Public liability based on incorrect land register entries is limited

The present case

In 2000 a woman agreed to transfer real estate to her nephew. A prohibition on encumbrance and sale (Belastungs- und Veräußerungsverbot) in favour of the nephew's son was also agreed. All corresponding land register entries were filed and approved by the land register court in 2001. Yet, the land register court failed to register the prohibition on encumbrance and sale, while registering all other approved entries.

Twelve years later the nephew assumed personal liability for a bank loan granted to his company. The real estate was the nephew's only asset that could be used as collateral. Prior to granting the loan, the bank checked the land register for encumbrances. It relied on the land register's status (Grundbuchstand) (wrongly showing that the real estate was unencumbered) and decided not to request a mortgage to secure the loan. The bank would not have granted the loan if the prohibition on encumbrance and sale in favour of the son had been registered correctly.

In 2014 the bank filed a preliminary injunction for a prohibition on encumbrance and sale of the real estate (einstweilige Verfügung zur Begründung eines sicherungsweisen Belastungs- und Veräußerungsverbots) to secure its claims under the loan agreement, which was approved by the court. Upon registering the prohibition on encumbrance and sale the land register court noticed its error and initiated a rectification procedure (Berichtigungsverfahren), registering the prohibition on encumbrance and sale in favour of the son in its original rank, i.e. with priority to the bank's rights. The bank filed a public liability lawsuit for damages, arguing that it would not have granted the loan had the prohibition on encumbrance and sale been registered correctly.

Key findings

The Austrian Supreme Court found that:

1. In principle, an erroneous non-registration of an approved land register entry, as a violation of the provision to keep the land register accurate and complete, can constitute public liability.
2. Even if such provision is violated, only those damages which the provision in question was intended to prevent are to be compensated (Rechtswidrigkeitszusammenhang).
3. As a public register, the Austrian land register merely provides information on the legal situation of a property, not official information on assets and creditworthiness.
4. Consequently, the provision to keep the land register accurate and complete only protects persons who either already have rights registered in the land register or are directly aiming to constitute such rights. Therefore, only these groups of people may assert public liability claims based on incorrect land register entries.

Summary and open question

In principle, incorrect (including missing) entries in the land register trigger public liability. However, according to a recent decision of the Austrian Supreme Court, only persons who either already have rights registered in the land register or are directly aiming to constitute such rights are entitled to public liability claims based on incorrect land register entries.

This particularly affects the common banking practice of only requesting registrable mortgage certificates (EPU; eintragungsfähige Pfandurkunde) from debtors (after checking the land register for encumbrances) while not registering the mortgage to avoid registration fees. Such creditors cannot rely on the correctness or completeness of the land register and therefore bear the risk of missing, incomplete or incorrect land register entries.

Finally, it remains unclear whether only partial registration of a mortgage would suffice to constitute public liability claims in the amount of the whole mortgage, i.e. also for the unregistered part. In future, creditors will need to carefully assess whether to always register mortgages with the land register in the full amount to avoid suffering damages due to incorrect land register entries.

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Further reading: Antitrust and Syndicated loans

authors: Miriam Simsa, Philipp Kalser, Clemens Stegner