Mortgage related matters in the Resolution of the Plenum of the Supreme Court of the Russian Federation on pledges

On 27 June 2023, the Plenum of the Supreme Court of the Russian Federation issued Resolution No. 23 “On the Application by Courts of Rules on the Pledge of Assets” (“Resolution”). The Resolution contains extensive clarifications concerning pledges in general and, more specifically, the pledge of immovable property (mortgage). This overview highlights certain mortgage related conclusions of the Resolution. In general, the Resolution to large extent repeats law provisions and conclusions of well-established court practice related to pledges and also contains some new guidelines. The Resolution might be viewed as a useful summary of frequently occurring matters related to pledge of assets.

Form of a mortgage agreement and state registration of mortgages

The Resolution summarises law provisions on the form of a mortgage agreement and state registration of mortgages, more specifically:

• a mortgage agreement must be concludedParagraph 14 of the Resolution in a written form;
• in certain cases stipulated by law, a mortgage agreement must be notarised. In particular, notarisation of a mortgage agreement is required when an agreement secured by mortgage is also subject to notarisation. Save for certain exceptions, a mortgage agreement of shares in joint ownership to immovable property is also subject to notarisation. Notarisation of a mortgage agreement may also be agreedParagraph 15 of the Resolution by the parties thereto; Moreover, notarisation might be required for our-of-court enforcement on the basis of a notary’s enforcement inscription;
• a mortgage occurs from the moment of state registration (subject to clarifications in section 8 of this overview regarding mortgages securing an obligation arising in the future).

It is pointed out in the Resolution that certain rights and obligations of the parties to a mortgage agreement may start from the moment of its execution. For example, an obligation of the mortgagor to provide certain information and/or to maintain the mortgaged property in a proper condition. However, a mortgagee is entitled to exercise its core rightsParagraph 9 of the Resolution (such as the foreclosure of the mortgaged property) only after the state registration of the mortgage.

Authorised mortgagor

Only the property owner or a person (or entity) authorised by law to dispose of the relevant property (for example, a trust manager) is entitled to grantParagraph 3 of the Resolution a mortgage in respect of such property.

A mortgagor must registerParagraph 24 of the Resolution its title to a newly constructed immovable property (including objects under construction) when:

• such property is considered mortgaged by operation of law; and
• a ground for the foreclosure of such property has occurred.

For example, a building constructed by a mortgagor on a mortgaged land plot is also considered mortgaged. Therefore, in case of a default event, the court may, on the basis of the mortgagee’s claim, force the mortgagor to register its title to this building.

Mortgage of “future” immovable properties

The Resolution contains the following clarifications regarding the mortgage of immovable properties that a mortgagor will construct or acquire in the future:

• such properties shall be considered mortgagedParagraph 4 of the Resolution from the moment of the state registration of their mortgage, unless a later moment is provided for by law or an agreement;
• a future immovable property may be described in a mortgage agreement by reference to details that allow one to identify the relevant immovable property as of the date of the mortgage agreement (for example, by identification of a construction site address, approximate total area and/or other characteristics according to the design documentation). In this case, the identification details required for the state registration of a mortgage should be indicatedParagraph 22 of the Resolution in a joint application of the mortgagor and the mortgagee for the state registration of the mortgage.

Survival of a mortgage in case of changes of the characteristics of a mortgaged property

The Resolution confirms the approaches contained in law and court practice regarding the survival of a mortgage in case of changes of the characteristics of a mortgaged immovable property, as follows:

• in case of reconstruction or other modification of a mortgaged property, including when new property has been created as a result of such recontraction or modification, the mortgage will survive, unless otherwise provided by law or the agreement between the parties. In this case, it is not necessary to amend the mortgage agreement to reflect the change of the characteristics of the mortgaged property;
• upon the state registration of title to premises formed out of a mortgaged building, such premises are considered mortgaged instead of the relevant building. The mortgage of these premises is to be registered simultaneously with the registration of the title thereto;
• the mortgage of initially mortgaged land plots survives the formation of new land plots out of such land plots or the modification of such land plots, unless otherwise provided by law. The mortgage of land plots formed out of a mortgaged land plot should be registered simultaneously with the state registration of the title to them; and
• when land plots, one of which is mortgaged, are merged, the mortgage extendsParagraph 23 of the Resolution to the newly formed plot, unless otherwise agreed between the mortgagor and mortgagee.

Responsibility of a mortgagor to maintain a mortgaged property

According to the Resolution, the scope of liability of a mortgagor that is a debtor under a secured obligation and a third-party mortgagor the for preservation of a mortgaged immovable property differs. If a mortgagor is a debtor under a secured obligation, it bears the risk of accidental loss or damage of a mortgaged property, unless otherwise provided by the mortgage agreement. A third-party mortgagor is not liable for accidental loss or damage of a mortgaged property, unless otherwise provided by a mortgage agreement.

A third-party mortgagor will be liable for loss of a mortgaged immovable property within the limit of its value, and for damage of such property — in the amount by which this value has decreased, irrespective of the value of the mortgaged property referred to in the relevant mortgage agreement. Such mortgagor will be released from liability if it proves that it, acting with care and prudence, took all measures to ensure the preservation of the mortgaged property, and such property was lost or damaged not due to an action or inaction of the mortgagor. In this case, the mortgagee is entitled to satisfy its claimParagraph 27 of the Resolution from other sources provided by law, for example from insurance payments.

Pledge of income from the use of the mortgaged property

Lease payments are usually the main source of income from the use of immovable property. The Resolution confirmsParagraph 5 of the Resolution that the mortgagor’s right to receive income from the use of a mortgaged property is considered pledged in favour of the mortgagee of such property, unless otherwise provided by the mortgage agreement. The rules on the pledge of rights applyParagraph 6 of the Resolution to such pledge, unless otherwise provided by law.

Description of secured obligations

As a rule, a secured obligation needs to be described in detail in a mortgage agreement (as well as in other types of pledge agreements). According to the law on mortgages, a mortgage agreement must contain a description of the basis, nature, amount and term of a secured obligation. Until recently, an insufficiently detailed description of a secured obligation might entail (i) the qualification of a mortgage agreement as not concluded or (ii) a narrow interpretation of the scope of the secured obligation.

The Resolution confirms a more flexible approach to the description of a secured obligation, as follows:

• if a mortgage agreement does not mention certain details of a secured obligation (eg, the amount or term of the obligation, the amount of interest), but describes it with sufficient certainty, or if a mortgage agreement refers to the agreement under which a secured obligation has occurred or will occur, the mortgage agreement may not be qualified as not concludedParagraph 11 of the Resolution;
• the absence in a pledge (mortgage) agreement of a reference to the amount and procedure of paying interest on a loan will not be interpreted as excluding such interest from a secured obligation;
• when there are ambiguities regarding the limitation of the scope of an obligation secured by pledge (mortgage), the secured obligation will be considered as unlimitedParagraph 30 of the Resolution.

Securing future obligations by mortgage

The Resolution pays considerable attention to security by the pledge of obligations that will occur in the future. According to the Resolution, when a mortgage agreement secures such obligations:

• the mortgage occursParagraph 16 of the Resolution from the later of:
• the state registration of the mortgage; and
• the occurrence of the secured obligation;
• and when the mortgagor has disposed of the mortgaged property:
• after the mortgage registration, but before the occurrence of the secured obligation, the mortgage occurs when the relevant obligation occurs and in this case the acquirer of the object replaces the initial mortgagor;
• to a bona fide purchaser prior to the mortgage registration, the mortgage does not occur. In this case, the mortgagee is entitled to claimParagraph 31 of the Resolution the compensation of losses caused by the disposal of the property;
• the seniority of several mortgages is determined depending on the dates of registration of the relevant mortgages. However, if at the time of the foreclosure by a subsequent mortgagee acting in good faith, no future obligation secured by the preceding mortgage has occurred:
• claims of a subsequent mortgagee will be satisfied regardless of the earlier registered mortgage; and
• the registration record of the previous mortgage will be deleted simultaneously with the state registration of the title of the acquirer of the mortgaged property.

A subsequent mortgagee shall not be deemedParagraph 48 of the Resolution acting in good faith when it knows that it may initiate the foreclosure of its mortgage earlier than the obligation secured by a preceding mortgage occurs.

Subsequent mortgage

A mortgage agreement may prohibit a subsequent mortgage. If a subsequent mortgagee knew or should have known of such prohibition, the subsequent mortgage agreement may be challenged by the prior mortgagee. When a mortgage is registered in the Unified State Real Estate Register (“Real Estate Register”), a subsequent mortgagee may not claimParagraph 46 of the Resolution that it did not know or should not have known about the prohibition of a subsequent mortgage.

Certain aspects of disposing of mortgaged property

The Resolution clarifies a number of matters related to the disposal of mortgaged immovable property.

• If a mortgaged immovable property is disposed without the consent of the mortgagee, the mortgagee may invalidate the relevant transaction. In this case the acquirer of a mortgaged property may claim damagesParagraph 40 of the Resolution from the mortgagor. It should be mentioned that, instead of invalidating the transaction the mortgagee may also claim early performance of the secured obligation and foreclose on the mortgaged property disposed without the consent of the mortgagee (article 39 of the law on mortgages). The acquirer of such property who knew or should have known of the existence of the mortgage will be liable jointly with the debtor for the secured obligation.
• If, at the time of the disposal of immovable property, its mortgage is registered in the Real Estate Register, the acquirer of immovable property should try to obtain additional information on such mortgage and relevant secured obligation from the mortgagor and the mortgagee known to the acquirer (such as the term of the secured obligation, validity term of mortgage, extrajudicial foreclosure conditions, etc). Failure to do so precludesParagraph 16 of the Resolution the relevant acquirer from claiming that it did not know and should not have known of the conditions of the relevant mortgage.
• When rights of use and possession (essentially a lease) occur after the occurrence of a mortgage and no consent of the mortgagee was obtained to them (including when such consent was not required by law or agreement), such rights will terminate from:
• the entry into force of a court decision on mortgage enforcement, or
• if mortgage is enforced out-of-court, from the completion of the out-of-court enforcement. However, these rights will not terminateParagraph 42 of the Resolution in the described circumstances if the acquirer of the mortgaged property agrees to keep them.

Agreement on out-of-court enforcement

The Resolution confirmsParagraph 59 of the Resolution that an agreement between the mortgagor and the mortgagee on out-of-court enforcement may be contained in a mortgage agreement or in a separate document.

An agreement on out-of-court enforcement, whether contained in a mortgage agreement or in a separate document, is not subject to state registration. However, information on the out-of-court enforcement option will be entered into the Real Estate Register. The parties to an agreement on out-of-court enforcement and other persons who knew or should have known thereof may notParagraph 61 of the Resolution in their relations with each other point to the absence of the entry on out-of-court enforcement in the Real Estate Register of Immovable Property.

Forced registration of mortgage termination

The Resolution considers certain cases when a mortgagor is entitled to claim in court the registration of the mortgage termination in a situation when the mortgagee does not file an application for such registration. These cases include:

• termination of the mortgage. The obvious reason for mortgage termination is the fulfilment of the secured obligation. However, there may be other cases, such as the termination of a mortgage granted by a third party due to the expiry of the term of such mortgage. In this case, a mortgagee who fails to initiate the mortgage termination must compensateParagraph 18 of the Resolution the mortgagor for losses caused by such failure;
• the expiry of the limitation period for a claim to enforce the mortgage. It is worth mentioning that there is a separate limitation period for a claim on the foreclosure of a pledged property, which is different from a limitation period applicable to a secured obligation;
• the expiry of the limitation periodParagraph 19 of the Resolution for filing an enforcement order on the foreclosure of a mortgaged property.