§ 27. Security interests and retention of title on limitation

§ 27 is about security for claims. Security interests, seller's security interests, retention of title and the right of retention are ways in which a creditor (kreditor) can secure their position. The question is what happens to such security when the claim itself becomes time-barred.

This is an area where the result is not always intuitive. Many people think that all security lapses when the claim becomes time-barred. Others think that a security interest always remains regardless. § 27 lies between these extremes. Some forms of security lapse. Others remain.

The first paragraph lists three types of non-possessory security interest that lapse when the claim (fordring) becomes time-barred. A non-possessory security interest means a security interest where the debtor (skyldner) still has the item or property, while the creditor has a right of security. Typical examples are security interests in property, operating equipment or other assets without the creditor physically holding them.

Letter a concerns a statutory non-possessory security interest that is not registered or recorded in a special register of rights. Registration makes the right visible and formal. If a statutory security interest is not registered, it lapses when the claim becomes time-barred.

Letter b concerns a non-possessory security interest under an indemnity bond securing a possible future liability for debt. An indemnity bond is a security document that secures a possible or varying claim, not just one fixed amount. When the claim becomes time-barred, such security lapses in the situation the provision describes.

Letter c concerns a non-possessory security interest for a claim for interest or other performance owed that falls due at fixed intervals and is not an instalment on the principal. This is similar to the rules in § 6. If the security interest secures running interest or performances, and these claims become time-barred, the security interest for them lapses.

The second paragraph concerns retention of title and a seller's security interest in delivered movable property. Movable property means things that are not real property. A car, a machine, furniture and equipment are typical examples. Retention of title means that the seller states that ownership is retained until the purchase price has been paid. A seller's security interest means a security interest in the item that has been sold.

The main rule in the second paragraph is that such a right lapses when the claim for the purchase price becomes time-barred. If the seller's claim for payment is time-barred, the seller normally cannot still take the item back on the basis of retention of title or a seller's security interest. But there is an exception: if the right has been registered or recorded in a special register of rights pursuant to law, it does not necessarily lapse in the same way.

The third paragraph states the main rule for everything else: otherwise, limitation has no effect on security interests and the right of retention. This means that a security interest can remain even if the claim itself is time-barred, unless it falls under the exceptions in the first or second paragraph. The right of retention means that you can keep something in your possession until the claim is paid.

The fourth paragraph concerns encumbrances on real property. An encumbrance is a right that rests on a property, for example an obligation to pay or provide something on an ongoing basis. Here the law says that only the individual performances owed become time-barred. The right itself does not necessarily lapse.

Can the bank use a security interest even if the debt is time-barred?

Sometimes, yes. § 27 third paragraph says that limitation otherwise has no effect on security interests and the right of retention. This means that in many cases a security interest can remain even if the claim can no longer be demanded as ordinary payment.

This may seem strange. If the claim is time-barred, why should the security interest remain? The reason is that a security interest is a separate right of security. It can give the creditor coverage from the asset subject to the security interest, even if the personal claim for payment is time-barred. But this does not apply to all forms of security. That is why you must always check the first and second paragraphs.

For example, a registered security interest in real property can have a strong position. If you own a home with a registered security interest, the security interest can have significance even if the personal claim has limitation problems. This is one of the reasons why secured debt must be assessed separately.

But retention of title and a seller's security interest in delivered movable property have their own rule. There, the right as a main rule lapses when the purchase price becomes time-barred, unless the right is registered pursuant to law. If you buy an item on instalments and the seller does not follow up the payment claim before it becomes time-barred, the seller's right to take the item back may also lapse.

What is a right of retention?

A right of retention means that you hold on to an item until you get paid. A classic example is a garage that has repaired a car. If the customer does not pay, the garage can in some situations keep the car until the bill is paid.

Under § 27 third paragraph, limitation otherwise does not affect the right of retention. This means that if someone lawfully holds on to an item, the right can remain even if the monetary claim (pengekrav) has limitation problems. But this must be assessed in each specific case, because the right of retention has its own conditions.

A right of retention differs from an ordinary claim. The creditor does not necessarily demand payment through a judgment (dom). The creditor says: "You won't get the item back until the claim has been settled." This is a strong position because the creditor already has the item.

If you encounter a right of retention, you should ask for a specification of the claim and the basis for holding on to the item. If you want to use a right of retention yourself, you should be sure that the conditions are met. Holding something back wrongly can make you liable.

What happens to a seller's security interest and retention of title?

If a seller has sold movable property with a seller's security interest or retention of title, the purpose is to secure the purchase price. The buyer gets the item, but the seller has security if the buyer does not pay.

§ 27 second paragraph says that the right lapses when the claim for the purchase price becomes time-barred. This makes sense. If the seller can no longer demand the purchase price because the claim is time-barred, the seller should as a main rule not be able to take the item back either.

But the exception is important. If the right has been registered or recorded in a special register of rights pursuant to law, the main rule does not apply in the same way. Registration gives the right stronger protection. Typically, a seller's security interest in a car may be registered.

This means that you must find out whether the security is registered. It is not enough to know that the agreement said "retention of title". You need to know whether the right is registered where the law requires or allows it.

What happens if you get it wrong?

If you, as a debtor, think that limitation automatically wipes out a security interest, you may be surprised. The creditor may still have a right in the security. This can mean that the asset can be used to cover the debt, even if the ordinary claim for payment is time-barred.

If you, as a creditor, think that the security always remains, you can also be wrong. Particularly with retention of title and a seller's security interest in movable property, the right may lapse when the purchase price becomes time-barred, if the right does not have special registered protection.

If you do not check registration, you may get the result wrong. Registration can be decisive.

First find out what kind of security it is. A security interest? A seller's security interest? Retention of title? A right of retention? An encumbrance? Then you must check whether the security is registered or recorded.

Distinguish between the claim itself and the security. Ask: is the claim for payment time-barred? Then ask: what happens to the security under § 27?

If you receive a demand to return an item because of a seller's security interest, ask for documentation of the claim for the purchase price, the agreement and any registration.