loan (and mortgage) was null and void.
Indeed, the Supreme Court has declared (hopefully) once and for all that the exceeding of the fundability limit in accordance with article 38, paragraph 2, TUB:
|1.||does not invalidate the validity of the land loan agreement,|
|2.||does not allow the court to reclassify ex officio the land loan contract as an ordinary loan contract,|
|3.||affects neither the validity nor the opposability of the mortgage guaranteeing the loan agreement.|
In particular, the Italian Supreme Court held that:
“with regard to land loan agreements, the funding limit provided for in Article 38, paragraph 2, of Legislative Decree No. 385 of 1993, should not be considered as an essential element of the agreement, since it it is not a provision which defines the content of the agreement itself nor ensures its validity, but a mere specific or supplementary element; the provision is not a mandatory rule – like the provision by which the Italian legislator empowered the Bank of Italy to fix the limit of financability within the framework of “prudential supervision” (see articles 51 et seq. and 53 of the Consolidated Banking Law) – the violation of which, if invoked for to justify the nullity (and invalidity) of the agreement (in this case, of the loan already disbursed, which should also lead to the loss of the mortgage guarantee), would lead to the result of undermining the very interest that the rule was meant to protect, which is that of the sta bility of the bank’s capital and risk management in the credit activity”;
“when the parties intended to enter into a land loan contract meeting legal standards (i.e. medium or long-term financing granted by a bank guaranteed by a first-degree mortgage on real estate ), it being understood that their common intention to this effect is undisputed (or, if disputed, noted by the judge), the court is not empowered to reclassify the agreement ex officio, for the purpose of neutralizing the effects of the type or sub-type of agreement legitimately chosen by the parties in order to reduce it to the general type to which it belongs (ordinary loan) or to different types of agreement, even in the presence of a questioning of its validity in terms of exceeding the financeability limit, which implicitly presupposes the proper qualification of the contract in terms of a land loan contract”.
The Supreme Court’s decision may reassure market investors willing to invest in non-performing loans from land loan agreements, the validity of which – as well as the validity of the associated mortgage security – is no longer in dispute, thus allowing operators to pursue their investments with more certainty.
1 Art. 38 co. 2. TUB: “The Bank of Italy, in accordance with the resolutions of the ICRC, will determine the maximum amount of financing, identifying it in relation to the value of the mortgaged property or the cost of the works to be carried out on the same, as well as the cases where the presence of previous mortgage registrations does not prevent the granting of financing.
Dante Campiverdi and Rodrigo Francisco Santini also contributed to this article.
©2022 Greenberg Traurig, LLP. All rights reserved. National Law Review, Volume XII, Number 325