Major changes in mortgages

On 20 February 2011 the Act Amending the Act on Land and Mortgage Registers and Mortgages and Certain Other Acts (Journal of Laws Dz.U. 2009 No. 131 item 1075) goes into effect. It provides for numerous changes concerning the nature of mortgages and the manner in which this form of security is used.

Elimination of distinction between “ordinary” and “capped” mortgages

The act provides for elimination of the existing distinction in Polish law between an “ordinary” mortgage (securing existing monetary claims) and a “capped” mortgage (securing contingent claims). Under the new regulations, there will be only one type of mortgage, securing both existing and contingent claims, covering not just the principal amount due but also claims for interest, collection costs and other incidentals identified in the document under which the mortgage is entered in the land and mortgage register. Thus it will be important to establish a mortgage in an amount high enough to satisfy both the principal and the incidental claims. The amount of the mortgage must nonetheless be closely connected to the real value of the claims, because the owner of the encumbered property will be able to seek reduction of the amount of the mortgage if it is excessive.

Multiple claims and creditors

The new regulations enable the use of one mortgage to secure more than one claim by the same creditor, so long as the document establishing the mortgage indicates the legal grounds for the claims. The act also permits use of one mortgage to secure claims by several creditors participating in financing of the same venture. For this purpose the creditors will appoint a mortgage administrator (one of the creditors or a third party). The mortgage administrator will then be entered in the land and mortgage register as the mortgage creditor. The mortgage administrator will exercise the rights and obligations of the mortgage creditor in its own name but on behalf of the creditors who claims are secured. The creditors may at any time file a motion with the court to change the mortgage administrator. If the agreement with the mortgage administrator expires and a new administrator is not appointed, or if the creditors fail to agree on changing the administrator, any of the creditors may demand that the mortgage be divided.

Use of vacated mortgage position

A new solution will be the ability of the property owner to use a position in the mortgage ranking that has been freed up. Under current law, if several mortgages are established with different rankings in order of priority, if a higher-ranking mortgage is extinguished, the lower-ranking mortgages shift forward in priority to take the place of the extinguished mortgage. Under the new law, if a higher-ranking mortgage is extinguished, the lower-ranking mortgages will not automatically shift forward, but the higher-ranked position will be left vacant. The owner of the real estate may then use the free space, for example by establishing a new mortgage or moving an existing mortgage into the free space. The higher-ranking position may be disposed of by the owner only up to the amount of the previous mortgage that has been extinguished. Otherwise, if the value of the new or promoted mortgage would be higher, the consent of the creditors whose mortgages would be lower-ranked will be required.

Compared to the current approach, this construction puts the owner of encumbered real estate in a more favourable position, enabling the owner to freely dispose of the value of the property for security. It should be pointed out that the right to make use of a free space in the mortgage priority is held by any owner of the property at a given time; it does not expire upon sale of the property, but passes to the new owner. This right is also not subject to attachment, and an involuntary mortgage may not be imposed on the free space in the ranking.

Extinguishment of mortgage

There is an important change involving the issue of extinguishment of a mortgage. Under current law, a mortgage is generally extinguished when the claim secured is extinguished. Under the new rule, extinguishment of the claim results in extinguishment of the mortgage unless, based on the specific legal relationship, additional secured claims may arise in the future. In the case of a mortgage securing several claims, the mortgage will be extinguished when the last of the claims is extinguished, so long as no more secured claims may arise under the legal relationships that were the source of the original secured claims. It will also be possible to replace a claim secured by a mortgage with another claim by the same creditor. This is intended to reduce the costs of establishing additional mortgages.

Lifting of mortgage

Because the new regulations will enable a mortgage to secure claims that do not exist yet at the time the mortgage is established, the law also provides for certain circumstances in which the owner of the encumbered property may demand that a mortgage of this type be lifted. Specifically, if the claim secured by the mortgage does not arise within 10 years after entry of the mortgage, but could still arise, the owner may demand that the mortgage be deleted, in exchange for an appropriate fee. If the mortgage was designed to secure several claims, the 10-year period runs from the date that the last mortgage claim is extinguished. However, in the case of “capped” mortgages existing as of 20 February 2011, the period will be the 5 years following that date.

Interim application of current regulations

The amending act provides that the new regulations shall apply to “capped” mortgages existing as of 20 February 2011, except for the regulations concerning use of a vacant place in the mortgage priority. With respect to “ordinary” mortgages existing as of 20 February 2011, the prior regulations will continue to apply, except for the provisions concerning joint mortgages, which will be governed by the new wording of the act.