Practicalities of Mortgage Enforcement Through Ukrainian Courts
Notwithstanding that a loan agreement is a document reflecting the main commitments between a creditor and a debtor, in practice a mortgage agreement is of nearly the same importance because it secures performance under the loan. Enforcing a mortgage when a debtor defaults under a loan agreement is often the only way for a creditor to recover the loan rather than incur losses. Generally, mortgage enforcement is considered to be a rather complicated procedure due to the specifics of the legal status of immovable property under Ukrainian law. Although the law provides various options for mortgage enforcement, the process of enforcement requires attention to meticulous details.
Under the Law on Mortgage (the 'Mortgage Law') mortgage enforcement may be carried out through the following options: (i) an extrajudicial procedure, specified in the mortgage agreement; (ii) a court decision; and (iii) a notary writ. In this article we will focus on certain practical issues surrounding mortgage enforcement through a court decision, particularly when a mortgagee aims to recognise through a court decision its right to sell the mortgaged property in its name to a third party purchaser at its discretion. For the purposes of this article we will not elaborate on the practical aspects of selling a mortgaged property through a public action. Here, we will limit our focus on mortgaged properties, which belong to non-residential premises.
The mortgagee's right for recovery of a mortgage via court decision raises many problematic issues, in particular issues related to enforcement of court decisions, disposal of the mortgaged property, preservation of the property before its disposal, and others.
The chance of effectively realising a mortgagee's rights depends on how clearly and precisely the claims are identified at the initial stage of court proceedings. Mortgage enforcement without identifying a disposal method and the mechanisms to achieve disposal will be of little value to the creditor.
In cases where the mortgage enforcement is done through courts, the Mortgage Law includes a list of mandatory elements of the court decision, which includes identifying measures to preserve the mortgage or transfer the property into management until its disposal, and a method for disposing the mortgage. The method of disposal can be identified as the mortgagee's right to conclude a sale and purchase agreement with respect to the mortgaged property in its name with any person.
The Mortgage Law states that the sale of a mortgaged property and execution of the sale and purchase agreement should be done by the mortgagee in its name based on the mortgage agreement. Under a general statutory rule, sale and purchase agreements of immovable property should be verified by a notary. In practice, despite the aforementioned provision of the Mortgage Law, the mortgagee cannot verify the sale and purchase agreement due to the fact that under the Instruction on the Procedure for Fulfilment of Notary Acts by Notaries of Ukraine, notaries must, when notarising sale and purchase agreements of immovable property, request from the seller an extract from the Immovable property rights registry ('Register'). However, under the effective law a mortgagee is not empowered to receive such extracts from the register unless duly authorised by the court. Accordingly, the mortgagee, without this extract from the Register, cannot notarise the sale and purchase agreement of the mortgaged property nor register a buyer's ownership rights on a mortgaged property in a local technical inventory bureau ('Inventory Bureau'). This situation will change after 1 January 2012, when the new procedure for obtaining extracts from the Immovable property rights registry comes into force. Under the new procedure a mortgagee will be empowered to obtain extracts regarding mortgaged property.
Today, however, the abovementioned obstacle can be resolved only by obtaining an appropriate court decision which expressly entitles the mortgagee to obtain from governmental authorities, local authorities, public and private notaries, enterprises, institutions and organisations, including the Inventory Bureau, any statements, extracts or other documents, including extracts from the Registry, required for a mortgagee to undertake any actions regarding the sale of a mortgaged property, including for the purposes of concluding a sale and purchase agreement with any person.
Besides ensuring the disposal of mortgage, it is also important for a mortgagee to transfer the mortgaged property into its management until such disposal. The Mortgage Law entitles a mortgagor to take all necessary actions for the proper preservation of the mortgaged property at its own expense, including maintenance, rational use and protection against illegal encroachments. However, after a court decision the mortgaged property may be transferred into the management of a mortgagee or other person until its disposal. Thus, with the transfer of the mortgaged property, a mortgagee is able to ensure the preservation of the property. Such measures can be applied based on a court decision. During the transfer of the mortgaged property into management, it is important to entitle a mortgagee to take actions related to management, in particular, to receive payment for the use of real estate, to conclude services contracts related to the operation and maintenance of real estate, etc. In addition, in order to sell the mortgaged property a mortgagee might require unrestricted access to the mortgaged property (which is possible only in the case of transfer of all keys and access codes to the security system and fire alarms of the mortgaged property and the right to equip it with new security devices), as well as the right of access for demonstration of the mortgaged property to potential buyers, appraisers and other experts.
Consequently, Ukrainian legislation permits mortgage enforcement through the courts. However, in practice the realisation of a mortgagee's rights requires determination and attention to the smallest details in a statement of claim, which must be mirrored in a court decision. Otherwise, a creditor's rights on the enforcement of a mortgage will remain just a contract clause.