Consumer Protection Law

Mortgage contracts: notice of right to cancel often void

The Hamburg consumer association reported recently on a surprising discovery following an investigation. Many ‘right to cancel’ clauses in mortgage contracts are erroneous and therefore void.

Mortgage contracts: notice of right to cancel often void © PictureP.-Fotolia

Mortgage contracts: notice of right to cancel often void © PictureP.-Fotolia

Invalid clause

The consumer association found that “more than two thirds of right to cancel notices in mortgage contracts are erroneous and therefore invalid. The results come from an investigation of right to cancel notices in three hundred home loan agreements.”

Consumers are being advised to check the right to cancel notices in their existing and future home loan agreements to ensure they are valid.

Clarity

In order to be valid, a ‘notice of right to cancel’ clause must conform with § 360 German Civil Code (Bürgerliches Gesetzbuch, BGB).

Such a clause must inform the contractual partner in a clear manner of the main rights and duties relating to cancelling the contract.

The objective of a right to cancel notice is to put the consumer in a position to be able to exercise the relevant rights. For this reason, consumers must be given clear and understandable information on the legal consequences of taking such action.

However, in practice many notices on the right to cancel are drafted in a confusing manner, as they contain unnecessary additional references and points to note.

Notice of right to cancel

A notice of right to cancel must draw consumers’ attention to the following:

  1. The existence of the right to cancel
  2. The fact that the right to cancel may be exercised without giving a reason
  3. The fact that the right to cancel can be exercised before the time limit expires by communicating the intention to cancel in written form or by returning the product
  4. The name and address to whom the intention to cancel should be communicated
  5. The duration and commencement date of the time limit for exercising the right to cancel
  6. The fact that to exercise the right to cancel it is sufficient to send the declaration or the product before the time limit expires

If this information is not contained in the right to cancel notice, the time limit for exercising the right does not expire.

Legal examination of home loan agreement

According to the investigations conducted by the Hamburg consumer association, many home loan agreements issued by banks and building societies do not properly inform customers of when the right to cancel time limit commences. Sometimes, loan agreements even fail to inform customers of the true legal consequences behind exercising the right to cancel.

Consumers are therefore well advised to have their mortgage contracts double-checked.

As the time limit does not expire, an erroneous right to cancel notice allows consumers to cancel the contract even years after it was concluded.

Our expert team of German lawyers is available to help you check the validity of your home loan agreement.

Michael Beuger is a partner at the law firm WILDE BEUGER SOLMECKE.

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