Mortgage Application

From the legal point of view the mortgage is the designation for two juridical subjects, namely a credit contract concluded according to the Commercial Code, and ultimately a contract as per the Civil Code that is secured by right of lien to real estate.

Right of lien may be characterized so that the lien creditor – in this case the bank providing credit – will get the right to claim satisfaction on something pledged in the situation where the debtor does not fulfil the secured debt properly and/or in time. Such rights and obligations of the parties arise on the basis of a Pledge Contract that usually stipulates, clearly, the  rights and duties of all the parties. It is necessary to point out that right of lien is connected to the term of the legal life of the secured debt. It means that origin and duration of right of lien inseparably relates to the secured debt. A right of lien has two functions, namely a securing function – debtor is motivated to dispose of the burden of right of lien by means of payment of the obligation, and function of the disbursement – the lien creditor may be satisfied from the pledge – from the proceeds of its sale provided the debt is not satisfied by the debtor.

The basic requirement is that the contract should be executed in written form, if not the right of lien is invalid.

The Pledge Contract has to make clear the subject of right of lien. The contractual parties are the lien creditor – the bank providing credit and the debtor – the mortgager. i.e. the person having some real estate that may be given into the pledge and, at the same time, the person that intends to draw credit and to buy real estate.

A pledge can be offered by a third party, in the event that the buyer has not real estate available.

Furthermore, it is possible that the mortgager will assign the pledged real estate to a third party who  then becomes a mortgager. The debtor is still obliged to pay the debt to the bank.

It is necessary to point out that it is not possible to pledge the cooperative flat.

The proportion between the value of debt and value of pledged real estate is not stipulated by any legal regulation. It is then only a matter for banks to verify the value of pledged real estate. Therefore, banks require a valuation report from a recognised expert.

Should the pledged real estate lose value and the debt security becomes insufficient, the lien creditor has the right to require additional security from the debtor. Should this not happen the part of the debt not secured by right of lien will become due.

By secured debt it is understood to be the debt resulting from a credit contract. It is possible that the credit contract will assume more debts, e.g. debt for purchase of real estate.

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For a right of lien to be valid it is required to be recorded into the cadastre of real estates. The proposal of the right of lien is presented by the parties to the Pledge Contract, namely the lien creditor and the mortgager. Due to the fact that the bank providing credit insists on proper security of debts, i.e. the provided credit, it is usually required that evidence of submission of the Pledge Contract to the cadastre office is provided to the bank prior to the provision of credit. In this way the banks minimise their risk, by having their debt secured.

The Pledge Contract often includes provisions about the fact that the mortgager is obliged to provide to the lien creditor the maximum possible cooperation to remove any obstacle restraining the entry of right of lien (eventually to conclude a new and correct pledge contract). For such cases the lien creditor may be protected in relation to the debtor by arranging that the provided credit will be immediately due.

A lien creditor may reach satisfaction of his debt from proceeds resulting from pledge monetization in case that the debtor is in delay with payment of obligations against the lien creditor. On the other hand it is necessary to point out that the lien creditor has the possibility to select another method of settling the debt.

In principle the pledge monetization may be realized in public auction or by a court sale of the pledge.

A lien creditor cannot attain satisfaction from a pledge by any method other than stipulated in law.

Settlement of debt secured by right of lien is one possible way of the extinction of  the right of lien. Due to the fact that existence of right of lien depends only upon the existence of debt it may be stated that, by extinction of the debt, the right of lien also becomes extinct.

It is in the interest of the debtor to pay the debt against lien creditor , in order to delete the right of lien from the cadastre of real estates.

For the sake of completeness we add that right of lien may become extinct by further ways, namely waiving of the right of lien by lien creditor, monetization of the pledge, extinction of the pledge (e.g. due to destruction of the pledged real estate) and under certain conditions also by a bankruptcy order for the property of the mortgager.

These stages can be categorised as follows: