Rights of mortgagee upon the decrease in value of immovable
In one way or another a situation may arise where the value of immovable has decreased, and which has been encumbered with a pledge and therefore can damage the rights of the mortgagee. Law of Property Act provides what are mortgagee rights when the value of immovable has decreased, while the immovable is encumbered with pledge.
- If the value of the pledged immovable has decreased without the owners fault, then the mortgagee can claim for additional collateral or require partial payment of the debt to the extent where the decrease of the value has been compensated for the owner of the immovable.
It may happen that the decrease of value has not been compensated to the owner of the immovable because the owner has not demanded compensation (for example from the insurer) for the decrease in value itself. The Law of Property Act does not provide that mortgagee could claim for compensation for the decrease in value on behalf of the owner of the immovable, i.e the owner thereof. Deriving such a right of claim from another piece of legislation (eg the Law of Obligations Act) is highly questionable. However, the owner of the immovable cannot be held liable for not claiming compensation – it is the owner’s right not obligation. For these kinds of questions, the answer has to be given by court practice, if they arise in a dispute.
According to the Law of Property Act, mortgagee cannot claim for additional collateral or require partial payment of the debt if the value of the immovable, on which the natural person’s (i.e person) main residence is located, decreases due to the change in the immovables market situation. What is the change in the market situation, what are the criteria’s to identify it and whether that exact change has caused the reduce of the immovable value particularly, depends in specific circumstances and assessment given on the evidence.
- Mortgagee may demand restoration of the former state or additional security from the owner of the immovable if the reduce of value of the encumbered immovable can be expected or if it has already ocurred.
Regarding that claim it is important to consider the following:
– since the restoration of the value presupposes a real decrease in value and its determination, the subjective assumption of the decrease in value cannot be decisive;
– the mortgage is related with the immovable, the mortgagee cannot claim anything other than an additional immovable as collateral.
- If the owner of the immovable does not restore the previous situation at the request of the mortgagee or does not provide additional collateral, the mortgagee can demand the satisfaction of the claim secured by the mortgage to the extent by which the value of the encumbered immovable has decreased.
Regarding that right to claim it is important to pay attention to the following. The partial satisfaction of a claim that has been secured must take place at the expense of an encumbered immovable which value has reduced. Since the claim that requires additional collateral would remain after the (compulsory) sale of the immovable, it would logically presuppose that the mortgage should continue to be valid to a corresponding extent. According to the Code Enforcement Procedure when an immovable is sold under enforcement procedure, the rights reflected in the land register which have the same ranking as, or a higher ranking than, the claim of the claimant or the right securing that claim shall be preserved and rights which have lower ranking than a claim shall extinguish when a bid is declared to be the best. The right belonging to a claimant and entered in the land register, if a claim for payment is made to satisfy the claim arising from the right, is also deemed to have extinguished. It is questionable whether the legislator’s intention in this case was that in the event of the sale of the immovable the mortgage entry should be deleted form the land register due to the partial satisfaction of the claim.
If you need legal aid regarding the previously mentioned, feel free to contact the author of this article.
Raini Nõu / LEADELL Pilv Law Office