Introduction of Surface Rights as Bank Guarantee

Banks & Finance

The Argentine Central Bank through Communique “A” 6297 issued on August 11, 2017 provided adjustments to the regulation on Preferred “B” bank guarantees, and mainly incorporated and regulated mortgage on the surface rights as a bank guarantee.

“Preferred B” bank guarantees (generally speaking, with a maturity exceeding six months) comprise rights in rem on third-party property or liabilities which, when duly formalized, ensure that the financial entity can dispose of the funds in settlement of the obligation undertaken by the borrower.

Communique “A” 6297 introduces first mortgage on surface rights as “Preferred B” guarantee -and all subordinate mortgages as long as the financial entity is the creditor- which will entail a more beneficial treatment in relation with the compliance of current prudential regulations applicable to local financial entities, including non-payment minimum risk previsions, fractioning credit risk and previsions related to banking minimum capital requirements. Before this, “Preferred B” first mortgage guarantee applied only to property - and in any degree of priority provided that the financial entity was the creditor in all degrees.

In this respect, financial entities will be able to accept that their customers take a mortgage on the surface right, to secure the obligations undertaken by the customers and to be regarded as a “Preferred B” bank guarantee, achieving a reduction of funding costs through the lessening of the applicable prudential regulations.

Although surface rights were introduced by Law 25.509 in 2001, their purpose was limited to the forestry sector – including different plantations – but did not include construction activity. Improvements were developed and the scope of surface rights was extended (see section 2114 – 2128 of the Argentine Civil and Commercial Code) with the entry into force of the new Argentine Civil and Commercial Code, so it is clear that: (i) it is a temporary property right established on third-party property, and can even include property subject to horizontal property law; (ii) it grants its holder (surface rightholder) the right to legally or materially use, enjoy and dispose of the right to plant, afforest and build, and (iii) it grants its holder the right to legally or materially use, enjoy and dispose of what is planted, afforested, or built on, above or beneath the land. Moreover, surface rights can be established on a property subject to horizontal property law, which further extends the purpose of this right.

Section 2120 of the Argentine Civil and Commercial Code states that “(...) holders of surface rights are entitled to create a security interest over the right to build, plant or afforest on the surface property (…).” Therefore, it is quite clear that a surface rightholder may establish a mortgage in favor of a financial entity over:

                a) The right to plant, afforest and build, and

                b) The surface property (what has been planted, afforested and built).

Communique “A” 6297, which incorporates the mortgage over the surfaced property as a bank guarantee, is aimed at widening the credit for the production activity by means of improvements in the conditions of access to bank loans within the farming, forestry and construction sectors, and in any other sector - when the borrower holds a surface right over somebody else’s property, and particularly, to benefit those legal entities and individuals who do not have their own property.