In its resolution as of August 2nd, 2021 (“the Resolution”), the Supreme Court of Cassation (the SCC) resolved whether a legal mortgage on real estate (established for security for a bank credit) is void if the borrower was not owner of the property upon the registration of the mortgage.
The Resolution refers to the previous long-standing case-law of the SCC stating that:
- irrespective of whose the real estate is, once the mortgage has been established, the creditor may initiate enforcement procedure to the property and receive payment from the sale price of the property prior to other creditors of the borrower;
- a mortgage may only be established on a property which at the time of establishment of the mortgage are owned by the borrower.
Mortgage on Co-owned Real Estates
If a person establishes a mortgage on a co-owned property (i.e. when several persons own a single real estate), this co-owner may validly establish the mortgage only on his/her own ideal parts of the property. The rest of the property, even if the mortgage agreement includes the whole property, remains free of any encumbrances (if no other encumbrances have been established).
If a co-owner mortgages the entire property without the other co-owners’ consent, the mortgage will be null and void for their ideal shares. With respect to the mortgage on the mortgagor’s ideal parts of the property, the mortgage is still valid.
“Indivisibility” of the mortgage?
In the view of legal doctrine, the SCC holds that such “partial nullity” of the mortgage does not affect the indivisibility of the mortgage. The so-called indivisibility is represented by the right of the mortgagor to initiate enforcement procedure on the entire property mortgaged by selling it, even if:
- the obligation secured by the mortgage is partially divided/repaid;
- the property mortgaged is divided or transferred to a third party.
In other words, if a mortgage credit is repaid only partially, the bank may (with the assistance of a bailiff) put the entire property up for enforced sale.
After the sale, the bank will be entitled to receive the part of the property price that corresponds to the unpaid part of the bank credit.
In the second case, in the event of a subsequent transfer of a property which has already been mortgaged, the bank is entitled to receive the sale price (the relevant part of the price) after completion of the enforcement sale of the property. In this case, the third party who has been “deprived” of his/her property may (if the legal prerequisites applicable are at hand) institute his/her claims against his/her predecessor – the borrower who transferred the property mortgaged to him/her, but not against the bank.
In its Resolution, the SCC states that a mortgage is also void if established on property that is acquired by the mortgage-establisher later on (i.e. when the mortgage is established by a person who subsequently acquires the property, after the mortgage has already been established).
As well as that, a mortgage is void if established on property owned by the establisher whose title deed is subsequently declared void. Hence, if a mortgage is established on a property which the borrower has acquired, but the acquisition transaction for the property mortgaged is latterly declared void, the mortgage itself (although established post factum) is also invalid.