Mortgage Clause: Last Chance to Ensure Debt Repayment - ALEXANDROV&PARTNERS
Mortgage Clause: Last Chance to Ensure Debt Repayment

While representing a creditor in a debt collection procedure where debtor’s security structure involves a mortgage agreement, few lawyers ever explore the possibility to enforce the collateral under a mortgage clause.

However, peculiarities of such an enforcement method and high probability of being involved in a litigation against such actions of the creditor result in limited, although occasionally employed, practical application of the mortgage clause upon enforcement of the collateral.

Recently, Alexandrov&partners lawyers have represented a client in an interesting case that required the development of a mechanism for acquisition of bank’s claims against the debtor with subsequent enforcement of the collateral, the latter being the main asset of interest for the client.

Having carried out a thorough analysis, we established that the bank had exercised its claims against the debtor, in particular under security agreements. However, the limitation period had not been complied with, which, at first glance, made it impossible for us to achieve the result necessary for the client.

Is it true that the failure to comply with the limitation period means that obligations are terminated and creditor’s claims against the debtor cannot to be satisfied?

It is true. In court. However, there is always a ‘but’.

Pursuant to the legal stance of the Supreme Court of Ukraine in case No. 6-786цс17:

“According to Chapter 50 “Termination of the obligation” of the Civil Code of Ukraine, expiration of the limitation period does not serve as a basis for termination of the obligation. If a person fails to file a respective lawsuit within the statutory period, as a matter of principle, such a person shall lose the right to a lawsuit, i.e. he or she cannot exercise his or her property right in court.

Having analysed Article 17 of the Law of Ukraine “On Mortgage” in conjunction with Articles 256, 266, 267, 509, and 598 of the Civil Code of Ukraine, the Chamber for Civil Cases of the Supreme Court of Ukraine concluded as follows: unless otherwise envisaged by an agreement, expiration of the limitation period relating to the principal and secondary creditor’s claim seeking recovery of a debt under a loan agreement and enforcement of the collateral (in particular, subject to a court decision on dismissal of the claim due to the failure to comply with the limitation period) does not itself terminate the principal obligation under the loan agreement and, accordingly, cannot be considered as a ground for termination of the mortgage pursuant to Article 17(1)(2) of the Law of Ukraine “On Mortgage”.

Thus, taking into account that the client aimed to acquire title to immovable property, Alexandrov&partners lawyers developed a mechanism for acquiring bank’s claims under the loan agreement and security agreement with further application of the mortgage clause in order to acquire the title to immovable property.

While applying the out-of-court procedure for enforcement of the collateral, we advise that you pay special attention to Article 35 of the Law of Ukraine “On Mortgage”.

The necessity to comply strictly with the requirements set forth in the article is caused by the fact that in order to carry out state registration of title under the mortgage clause, the following documents must be submitted with the registrar pursuant to Clause 61 of Resolution of the Cabinet of Ministers of Ukraine No. 1127, dated 25 December 2015:

1) a copy of a written request of the mortgagee addressed to the mortgagor and the debtor (if the latter is not the mortgagor) seeking to eliminate the violations;

2) a document confirming that the 30-day period from the moment of receipt by the mortgagor and the debtor (if the latter is not the mortgagor) of the mortgagee’s written request has ended, unless a longer period specified in the respective written request;

3) an instrument of pledge (unless the mortgage agreement does not provide for its issue).

Any violation, even quite formal at first glance, of Article 35 of the Law of Ukraine “On Mortgage” may result in a refusal to carry out state registration or in successful appeal by the debtor of actions taken by a registrar or a notary.

Furthermore, in our experience, despite the possibility to register title to immovable property under the mortgage clause both at the notary’s or at the state registrar’s office, we advise you to address the registrar, since sometimes notaries may be reluctant to take such actions or the price for such services may be quite higher than at the registrar’s.

For those of my colleagues who rarely deal with such issues, I would advise to pay attention to amendments introduced to the Law of Ukraine “On Mortgage” and the Law of Ukraine “On State Registration of Rights to Immovable Property and Encumbrances Thereof” in 2018.

For instance, starting from 4 February 2019, during state registration of title to immovable property by the mortgagee (where the mortgagee is a financial institution) under the procedure envisaged by Articles 33–38 of the Law of Ukraine “On Mortgage”, any existing encumbrances, other property rights (including mortgages) to mortgaged property registered after the state registration of mortgage do not serve as a ground for refusal to carry out state registration of title in favour of the mortgagee.

The distinction between consequences of the out-of-court procedure has become yet another novelty. In particular, after completion of the out-of-court procedure, any further claims of the mortgagee for fulfilment of the principal obligation:

by an individual debtor are null and void unless otherwise envisaged by the mortgage agreement, loan agreement or agreement on discharge of claims of the mortgagee;

by a corporate debtor or individual entrepreneur are valid unless otherwise envisaged by the mortgage agreement, loan agreement or agreement on discharge of claims of the mortgagee.

We believe the above changes are positive and aim to popularise the applicability of the out-of-court procedure.

Furthermore, such mechanisms of the out-of-court procedure have a number of clear advantages as compared to enforcement of the collateral in court, and sometimes, as we can see from the example at the beginning, they are the only possible option for the creditor to satisfy its claims against the debtor.

Аuthor
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    Shein Kseniya

    Partner. Attorney

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