Concluding Mortgage Agreements: Practical Recommendations

Nina L. Shipilova
Lawyer of the Practice “Land,
Real Estate, Construction”
Yakovlev & Partners

In this article we are going to provide some practical recommendations that should be taken into account both by mortgager and mortgagee when concluding a mortgage agreement.

In the case of mortgage of a building, recourse may also be taken upon the land plot under the building. The same will happen to the building in the case of mortgage of a land plot under the building and to subsidiary annexes of the building in case of mortgage of the building, following the principle of belonging to the principal building. It should be noted here that a creditor under the obligation secured by mortgage is not entitled to receive money from the value of such things, since they were not the subjects of the mortgage.

In the case of consolidation of land plots, one of which is mortgaged, the mortgage will also apply to the land plot created in the result of consolidation. This rule is directly stipulated in the Land Code, however, such a rule is not provided in case of division of the mortgaged land plot. Therefore, at the stage of outlining the terms of the mortgage agreement, it is necessary to define the destiny of the mortgage in case of any changes that can be made by the owner of the mortgaged land plot, namely, to apply the mortgage to the newly formed plots, since in the case of formatting new land plots through division or other operations with the mortgaged plot, the initial mortgaged plot ceases to exist as an object of civil rights. Thus, it is worthwhile to stipulate in the mortgage agreement that the mortgage will apply to any new plots that may be formed out of the mortgaged plot through its division or other operations, or to restrict the proprietor’s rights to such activities, such as by necessity to obtain written consent from the mortgagee to operations involving the subject of the mortgage. In the latter case, if the mortgagee’s consent to division of the plot has been obtained, it is possible to conclude an additional agreement to the mortgage agreement stating that the new land plots created after division are mortgaged in the same way as the initial land plot. Additional agreements of this sort are subject to obligatory state registration.

Incomplete constructions that belong to a real estate object may become the subject of the mortgage, unless they are the subject of an effective building contract. Mortgage creditors under conclusion of the mortgage agreement should provide a clause where the mortgager declares that the incomplete construction is not the subject of an effective building contract. Under such a condition a bad faith mortgager will not be able to present to court any building contract that was unknown at the moment of concluding the mortgage agreement, or claim nullity of the mortgage agreement reasoning that the subject of the mortgage was the subject of the effective building contract.

Under mortgage of land plots their evaluation is necessary in accordance with the legislation on evaluation activities, that is, the evaluation should be performed by an independent evaluator. An independent evaluator’s report should be dated no earlier than six months prior to conclusion of the mortgage agreement.

Under mortgage of several real estate objects, such as several land plots, each land plot should be evaluated separately, since they do not make up a property complex — each object that has a certificate of the state registration of property is subject to evaluation.

The agreement should state all the rights to the subject of the mortgage that exist at the moment of concluding the mortgage agreement, otherwise the mortgagee may demand early discharge of obligations secured by the mortgage — see Article 12 of the law on mortgages.

If a debt under obligation secured by mortgage is transferred to the other party, the mortgage is terminated unless the mortgager has assumed liability for the new debtor to the creditor.

In the case of a change of the principal obligation secured by a mortgage, such as extension of the term of loan repayment, the respective amendments should be made to the mortgage agreement and registered with the state registration body.

Finally, one should always observe the requirements for concluding major deals provided in Article 78 of the federal law on joint stock companies and Article 46 of the federal law on limited liability companies.