Authorization to Debit

Power of Attorney to Encumber - The power of attorney to encumber is a provision included in the notarized purchase agreement that authorizes the buyer to encumber the purchased property with a mortgage in favor of the financing bank even before the transfer of ownership is recorded in the land register. It bridges the gap between the conclusion of the contract and the transfer of ownership and is an indispensable tool in real estate financing.

Function and Significance

Typically, four to eight weeks elapse between the notarized purchase agreement and the buyer’s registration as the new owner in the land registry-and even longer during peak periods at the land registry office. Without a power of attorney to encumber the property, the buyer could not have a land charge registered during this time, as they are not yet the owner. Their bank would not disburse the loan, and the purchase price could not be paid on time.

The power of attorney to encumber resolves this problem elegantly: The seller authorizes the buyer to encumber the property-which is still legally owned by the seller-with a land charge. The bank receives its security interest and disburses the loan, even though the buyer is not yet registered as the owner. At the same time, the notice of transfer (§ 883 BGB) protects the buyer: Any encumbrances registered after it are ineffective against the buyer once ownership is ultimately transferred.

Content and Restrictions

A carefully drafted power of attorney to encumber the property contains the following restrictions to protect the seller:

• Amount Limit: The encumbrance may not exceed a certain maximum amount-usually the purchase price or an agreed-upon maximum amount. This prevents the buyer from encumbering the property with a land charge higher than what was contractually agreed upon.
• Intended Use: The land charge may only be used to finance the property being purchased, not for other liabilities of the buyer. Use for other purposes would constitute a breach of contract.
• Ranking Restriction: The land charge may only be registered with a lower priority than the priority notice of conveyance-the priority notice thus takes precedence.
• Payment Restriction: The loan proceeds may only be paid to the seller (for the purchase price) or into a notary escrow account; they may not be paid directly to the buyer. This protects the seller from the buyer using the funds for other purposes.

Power of Attorney for Debit and Financing Process

In practice, the process typically proceeds as follows after notarization: The notary sends the application for registration of the priority notice of conveyance to the land registry office. At the same time, the buyer sends the bank a certified copy of the purchase agreement along with the power of attorney for debit. The bank prepares the deed of land charge, which is signed by the buyer (as the seller’s authorized representative) or notarized. The land registry office records the land charge, the bank receives the deed of land charge, and disburses the loan. This enables the buyer to pay the purchase price to the seller.

Practical Tip for Property Owners in Nuremberg and Franconia

We recommend that sellers in the Nuremberg metropolitan area carefully review the authorization to debit in the purchase agreement and insist on a clear amount limit as well as a disbursement restriction. The notary will typically suggest this, but you should fully understand the wording and, if necessary, ask the notary for clarification. Buyers should forward the debit authorization to their financing bank immediately after notarization so that the land charge can be established and the loan disbursed promptly-every day of delay can result in additional commitment fees, which the buyer must bear.

Frequently Asked Questions

Does the seller take on any risk with the power of attorney for loan disbursement?

The risk is low if the contract is drafted correctly, as the power of attorney is limited in amount and the loan disbursement is tied to the intended purpose (payment of the purchase price to the seller). Additionally, the priority notice of conveyance protects the buyer, ensuring that the mortgage can only be registered with a lower priority than this notice. A residual risk theoretically exists if the buyer misuses the authorization-for example, by registering a mortgage for a higher amount than agreed. However, this scenario is rare, as banks verify the mortgage amount and generally limit it to the purchase price. The notary is liable for the correct drafting of the contract.

Does the power of attorney for encumbrance need to be notarized?

The power of attorney for encumbrance is typically part of the notarized purchase agreement and is therefore automatically notarized. Separate notarization is possible but uncommon. The land registry office accepts the creation of the land charge based on the power of attorney to encumber contained in the purchase agreement-a certified copy of the purchase agreement with the relevant passage is sufficient. Important: The bank requires an original (not just a copy) of the deed, as only this has legal probative value.

What happens if the purchase agreement is rescinded?

If the purchase agreement is rescinded for any reason-such as failure to fulfill a condition precedent, fraudulent misrepresentation, or the buyer’s failure to meet a financing condition-the power of attorney to encumber the property expires. Any land charge that has already been registered must then be deleted. The seller is entitled to full release of encumbrances on their property; the authorization for deletion must be granted by the land charge creditor (the buyer’s bank). In practice, the notary handles this as part of the rescission process.

How does the power of attorney to encumber apply when there are multiple buyers or financiers?

If multiple people purchase jointly-such as a married couple or two investors as a civil law partnership-the power of attorney to encumber is issued to all buyers. Each participating person may then create the land charge under the power of attorney, provided they act jointly. If multiple banks are involved in the financing (e.g., a financing bank and a subordinated lender), both land charges must be limited and clearly designated within the scope of the power of attorney. In such arrangements, we recommend that sellers agree in the purchase contract on a cumulative maximum limit for all land charges combined-not just per land charge. This ensures that the property cannot under any circumstances be encumbered with a total amount exceeding the agreed-upon aggregate sum. In the Nuremberg metropolitan region, notaries routinely handle such multi-party structures; a preliminary consultation with the notary who will execute the deed clarifies all outstanding issues.

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