The matter of great interest is the position taken by the Solomensky District Court inKyiv regarding the counterclaim of individual against Astra Bank the decision to invalidate the mortgage agreement concluded between them to secure the obligations of the individual, as entrepreneur to the bank under the creditcontract.
The court adopted the decision referring to two circumstances, which are the ground for the recognition of the mortgage contract invalid. As proving any of these grounds is sufficient to recognize the agreement invalid, lets discuss one,which may be the most resonant and disastrous for the banks.
THE CORE OF THE CASE
In the case widely used by banks scheme of lending to real estate purchase appeared at gunpoint, where the loan was secured by the mortgage of the specified property. As a rule, sale and purchase contract and mortgage contract were concluded at the same time (pursuant to Part 2 of Article 5 of the Law of Ukraine "On Mortgage").
According to the position of the court in the case under consideration, the conclusion of the mortgage contract until the ownership of the borrower for this property is not registered is illegal.
If courts massively support this position, a huge number of mortgage contractsexecuted simultaneously with the loan ones will be in the firing line.
LEGAL GROUND FOR MORTGAGE INVALIDY
The plaintiff referred to Art. 331 of the Civil Code of Ukraine, Art. 5 of the Law of Ukraine "On Mortgage" and Part 6 of Art. 3 of the Law of Ukraine "On state registration of the rights to immovable property and their limitations" (effective at the time edition).
To simplify analysis, we provide verbatim below:
- If the rights to immovable property, in accordance with the law, are subject to state registration, the right to ownership arises from the state registration (Part 2 of Art. 331 of the Civil Code of Ukraine);
- Real estate being transferred to the mortgage should belong to the mortgagor based on the right of private property, it is one of the conditions for thetransfer of such property in the mortgage (Part 1 Art. 5 of the Law of Ukraine "On Mortgage" effective at the time edition of February 23, 2006);
- Transactions connected with immovable property shall be concluded, if the ownership of the property is registered in accordance with the specified law (Part 6 Art. 3 of the Law of Ukraine "On state registration of the rights to immovable property and their limitations" effective at the time edition of January 30, 2006).
On the basis of the aforesaid provisions of the law the court ruled the following:
"... as the right to immovable property specified inthe disputed contract is referred to as the subject of the mortgage, on the day of conclusion of the contract was not registered for the mortgagor, but for the other entity, namely, OOO Diya, thus there was no legal ground for the conclusion of the mortgage contract between the parties. Pursuant to the court, as thesubject of the mortgage was absent de jure, the individual had not acquiredcompetence regarding disposition of such property. "
Art. 331 of the Civil Code of Ukraine does not require the registration of the property, while transferring property in the mortgage,
2) It should be noted that the court referred to the violation of Part 5 of the Law of Ukraine "On Mortgage", whereas, according to the second part of the mentioned article, the subject of mortgage may be a building under construction or OTHER IMMOVABLE PROPERTY, which will BECOME THE PROPERTY of the mortgagor AFTER signing the mortgage contract, in case the mortgagor CAN provide the documents proving the right to the purchased property in FUTURE. Such document in this case is notarized real estate sale and purchase contract.
Furthermore, according to the provisions of the specified article "encumbrance of such real estate mortgage is subject to state registration in accordance with the law, regardless who is the owner of such property at the time of the mortgage contract."
the aforesaid provisions of the law corresponds to Art. 18 of the Law of Ukraine "On Mortgage": "if the mortgage provides the return of the loan for the purchase of real property, which is transferred to the mortgage, the real estate sale and purchase contract and the mortgage contract may be executed at the same time."
3) The court adopted decision applying the provisions of Part 6 of Art. 3 of the Law of Ukraine "On state registration of the rights to immovable property and their limitations", according to which (effective at the time of the mortgage contract – May 14, 2008) transactions connected with immovable property shall be concluded, if the ownership of the property is registered in accordance with this law.
It is obvious that in this case appears legal conflict between the norms of the two laws:
- Part 6 of Art. 3 of the Law of Ukraine "On state registration of the rights to immovable property and their limitations" (of July 1, 2004)
- Part 2 of Article 5 of the Law of Ukraine "On Mortgage" (June 5, 2003).
To resolve this conflict into account should be taken the fact that here we are talking about the norms of equal legal force (law). Unfortunately, the Civil Procedural Code of Ukraine does not provide rules to resolve a collision between the legal norms of the same legal force. Other laws and regulations and regulations do not handle this issue.
The only source to resolve the conflict in this case may be found on the basis of the theory of state and law.
Even a freshman lawyer knows that a new norm takes precedence over the older one, and a special norm - over the general one.
Perhaps, the Ministry of Justice of Ukraine relied on the theory and in the letter №758-0-2-08-19 dated December 26, 2008 “On law practice in case of conflict" (cl.1 and 4, respectively) indicated the following:
"Cl.1 If there is incompliance between the rules issued by the same law making body the act issued later is applicable, even if the act adopted before has not lost its power.
Cl.4 In case of conflict between the general and special legal act advantage is given to special one, if it is not canceled by the general act issued later. "
This kind of letter is used quite often, but one should bear in mind that it has no binding force, but only makes recommendations (the Ministry of Justice usually indicates this in the letter itself).
Besides, there is the Resolution of the Plenum of the Supreme Court of Ukraine № 14 dated December 18, 2009 "On the court decision in civil cases" in the event of conflict between norms of laws (codes), which have the same legal force, the one adopted latter is applicable. The Resolution does notprovide the settlement of collision between the norms of general and specific nature.
The Law of Ukraine "On state registration of the rights to immovable property and their limitations" (of July 1, 2004) was adopted later than the Law of Ukraine "On Mortgage" (June 5, 2003).
At the same time there are such disputing questions: which of these laws should be considered as general, and which as special one. In my view, in this case, it is the conclusion of the mortgage contract, so the law "On mortgage" will be special here.
Due to the absence of clearly defined rules in legislation regarding the resolution of the collision, the question of the legitimacy of the decision continues to be open for the principle of making decision in accordance with judge’s inner conviction. And “the inner conviction" is known to be unpredictable thing.
Apparently, the issue may be finally settled in favor of banks or borrowers either by making appropriate amendments to the Law of Ukraine "On mortgage", or by receiving an official interpretation of the Constitutional Court of Ukraine (this option seems quite possible, although the law does not empower the Constitutional court to resolve legal collisions, but only to give officialinterpretation of the law).
It is necessary to highlight the argument raised in connection with the abovementioned matter by some lawyers.
Namely, the real estate sale and purchase contract is subject to notarization and state registration. Pursuant to Part 4 Art.334 of the Civil Code of Ukraine, if the contract for the alienation of the property is subject to state registration, the right of acquirer’s ownership shall appear since such registration.
In this regard, lawyers assume that state registration of the sale and purchase contracts (held by notary) is sufficient for the mortgage transactions to meet the requirements of Part 6 Article 3 of the Law of Ukraine "On state registration of the rights to immovable property and their limitations "
However, the concepts of "the moment of acquiring property rights" (p.4 Art.334 of the CC) and "the registration of property rights in accordance with the Law of Ukraine "On state registration of the rights to immovable property and their limitations "(Part 6 Article 3 of the law) are not identical.
Part 6 of Article 3 is worded as follows:
"Transactions connected with immovable property shall be executed, if the ownership right to the property is registered in accordance with this Law."
Taking into consideration the abovementioned, the argument is rather disputable.