Netherlands: Dutch loan portfolios - Supreme Court rules on assignability and duty of care (2024)

In brief

Following several Dutch court cases on the effectiveness of the transfer of a Dutch CRE loan portfolio by Dutch bank Van Lanschot Bankiers N.V. to Promontoria Holding 107 B.V. (an SPV sponsored by Cerberus) and the duty of care towards the relevant borrowers, the lower court of Amsterdam raised preliminary questions to the Dutch Supreme Court (Hoge Raad) in its interlocutory judgment of 7 August 2019 (Immobile/Promontoria).

In the Netherlands, the most commonly used methods to transfer loan portfolios are contract takeover (contractsoverneming) and assignment (cessie) of loan receivables. In case of contract takeover, the entire legal relationship (i.e. all rights and obligations arising under a loan agreement) is transferred to the investor. The lower court of Amsterdam already ruled earlier that no valid contact takeover has taken place. The preliminary questions therefore focus on the assignment (cessie) of loan receivables.

On 10 July 2020, the Dutch Supreme Court ruled on the following questions: (i) does the nature of a loan receivable restrict the assignability of such loan receivable in case of a transfer to a non-bank entity and (ii) if the answer to the first question is no, is a duty of care imposed on such non-bank entity to which the loan receivable has been assigned and how does this relate to the duty of care of a bank.

Assignability

In its recent judgment dated 10 July 2020, the Supreme Court ruled that the nature of a receivable (vorderingsrecht) arising under a loan agreement between a bank and a borrower does not restrict the assignability of such receivable from the bank to a non-bank entity. The Supreme Court sees no reason for such restriction as (i) assignment of a loan receivable will not change the performance by the borrower of its obligations under the loan agreement and (ii) the rights and powers arising from such receivable are not such that this receivable can only be exercised by a bank. That a non-bank entity may exercise such rights in a different manner does not legitimate an exception to the general rule that a loan receivable is transferable.

Duty of care

Dutch banks have a duty of care towards each borrower based on their general terms and conditions applicable to the loan agreement and statutory provisions governing such agreement, and a particular duty of care due to their function in society (including the duty to provide information and advice). The Dutch Supreme Court confirmed that this duty of care which follows from the legal relationship between the bank and the borrower, is not part of the loan receivable and will not apply to the non-bank entity as such, after assignment of the loan receivable.

The Supreme Court however clarified that, after the assignment of a loan receivable, the legal relationship between the borrower and the non-bank entity as assignee (and in particular the obligations of the non-bank entity towards the borrower) will be determined, depending on the circ*mstances of the specific case, by:

1. the 'content' of the loan receivable (including the ancillary rights), which may be subject to certain limitations following from contractual arrangements, statutory provisions and the (particular) duty of care of the bank (for example on the maximum increase of the interest rate applicable to the loan receivable). After assignment of a loan receivable, such limitations also apply to the non-bank entity as assignee;
2. the defenses the borrower would have towards the bank, as it follows from Dutch law that assignment of a receivable does not affect such defenses; and
3. the principles of reasonableness and fairness, which require the non-bank entity to take into account the circ*mstance that the loan receivable is transferred from a bank having a (particular) duty of care and therefore the legitimate interests of the borrower to play a role in determining the non-bank entity's conduct towards the borrower. This may lead, to the extent the non-bank entity having a separate duty of care towards the borrower, the non-bank entity should act towards the borrower as can be expected from a reasonable bank.

Interest reset

The Dutch Supreme Court ruled, in line with the foregoing, that if the 'content' of the loan receivable allows for an increase of the interest payable by the borrower, the non-bank entity is allowed to implement such increase as long as the interest is in line with market practice and the standards of reasonableness and fairness.

This is an interesting conclusion of the Dutch Supreme Court. Although the majority view in the Dutch market is that interest rate reset rights will follow in case of an assignment of the loan receivable (and not remain with the bank as lender of record), there is no case law or statutory provision on this yet.

Consumer borrowers

The questions addressed by the Supreme Court are general and apply to both consumer and non-consumer borrowers. However, when a receivable arising under a loan agreement with a consumer is assigned, purchasers of such loan receivables need to obtain a consumer credit license and comply with the related statutory provisions (including the rules of conduct and duty of care), unless an exemption applies. The most commonly used exemption applies where the originator or a third party acts as servicer of the loan receivables. In such case, the servicer needs to comply with the license requirements and related duty of care.

Conclusion

In our view, the Dutch Supreme Court has drawn the right conclusion that no limitations apply to the assignment of loan receivables to non-bank entities. This is good news for loan portfolio transactions in The Netherlands.

When investing in Dutch loan portfolios, it is important to check if the portfolio is transferred by means of contract takeover (contractsoverneming) or assignment (cessie) of loan receivables. In case of assignment of the loan receivables only, the duty of care towards the borrowers remains with the Dutch bank and does not apply to the non-bank entity as assignee as such. The conduct of the non-bank entity as assignee should however be in line with (i) contractual arrangements between the bank and the borrower, (ii) statutory provisions and (iii) the standards of reasonableness and fairness, which may require the non-bank entity to act towards the borrowers as may be expected from a reasonable bank.