A loan agreement is a document that reflects the main commitments between a creditor and a debtor. However, in practice, a mortgage agreement is almost as important 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 a relatively complicated procedure because of the specifics of the legal status of immovable property under Ukrainian law. The law provides various options for mortgage enforcement and the process of enforcement requires close attention to detail.

Under the Law on Mortgages, mortgage enforce­ment may be carried out on the basis of:

  • an extra­judicial procedure, as specified in the mortgage agreement;
  • a court decision; or
  • a notarial writ.

This update focuses on certain practical issues surrounding mortgage enforcement through a court de­cision, particularly when a mortgagee seeks recognition of its right to sell the mortgaged property in its name to a third-party purchaser at its discretion. Exercising a right of recovery on the basis of a court decision raises problems, particularly in relation to enforcement, the disposal of the mortgaged property and the preserva­tion of the property before its disposal.

The likelihood 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 will be of little value to the creditor without identifying a disposal method and the mechanisms to achieve such disposal. In the case of mortgage enforcement through the courts, the law lists the mandatory elements of the court deci­sion, which include identifying measures to preserve the mortgage (or transfer the property into management until its disposal) and a method of disposing of 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 own name with any person.

In addition to ensuring the disposal of the mortgage, it is important for a mortgagee to transfer the mortgaged property into its management until such disposal. The 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, the transfer of the mortgaged property allows the mortgagee 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 that a mortgagee be entitled to take actions related to management (ie, receiving payment for the use of real estate) and conclude services contracts related to the operation and maintenance thereof. In addition, in order to sell the mortgaged property, a mortgagee may require unrestricted access to the property, as well as the right of access to show it to potential buyers or appraisers and other experts.

Thus, Ukrainian legislation permits mortgage lenders to enforce mortgages through the courts. However, in practice the realisation of a mortgagee's rights requires determination and attention to the details in a statement of claim, which must be mirrored in the court's decision. Other­wise, a creditor's rights to the enforcement of a mortgage will remain nothing more than a clause in a contract.

For further information on this topic please contact Yaroslav Petrov or Viktoriia Afanasieva at Asters by telephone (+380 44 230 6000), fax (+380 44 230 6001) email ([email protected] or [email protected]).