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The New Mortgage Law - A step in the right direction




04.07.2002Coudert Brothers

Russian Federation Law No. 102-FZ "On Mortgage (Pledge of Real Estate Property)" (the "Mortgage Law") was passed on July 16, 1998 by President Boris Yeltsin. Hereunder we not only examine the Mortgage Law but place it in the context of previous respective legislation.

General Aspects

The Mortgage Law regulates most of the main areas of mortgage including: procedure for the formation of mortgage contracts, procedure for the registration of mortgage contracts, transfer of a title to pledged property and its encumbrance, secondary mortgage, transfer of rights under mortgage contracts, enforcement of the security interest, execution of mortgage bonds.

However, although the Mortgage Law may be considered to provide reliable protection for the rights of creditors under loan agreements, it is in some respects incomplete. It contains no regulations concerning the mortgage of some types of property, such as forestry, agricultural land, and mineral resources. Had such types of property been mentioned in the Mortgage Law, they would have been promoted into circulation under the general legislation of the Russian Federation. In practice, such types of property may already be circulated in some subjects of the Russian Federation and the situation in these areas would have been eased had the Mortgage Law included all types of property. Furthermore, given that the circulation of property is likely to be legalized at some point, the lack of regulation will require that the Mortgage Law be amended.

Although much of the Mortgage Law merely rephrases existing mortgage rules it also contains some new provisions. The most important of these new provisions is the introduction of mortgage bonds - registered securities certifying the rights of pledge which may independently be subject to alienation or pledge. The Civil Code stipulates that a new type of security may only be introduced by a federal law and therefore the Mortgage Law is of great significance.

The Mortgage Law is also more detailed about the mortgage of certain types of property and the rights of the pledgee and the pledgor under mortgage contracts. In particular, the pledgee has acquired some additional rights. For instance, although as a general rule the object of a mortgage contract remains in the possession of the pledgor, the pledgee may supervise the use of such property. Furthermore, if the property is an enterprise mortgaged as an entire complex, the pledgee may request:

i) the financial documents and balance sheet of the enterprise; and

ii) the annullment of transactions (if, in his opinion, such transactions may result in a reduction in value of the pledged property).

Under previous mortgage legislation, mortgage relations arose solely as the result of a contract i.e., in order to pledge real estate the parties had to enter into a mortgage agreement. The mortgage agreement only entered into force, however, after its state registration. The Mortgage Law provides that real objects, such as apartments and houses, are automatically considered to be pledged from the moment of the state registration of the relevant purchase-sales agreement if the money for the acquisition of such property was obtained as a loan from a credit institution. This means that creditors under loan agreements do not have to form an additional mortgage agreement as a security under such loan.

This represents a more detailed approach to legislating the problems connected to mortgage in Russia. The very fact that the new regulation of mortgage is provided for by a law is also of significance. Laws are, per se, a less вАШtemporalвАЩ form of regulation than other normative acts and therefore are more likely to create investor confidence.

Some Provisions of the New Law

Mortgage Bonds

The Mortgage Law defines a mortgage bond as a registered security confirming the right of its holder вАЬto obtain the fulfillment of the monetary obligation confirmed by the mortgage bond and specified by mortgage agreement and pledge right towards the property indicated in itвАЭ. A mortgage bond must be completed by the parties thereto, registered together with the mortgage agreement. It may then serve as a separate object of civil rights.

This regulation is of particular significance to those credit institutions which grant credit for the acquisition of real estate as it will help them to attract additional money during the period of the mortgage agreement. The credit institution may pledge the mortgage bond and as a result grant a new loan to another person.

In order to make easier for a debtor specified in a mortgage bond to pay for his debt if the bond is pledged, the letter may be deposited with a public notary. The first debtor then executes payments under the mortgage agreement by depositing the relevant amount with such public notary.

A mortgage bond may also be sold by its holder. In order to do so the holder must make a transfer inscription on the back of the bond. A bond is considered to be owned by the last person indicated thereon.

State Registration of Mortgage

The Mortgage Law requires that mortgage contracts be registered with the same state bodies which register the sale and purchase of real objects. With the introduction of the new law, a mortgage agreement is valid only after its state registration and is considered to be concluded after the necessary entry is made in the state registry. The Law also contains an exhaustive list of the circumstances in which the registering bodies may refuse to register a mortgage contract. For the most part these are circumstances in which the rules concerning the form of the mortgage agreement or mortgage bond have been violated.

It also should be noted that the Mortgage Law states that any information on encumbrances of real property such as pledge or servitude is вАЬpublic informationвАЭ and may be submitted to any interested party making a written application.

Protection of the Pledged Property

As with the respective regulations pertaining to pledge in the Civil Code, the new Law binds the pledgor to ensure pledged property from the risks of mischief and forfeit at its own expenses in an amount not less than the amount of the obligation under the mortgage agreement. However, under the Civil Code the parties to an agreement could release a pledgor from its obligation by stipulating other conditions in the agreement. The Mortgage Law does not provide for such possibility.

It is not clear whether a pledgor is obliged to ensure pledged property if such property is pledged automatically (see paragraph 5 of General Aspects herein). However, this would seem to be the most likely interpretation. In such a situation a pledgor will have to pay not only a rate of interest under the loan agreement but also for the insurance of the acquired property. Should this be the case it will be very expensive, if not impossible, for most potential buyers to acquire apartments or houses with the help of loans obtained from credit institutions.

Secondary Mortgage

Secondary mortgage, to which a significant part of the Mortgage Law is devoted, means that a pledged property may be pledged again under a new mortgage agreement. This is possible under the Mortgage Law, provided that the first mortgage agreement does not stipulate otherwise. However, the second pledgor may not get a mortgage bond. If the obligation is executed by realizing the security under the mortgage agreement, the relevant parties will have the right to get their share in the relevant order of priority.

Realization of Security

Under the general rule it is only possible to realize a security in accordance with a court ruling (granted that the term of the mortgage agreement has expired and the pledgor has not fulfilled his obligations). Advance realization of a security is also stipulated by the Mortgage Law. Such possibility is provided if a pledgor has failed to execute payments under a mortgage agreement three times within one year or executed them with a delay (even insignificant).

The Mortgage Law provides that there are two circumstances in which the realization of a security may be postponed: (i) when a private person pledges real property for purposes not connected with commercial activities; (ii) when the security under this agreement is an agricultural land plot. However, even in these circumstances postponement may not be granted if (i) to do so may result in the financial status of the pledgee being made significantly worse; or (ii) one of the parties to the mortgage agreement is declared bankrupt.

The Mortgage Law stipulates that in some circumstances the security under a mortgage agreement may be realized without applying to the court. However, in order to avoid court proceedings the parties must enter into a special agreement, which must be notarized by a public notary, after the main agreement expires. The Mortgage Law also provides that a mortgage agreement may not be concluded by the parties (and thus the security under the mortgage agreement may be realized only after applying to the court) if:

(i) the pledgor had to obtain special approvals from state bodies in order to enter into the main agreement;

(ii) an enterprise (as a whole property complex) serves as a security under the main agreement;

(iii) the security under the main agreement is an object which has cultural, historical, or other social significance; or

(iv) the security under the main agreement is common property and the other co-owners do not give the necessary approval.

In such agreement the parties may agree to sell the security by one of the methods stipulated by law or to transfer the security to the pledgee. The latter form of transfer is not allowed with regard to the pledge of land plots.

Mortgage of Land Plots

The Mortgage Law stipulates that the mortgage of land plots does not automatically result in the pledge of the buildings on such plot. Furthermore it also allows the pledgor to erect buildings on pledged land plots, unless otherwise agreed by the parties. In this situation the pledgee does not receive pledge rights towards the buildings. The Mortgage Law even allows a pledgor to sell such new buildings or alienate them in any other manner without the approval of a pledgee. But in this situation the latter acquires the right to claim changes in the terms of the mortgage agreement. It should be noted that if the rights of the pledgee are confirmed by a mortgage bond the pledgor is not allowed to erect any buildings on the pledged land plot unless otherwise so stated in the mortgage bond.

The Mortgage Law stipulates a special form for land mortgage agreements. Such agreements must be followed by the chart of the relevant land plot.

Mortgage of Enterprises

Under the Mortgage Law the mortgage of an enterprise includes the mortgage of the relevant land plot under this enterprise (and all other land plots in its possession) and simultaneously the pledge of all the assets and rights of this enterprise (including exclusive rights). The Mortgage Law stipulates that such agreements must be accompanied by the inventory act, the most recent balance sheet of the company and an official evaluation of the companyвАЩs assets made by an independent appraiser. Such agreements may not be made for a term of less than one year.

The mortgage of an enterprise is allowed only as a security of an obligation, the value of which exceeds 50 percent of the value of such enterprise. It is not clear in the Mortgage Law, though, whether value refers to the balance value of the company, its capital fund or to the value of the enterprise as calculated by an independent appraiser.

If a pledgor does not take all the necessary measures to protect the security under such agreement the pledgee may apply to the court to establish вАЬmortgage controlвАЭ. This term presupposes that the pledgee acquires the right to receive all financial documents and contracts of this enterprise, apply to the owner of the enterprise with a claim to dismiss the management of the enterprise, apply to the court with a claim to declare invalid those transactions of the enterprise which may result in its financial status being worsened.

Mortgage of Apartments and Houses

Under the Mortgage Law, the pledgee and pledgor in a mortgage agreement relating to real estate must sign such agreement personally. Only minors and the disabled are exempt from this rule.

Previous mortgage regulations prohibited the eviction of private persons from apartments and houses even after such property had been realized as a security under a relevant agreement. This represented a significant obstacle to creditors (primarily credit institutions) which were trying to get their money back. The Mortgage Law, however, provides for two exceptions to this rule:

(i) the object of the mortgage was acquired for the credit obtained from the pledgee;

(ii) before moving to the pledged apartment or house, or before the latter property was pledged, the pledgor and all members of his family signed a separate agreement with the pledgee by which they consented to be evicted if the object of the mortgage is realized.

Article 78 requires that such agreements be notarized by a public notary.

This represents a big advance in Russian mortgage legislation. It is likely that such additional agreements with the pledgor will become an integral part of all mortgage agreements in which the pledgor is a private person.


We note that the foregoing discussion is of a theoretical nature and that it is likely that the implementation of the Mortgage Law will reveal some practical difficulties which will require additional regulation. Only then will it be possible to assess fully the merits and demerits of the Mortgage Law.

Whatever the results of the вАШfield trialsвАЩ that the Mortgage Law will inevitably undergo, it is clearly a significant contribution to Russian mortgage legislation and its progressive nature is encouraging.


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