The new mortgages

The long-awaited amendment to the Land and Mortgage Registers and Mortgage Act has been in effect for more than six months and many doubts have already been clarified. but there still remain a number of questions in need of answers

In banking circles, the new institution of a vacant mortgage place is raising a great deal of concern, all the more so if the property owner seeks to reduce the amount of the mortgage or divide it up. In practice, the new law contributes to the increased legal risk that a mortgage entails. This may impede or increase the costs of raising finance.
The amendment to the Mortgage Law has enabled the owner of encumbered real estate to request a reduction in the mortgage amount, if the security is excessive. This may happen where the value of the mortgage is higher than the amount of the loan being secured. In practice, the parties to the secured loan agreement may agree on a reasonable ratio between these two values at the initial stage at which the mortgage becomes established. However, in line with the gradual repayment of the loan, the ratio tends to change, leading to the above-mentioned excess. If this happens, the real estate owner may ask the lender to reduce the mortgage amount, and, if this is denied, a court judgment may even be sought. Such a situation may cause the risk that the existing lender could face an unexpected competitor to the proceeds from the real estate.

New options and the increased risk
A reduction in the mortgage amount gives rise to a partially vacated mortgage place as a result of the difference between the original and the reduced mortgage amount. This solution is a novelty in Polish legislature. Before the Mortgage Law was amended, the deletion of a mortgage ranking higher than other mortgages on the same real estate resulted in each being moved up one rank. The amendment has now provided the real estate owner with the right to keep the place after the expired mortgage and freely dispose of it up to the mortgage amount. This means that a lower rank mortgage lender or a new creditor may be given a higher rank in the case of execution proceedings against the real estate than would a creditor whose mortgage was established earlier. The same follows for a partially expired mortgage, giving rise to a partially vacated mortgage place (e.g. as a result of the partial debt repayment). Moreover, the owner cannot obligate itself towards the creditors to not dispose of the vacated mortgage place.
Mortgage division entails the same risk as disposal of the vacated mortgage place, especially if the real estate is divided into premises, apartments or plots developed with houses. All parts of the new real estate originating from the division are encumbered with the mortgage up to its original amount. However, the acquirers of separated premises are entitled to request a mortgage division proportionate to the value of the separate parts. In practice, this may give rise to a partially or wholly (if the separated part is released from the mortgage) vacated mortgage place being at the free disposal of the acquirer.

More freedom, more precautions
Although at first glance such new solutions may seem advantageous for borrowers, in practice they could make it more difficult to take out a loan or increase the costs of obtaining one. Perhaps this could be solved by insurance companies offering relevant products to banks and their clients. And yet the new legislative solution still does not seem to be favourable for either party to the loan agreement.
Another solution would be to amend the law to ensure that the sum obtained in the execution proceedings is not sufficient to fully discharge the claim secured with the original mortgage - the claim would then take priority over any claim secured with a mortgage for the partially vacated mortgage place. ?
Małgorzata Chruściak is a partner and head of the banking and international finance department of CMS Cameron McKenna's Warsaw office
Magdalena Brzozowska-Bielska is a senior associate in the banking and international finance department of CMS Cameron McKenna's Warsaw office