Limited rights in rem, part 5: the mortgage, the best-known right in rem that most owners know surprisingly little about

In the earlier parts of this series on limited rights in rem we wrote about rights to premises: the cooperative ownership right and the tenant’s right. Today it is the turn of the right that in practice affects probably the largest number of properties in Poland, because it accompanies almost every mortgage loan. The mortgage is expressly named in the Civil Code’s catalogue of limited rights in rem, so unlike the tenant’s right from the previous post, there is no doubt whatsoever about its character as a right in rem.

What a mortgage is and what it secures

A mortgage is a limited right in rem that burdens a specific property and allows the creditor to seek satisfaction of their claim out of that property, regardless of who happens to own it. That is exactly what the in rem character of this right means: it attaches to the property itself, not to the person who holds it at a given moment. If a burdened property is sold, the mortgage does not disappear; it passes with the property to the new owner.

Most often a mortgage secures a housing loan taken out to buy or build a property, but it is by no means limited to those. It can secure any monetary claim: a business loan, a private loan, tax arrears or social insurance contributions, and even a claim awarded by a court judgment. For a creditor it is one of the strongest forms of security Polish law offers, because in the event of repayment problems it gives priority of satisfaction out of the value of the property ahead of the debtor’s ordinary personal creditors.

Types of mortgage

The basic division follows the way the mortgage arises. A contractual mortgage arises with the consent of the property owner, on the basis of an agreement with the creditor, and it is this type that accompanies the overwhelming majority of housing loans. A compulsory mortgage, by contrast, arises without consent, and sometimes against the owner’s will — for example on the basis of a court judgment, a court settlement, a final administrative decision or an order granting security. It is the tool creditors reach for when the debtor will not establish security voluntarily and they already have a legal basis to do it without their involvement.

A separate category is the joint mortgage, which secures one claim on several properties at once — for instance where a loan covers a plot and the house built on it, recorded in two different land and mortgage registers, or where a property is divided after the mortgage has been established. It is also worth knowing that the amendment of 2011 did away with the old division into ordinary and security mortgages. Today there is a single type of contractual mortgage, which may also secure claims of variable amount, such as interest or the costs of proceedings, provided these were specified in the document forming the basis of the entry.

How a mortgage arises and is established

Whatever its type, a mortgage always arises only upon entry in the land and mortgage register. The entry is constitutive here: the agreement, or even the owner’s declaration, is not enough on its own — until the land and mortgage register court makes the entry, the mortgage simply does not yet exist.

With a contractual mortgage the property owner must make the declaration establishing it in the form of a notarial deed. The exception is where the creditor is a bank: banking law then allows ordinary written form, which in practice makes the whole procedure for housing loans faster and cheaper. An application for entry is then filed with the court keeping the land and mortgage register, together with the court fee. With a compulsory mortgage the owner’s consent is not required at all: the creditor, already holding an enforcement title or another basis provided for in the regulations, files the application for entry themselves, and the court, after a formal check, enters the mortgage regardless of the property owner’s position.

As long as the loan is being repaid, the property is not at risk

The mere entry of a mortgage in the land and mortgage register is nothing alarming and applies to the overwhelming majority of flats and houses bought with a loan. The owner of the burdened property may use it normally, let it and even sell it — although in that case the debt usually has to be repaid as part of the transaction, or the buyer takes the property over together with the mortgage. As long as the instalments are paid on time, the mortgage stays in the background as pure security and has no practical consequences for the everyday use of the property.

The situation changes when the repayments start falling behind. The bank usually begins with reminders and demands for payment, and if the arrears persist, proposes rescue measures such as extending the loan term, a temporary grace period on capital repayment or restructuring the debt. When that too brings no result, the bank may terminate the loan agreement, which makes the entire outstanding amount immediately due. If, on signing the agreement, the borrower made a declaration in a notarial deed submitting to enforcement — practically standard with housing loans — the bank can obtain an enforcement clause relatively quickly and refer the matter to an enforcement officer. Otherwise it must first apply to a court for judgment on the debt.

Once the matter reaches an enforcement officer, enforcement against the property begins: a description and appraisal of its value, a notice of auction, and then the public auction itself. The mortgage creditor is satisfied first out of the sum obtained. The problem is that properties sold at enforcement auction almost always fetch a price markedly below the market one, so it is the worst possible moment for an owner to resolve a debt problem.

What is worth taking away from this

A mortgage is not in itself a threat to a property; it is a standard security instrument accompanying most loans. The threat only appears once the obligation stops being serviced, and that is precisely when action has to be taken quickly, ideally before the matter reaches an enforcement officer. Talking to the bank, restructuring the debt or selling the property on your own terms almost always produces a better outcome than waiting for the auction.

Are you behind on your mortgage repayments and can see the matter heading towards an enforcement officer? Do not wait until the last moment. Write to us. At Remedy we specialise in buying up indebted properties, we pay cash and we help close the matter before it reaches auction, where the most is usually lost anyway.