Can the rules of third party protection under section 3:36 of the Dutch Civil Code be successfully invoked by a party making an attachment on real property which at the time of such attachment was seemingly unencumbered? In a recent judgment, the Dutch Supreme Court ruled that those rules do not prevent the holder of a right of mortgage from invoking an incorrect assumption by the person making the attachment that such right of mortgage had ceased to exist prior to the attachment.
Dutch Supreme Court 18 November 2016 (ECLI:NL:HR:2016:2640)
In 2007, a project development company granted a right of mortgage to a Dutch bank over a parcel of land which was subsequently split into six apartment rights, one of which was later sub-divided into several more apartment rights. In September 2011, the project development company, which had continued to be the owner of one of the apartment rights, and the bank executed a notarial deed of release (afstand) with respect to, amongst other things, the right of mortgage over that apartment right, following which the release was entered into the public registers. In November 2011, another creditor of the project development company made a preliminary attachment (conservatoir beslag) on the apartment right, assuming on the basis of his review of the public registers that the apartment right was at that time unencumbered. In December of that same year, a notarial deed of correction was executed between the project development company and the bank, under which the original notarial deed was corrected and the release of the right of mortgage over the apartment right was annulled. Consequently, the right of mortgage was re-entered in the public registers. Shortly thereafter, the preliminary attachment became an executory attachment (executoriaal beslag). This resulted in discussions between the bank and the other creditor regarding who had priority to the enforcement proceeds.
The rules of third party protection under section 3:36 of the Dutch Civil Code entail that a third party who, on the basis of another person’s declaration or conduct, assumes the creation, existence or extinguishment of a certain juridical relationship, which is reasonable in the circumstances, and who acts reasonably in reliance on the accuracy of that assumption, cannot have the inaccuracy of that assumption invoked against it by that other person. To a certain extent, those rules can be invoked by persons making an attachment.
In the underlying proceedings, both the District Court of The Hague and The Hague Court of Appeal ruled that, although the right of mortgage had continued to exist, the person making the attachment could justifiably invoke third party protection rules against the bank and that, consequently, the bank had to tolerate enforcement of the attachment as if the apartment right was unencumbered. However, the Supreme Court came to a different conclusion, reasoning that an attachment does not in itself create new rights in the same way, for example, that a contract does, but instead an attachment only serves to protect rights. It does not follow from the nature of an attachment that the other creditor, by doing nothing other than making the attachment, would become entitled to levy execution on the apartment right as if it was unencumbered. In order to successfully invoke the rules of third party protection against the bank, it would have been required that the other creditor at the time of execution could still reasonably assume that the apartment right was unencumbered. However, given the prior re-entry of the right of mortgage in the public registers, this was no longer the case at the time. Thus, the Supreme Court ruled that the bank was entitled to invoke the mortgage against the other creditor and was therefore entitled to transfer the apartment right free from the attachment to a third party following an enforcement sale. The bank had priority to recover its claims against the project development company from the enforcement proceeds.
In terms of relevance for the Dutch finance practice, this judgment highlights that if a person making an attachment wishes to successfully invoke the third party protection rules under section 3:36 of the Dutch Civil Code against another creditor, it must reasonably be under the assumption, not only at the time of making a preliminary attachment but also at the time of execution of the attachment, that other creditors do not have prior rights with respect to the attached asset.