The most privileged security: mortgage – finance and banking

A pledge on real estate is called either a mortgage or a mortgage (hypotheca). In this article, pledging real estate as a mortgage under Turkish law is discussed as it is the type of collateral most preferred by creditors to secure an extended loan.

I. Types of mortgage loans

Turkish law separates mortgages into two groups: (i) principal amount mortgages and (ii) limited amount mortgages.

(i) Principal amount of the mortgage

A principal amount mortgage is issued to secure an existing debt of a determinable amount. It also functions as an acknowledgment of an unconditional debt by the holder of a mortgage. Regardless of the total amount payable on a mortgage, a principle amount mortgage limits collectibles to the following:

• the principal amount of the debt
• interest and default interest
• costs and expenses related to enforcement proceedings and insurance premium payments made by the creditor / mortgagee.

Other expenses and debts not listed above are treated as unsecured debts for the creditor / mortgagee.

In addition, in a principle amount mortgage, the amount of the debt and the interest rate (if it is higher than the interest rate determined by law) must be registered with the relevant title deeds register.

(ii) Limited amount mortgage

A limited amount mortgage is established to secure a potential claim of an undetermined amount.

Unlike the aforementioned principle amount mortgage, in a limit amount mortgage, a limit is not applied to collectibles but is applied to the amount payable on the mortgaged asset. The ceiling of the recoverable sum is determined by mutual agreement between the parties when setting up the mortgage. An amount claimed in excess of the mutually determined limit is considered an unsecured debt, and the obligee is treated as unsecured for that excess amount.

For existing debt of a determinable amount, the parties may choose to issue both a principal amount mortgage and a limited amount mortgage. However, for a possible debt of an undetermined amount, a capital mortgage cannot be established.

In practice, the Banks as creditors establish a mortgage of a limited amount by defining the scope of the collateral as “the claims which have already been contracted or which will be contracted”. This is considered contrary to the principle of “certainty of the claim” in legal doctrine. In 2017, the Supreme Court of the Assembly of Civil Chambers ruled that a mortgage obtained in 2006 as security for an extended loan in 2007 was authorized.

II. Currency Name of the mortgage

In principle, the mortgage amount should be established in Turkish lira. The amount of a mortgage can only be expressed in foreign currency if the mortgage is made to secure a foreign currency loan or a foreign currency index loan provided by a
Financial institution¹ doing business in the Republic of Turkey or abroad. In this case, foreign currencies whose rates are published in the Official Gazette of the Central Bank of the Republic of Turkey on the date of registration of the mortgage can be registered as the currency of a mortgage only. As of the date of this article, cryptocurrency cannot be included among these currencies for the foreseeable future. In addition, all mortgages in a building decree must be denominated in the same currency.

III. Ranking system

A debtor can divide the value of his real estate into fictitious parts in the title deeds register and can create independent collateral for each part. During foreclosure proceedings, the first mortgagee / creditor is always paid first, although there may be other lower mortgages granted at a later date. A rank becomes vacant if the secured debt is fully paid or canceled by the written consent of the creditor / mortgagee. Lower mortgages do not automatically go up unless the parties agree otherwise on a registered contract with title to the property.

IV. Title deed registration

To establish a legal and valid mortgage, an agreement prepared by the land registry officer must be signed by both parties at the title registry office and registered with the relevant land registry.

V. The spouse’s consent to the mortgage

A mortgage on a matrimonial home must be made with the express consent of the spouse. The General Assembly of Civil Chambers has decided that a mortgage is not considered valid without the consent of the spouse even if the real estate in question is not noted as “matrimonial home” in the title deed on the date of constitution of the mortgage (The General Assembly of the judgment of the civil chambers numbered 2015/2322 on the file numbered 2014/2096).

VI. Foreclosure of a mortgage

A creditor / mortgagee can initiate foreclosure proceedings following the default of a debtor. The basic steps in foreclosure proceedings without final and binding judgment are as follows:

(i) The creditor / mortgagor must first send a notice of stay to the borrower and the mortgagor;

(ii) The borrower, who receives the notice sent by the creditor / mortgagee, may object to the notice within 8 days of the date of notification,

(iii) The creditor / mortgagee must then request the enforcement office to send a payment order to the borrower and mortgagor.

(iv) The mortgagor must then (a) pay the amount of the debt (with default interest and attorney’s fees) within 30 days of receipt of the payment order, or (b) object the content of the payment order within seven days of receipt of the payment order. Otherwise, the Enforcement Office will appoint experts to assess the market value of the property.

(v) If the content of the payment order is disputed by the mortgagor, the mortgagee / mortgagee is obliged to take legal action to request the annulment of the opposition against the mortgagor. If the court cancels the opposition, the Enforcement Office can then order an appraisal of the property. The mortgagor can also appeal against this annulment, in which case the proceedings before the Court of Appeal do not stay the proceedings of the Enforcement Office until the sale of the property at public auction. Once the court judgment has been approved by the Court of Appeal, the property can be sold at public auction.

(vi) Once the Enforcement Office has received the expert report regarding the market value of the property, it officially notifies the report to the mortgagor.

The mortgage debtor will then have the right to object within seven days before the competent court. In the event of opposition, the competent court will determine the market value of the property through experts appointed by the judge. The court judgment fixing the market value of the property is also subject to appeal, and such an action then suspends the sale of the property at public auction.

(vii) After the completion of the above-mentioned procedure, the Enforcement Office will specify two auction dates. If the first auction produces bids less than 50% of the value determined by the expertise, a second auction will take place within 20 days. Also in this case, the rate of 50% is applicable and if an offer does not reach this amount, the auction will be canceled and the whole process will be repeated.

If the claims resulting from the foreclosure procedure do not cover the full amount of the creditor / mortgagee’s claims, a certificate for the remaining claim “Temporary pledge deficit document” is given to the creditor / mortgagee. The mortgagee can then initiate enforcement or bankruptcy proceedings against the other assets of the mortgagor on the basis of obtaining such a certificate.

The references:

Kuru, B. (2013). Icra ve Iflas Hukuku, Adalet Yayinevi

Karmis, E. (2015). Icrada Iflasta Tüketici Hukukunda Ipotek Rehin ve Paraya Çevrilmesi, Seçkin Yayincilik

Sipka, S. (2004). Konutu Wing Ilgili Islemlerde Diger Esin Rizasi, art.122

Footnotes

1 As defined in banking law number 5411 and dated 19.10.2005