Legal reform of Lithuanian mortgage system - for the benefit of business, society, and the state
Legal reform of Lithuanian mortgage system - for the benefit of business, society, and the state
Changes, approved by the Seimas of the Republic of Lithuania, being made to the Civil Code, the Code of Civil Procedure, the Law on Notariat and other legislative acts at the end of 2011, came into effect on 1 July, 2012, following which the mortgage system underwent a legal reform in Lithuania. Mortgage system reform aimed at an effective management of the state budget funds, time and financial resource saving of mortgage creditors and debtors. Along with the above named ambitions, attempts were made to modernize the mortgage system of Lithuania, granting the counterparties more rights and options, thus facilitating a process of transactions made by businesses and residents.
With more than a year away since the beginning of the said reform, we can assure that it really met our expectations and facilitated the businesses, society, and the state. Initiation of the reform contributed to a faster process of mortgage registration and made it simpler, parties were granted more freedom to agree on a legal relationship pertaining to a mortgage, a number of dispositive legal rules has increased in legislative acts and notaries were provided with more functions.
Procedure of the mortgage transaction became faster, as a double legal investigation was cancelled and the notary was assigned a responsibility of transferring all the data necessary for a mortgage registration in the Mortgage Register. Prior to 1 July, 2012, mortgage transactions were witnessed by a notary, following which, one of the counterparties was obliged to apply the mortgage judge in order to register the mortgage in the Mortgage Register. Both, the notary and the mortgage judge, executed a legal control of the said transactions. Following legal investigation, the mortgage judge would adopt a decision to register the mortgage and the mortgage would then be registered. The investigation, processed by the judge, had three business days to be complete following receipt of the documents.
After the 1 July, 2012, this process was significantly facilitated. The counterparties now contacts a notary only, who, having approved the transaction, transfers all the information to the Mortgage Register in order to register the mortgage. Mortgage register, in its turn, only makes sure that all the information is present and that the fee for the mortgage registration is paid. Information, presented by the Central Mortgage Office, managing the Mortgage Register, proposes that during the first half of 2012, when a former law on the mortgage system was still in force, only 2,2% of transactions were registered on the day of data receipt, while during the second half of 2012, following implementation of the said reform, the numbers of registered transactions on the day of data receipt have reached 70,8%. Conclusion and registration procedure of the mortgage transactions became less time and effort consuming. As was already mentioned above, the mortgage judge is discharged from the process of mortgage registration.
For this reason, registration of mortgage became an administrative and not a legal process. Moreover, a requirement, being valid prior to 1 July, 2012, to enter into a mortgage transaction using a special form of mortgage sheets, was cancelled. Having cancelled such requirement, parties can enter into a mortgage agreement pursuant to their own wish. Requirement to form a mortgage agreement as a separate document also became ineffective. Mortgage agreements can now form a part of the contract, obligations of which are secured by the mortgage. However, such opportunity is rarely practiced.
Following the reform, the Civil Code now contains a higher number of dispositive legal rules. Since the reform took place, the counterparties may at their personal discretion decide whether they wish to register their made mortgage agreement in the Mortgage Register immediately. Prior to 1 July, 2012, the mortgage transaction came into force since the moment it was registered in the register only.
Under the currently valid regulations, a mortgage transaction is valid since the moment of its conclusion; however, it can only be used against the third parties following its registration in the register. Provided the parties wish not to register the transaction immediately subsequent its approval issued by the notary, the notary is entitled not to register the transaction.
Later on, upon application of any of the counterparties, the notary registers the transaction in the register. Only the judgement mortgages, which are created without the will of the collateral owner, come into force since its registration in the register. Compulsory insurance of the pledged real estate, except for the land, was cancelled.
In practice, however, the property being pledged is still usually insured, since insurance secures the creditor‘s interests as well as that of the debtor. In cases a collateral insurance is absent, the debtor, provided the pledged property is perished, shall continue to pay his contributions to the mortgage creditor.
Request to pledge the land lot or land lease along with the pledged real property was also canceled. Even though creditors usually still require to pledge not only the building, but also a land lot, on which its stands, or the land lease, however, revocation of the imperative request allows to pledge the buildings in cases the pledge of a land lot or land lease is not possible. Concept of the collateral was also broadened.
Since the reform became effective, collateral is not only a presently established or a future real estate or its share, but also personal assets and property rights, if such are pledged along with the real estate. During the mortgage reform process, regulation of certain mortgage types was specified and altered and the civil Code now creates a possibility to enter into company’s mortgage transactions.
Having changed regulation of a conditional mortgage, conditions are created to pledge the real estate not yet developed – such real estate, which will be developed in a future or an owner of which will be the collateral provider himself. Such mortgage comes into force since the property registration in the name of the collateral provider in the Real Estate Register.
Regulation of such conditional mortgage allows a person, applying for a mortgage, to secure the creditor by the property, which is still not developed or which does not yet belong to him. Mortgage transaction of the company allows pledging the company as a set of assets belonging to a profit-seeking legal entity. Having pledged all of the company‘s assets as a unit, the legal entity is entitled to continue with its activities, and in cases of recovery, the creditor should first attempt to satisfy its claim administering the pledged company. And only provided that the debt cannot be recovered through the company’s administration, the latter may be sold, prioritizing a sale of the entire company first. Statistics, presented by the Mortgage Register, indicate that regulation of the company‘s mortgage was necessary. Even though in theory, a company may have been pledged under the previously valid laws, however, practically, this has not been done. During the second half of 2012, having regulated this type of mortgage, a total number of registered company mortgages has reached 32 cases. Having implemented the reform, more functions were attributed to the notaries. Notaries were not deprived of the right to witness the contractual mortgages. They, since 1 July, 2012, also create a judgement mortgage upon a request of the mortgage creditor in cases specified for under the Civil Code. Usually notaries create a judgement mortgage attempting to secure the state‘s claims, arising out of the installment sales contracts. Such judgement mortgages comprise almost 98 % of all the judgement mortgages.
Since 1 July, 2012, a more effective system of enforcement against the pledged property was implemented. Previously, all matters relating to enforcement against the pledged property should have been forwarded to the mortgage judge, who would first adopt a decision to seize the property and notify the debtor that in case the debt is not returned, the property will be foreclosed or transferred to be administered by the creditor. Following such proceeding, the judge would adopt a decision to foreclose the property (or transfer it to the creditor to administer), and having a bailiff to complete the enforcement procedure against the property, the judge would adopt a decision regarding distribution of enforced resources. Currently, enforcement against the mortgaged property is executed with an endorsement. Creditor shall apply the notary, and the latter, having notified the debtor and the collateral provider, issues the endorsement within a period of 20 days to enforce the debt. The creditor, when applying the notary, shall specify information of the counterparties, overdue debt, and basis for premature debt enforcement, given the debt is being enforced prematurely. Mortgage creditor shall be held in charge for correctness of the data. The notary only verifies that data, provided by the creditor, coincide with the data held by the Mortgage Register. Liability of the notary during the enforcement process is clearly defined in the Law on the Notariat. Notary‘s actions, performed in issue of an endorsement or a decline to issue the same, are appealed by the non-contentious proceedings. Provided that a dispute arises out of the debt amount, basis for premature debt enforcement and etc., such disputes are solved between the parties under the claim proceedings. So far the court practice, pertaining to enforcement against the mortgaged property, is not extensive, and the Supreme Court of Lithuania, unifying the court practice, does not name at least one such case. Therefore, we cannot share the experience, whether a clear separation of the notary‘s liability from the parties’ disputes, as prescribed for under the laws, will be transferred to a practice of courts. Notaries, starting from the very initiation stage of the reform, have been issuing the endorsements. During the second half of 2012, a total number of issued endorsements counts 805 units, while in January – August of 2013, a number of issued endorsements reached 1287.
Concluding my report as the president of the Lithuanian Chamber of Notaries, I want to rejoice at a fact that Lithuanian notaries were prepared for implementation procedures of the mortgage system reform and demonstrated that the state can rely on them and entrust new and complex functions.