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Priority Lien - A priority lien is a right recorded in the land register (land charge, mortgage, easement, preliminary notice) that takes precedence over other rights. In the event of a foreclosure sale, priority liens are satisfied first from the proceeds; subordinate rights receive nothing if the proceeds are insufficient. For banks and buyers, knowledge of existing encumbrances is essential, as they directly influence the value and mortgageability of a property.

Order of Priority in the Land Register

The priority of land registry rights is determined by the order of registration (principle of priority, § 879 BGB). Within the same section, the rule is: whoever was registered first has the higher priority. For rights in different sections (Section II: Encumbrances and Restrictions, Section III: Real Property Liens), the date of registration also determines the priority. A change in priority is possible by agreement among the entitled parties (Section 880 BGB). When granting a land charge, banks insist that it be in the first priority-existing prior encumbrances must either be deleted or yield in priority.

The land register is divided into three sections: Section I contains the ownership entry, Section II contains other encumbrances and restrictions (easements, rights of residence, real encumbrances, preliminary notices), and Section III contains real estate liens (land charges, mortgages, annuity debts). The order of priority applies both within a section and across sections: An older easement in Section II may rank higher than a more recent land charge in Section III. For a bank to provide a loan secured by real estate, therefore, it is not only the existence of other land charges that is relevant, but the entire structure of priorities and encumbrances in the land register.

Significance for Financing and Purchase

Existing encumbrances affect mortgageability: A second-priority land charge is worth less to the bank because, in the event of a foreclosure sale, it is satisfied only after the first-priority land charge. Banks generally provide financing only if their land charge is first-priority. For buyers, prior encumbrances pose a risk: Anyone purchasing a property with existing land charges assumes these obligations-unless the purchase agreement stipulates a transfer free of encumbrances (which is the norm). Easements (rights of way, utility rights) as prior encumbrances can reduce the property’s utility value and thus the purchase price.

In a typical real estate purchase financed by a loan, the transaction is structured as follows: The financing bank makes the payment of the purchase price contingent upon its new land charge being registered as first-ranking. The notary coordinates the repayment of the seller’s existing land charges using the purchase price and the simultaneous registration of the buyer’s land charge. This procedure requires that all senior creditors issue their consent to cancellation in a timely manner. If there are multiple encumbrances, the settlement process can become complex and take longer-an experienced notary is essential here.

Types of Encumbrances and Their Effects

Land charges and mortgages as encumbrances are usually unproblematic if they are discharged in the course of the sale. More difficult are rights in rem under Section II, which remain in effect after the purchase:

• Right of way (easement): A neighbor is permitted to cross the property-this restricts its use and may reduce its value.
• Utility rights: Utility companies are permitted to lay and maintain lines-development in this area is restricted.
• Right of residence (Section 1093 BGB): A third party is permitted to occupy the property or parts thereof-significant reduction in value, often unsaleable.
• Usufruct (Section 1030 BGB): The usufructuary is entitled to collect fruits (e.g., rental income)-property is virtually unfinanceable.

Practical Tip for Property Owners in Nuremberg

We recommend that buyers in the Nuremberg metropolitan area request a current land registry extract before purchasing and discuss all registered rights in Sections II and III with the notary. Existing land charges held by the seller are generally discharged as part of the closing process-the notary arranges for the release of encumbrances. Easements (rights of way, utility rights), however, often remain in place. Check whether these restrict the value or use of the property. The cost of a current land registry extract at the Nuremberg Land Registry Office is approximately 10-20 euros.

For older buildings in downtown Nuremberg or in historic neighborhoods such as Wöhrd or Gostenhof, the land registry often contains older easements-utility rights held by the municipal utilities, rights of way, or boundary setback regulations from past decades. Have these thoroughly reviewed before signing a purchase agreement. In some cases, such rights are economically insignificant; in others, they significantly restrict development or use. We assist our clients in understanding the land registry extract and recommend consulting a specialist real estate attorney for complex encumbrance structures.

Frequently Asked Questions

Does the seller have to remove pre-existing encumbrances?

That depends on the purchase agreement. By default, the seller agrees to transfer the property free of encumbrances-in particular, land charges are removed. Easements (rights of way, utility rights) often remain in place and are listed in the purchase agreement as known encumbrances. The buyer should verify before signing the contract which encumbrances remain and whether they agree to them.

What happens to pre-existing encumbrances in a foreclosure auction?

In a foreclosure auction, pre-existing encumbrances that rank ahead of the enforcing creditor are assumed by the purchaser-they remain in place and increase the minimum bid. Subordinate rights expire upon the award of the property. Therefore, the priority ranking is decisive: A first-ranking land charge remains in effect in an auction initiated by a second-ranking creditor-the purchaser must assume it.

Can I change the priority ranking of a land charge?

Yes, through a change of priority (Section 880 BGB). Both entitled parties (e.g., two banks) agree to the swap of priority, which is entered in the land register. In practice, this occurs when new financing is to take precedence over an existing land charge. A reservation of priority (Section 881 BGB) is also possible: When creating a land charge, the owner reserves the right to have a subsequent right entered with priority.

How can I identify all encumbrances on a property?

Exclusively through a current land registry extract from the relevant land registry office. Section II shows easements, real encumbrances, and preliminary notices; Section III shows land charges. Deletion notes and priority numbers are also visible. The land register is only publicly accessible to those with a legitimate interest-buyers, sellers, and notaries have this right. We help our clients interpret the land register extract correctly.

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