New Mortgage legislation
Four laws regulating mortgage transactions in Ukraine take effect as of 1 January 2004. The purpose of the laws is to facilitate the development of the mortgage market and to regulate the construction of real estate using mortgage mechanisms.
The main legal developments under the new legislation are briefly described below.
Law “On Mortgages”
Objects of Mortgage
Under the law, objects of mortgage include immovable property -- land plots and other immovable objects, which are inseparably connected with land, as well as aircraft, sea and river vessels and space objects.
As a new development, the law specifically permits the owner to mortgage objects of unfinished construction and agricultural land. Agricultural land may be mortgaged from 1 January 2005.
Mortgage agreement
Under the law, a mortgage agreement should be in written form. The mortgage agreement should be notarized and registered in the state register of mortgages.
A mortgage agreement should indicate the details of the parties, specify the principal obligation secured by mortgage, describe the mortgaged property, and contain information on whether the debtor issues a mortgage note to the creditor.
Mortgage note
The law prescribes that, where specifically provided for in a mortgage agreement, a mortgagor may issue a mortgage note (zastavna) to the creditor.
A mortgage note is a security, which evidences mortgage rights with respect to specific property. In the event of non-performance by the debtor of the principal obligation, the creditor has the
right to enforce the mortgage note, i.e.,demand the sale of the mortgaged property or otherwise enforce the mortgage agreement.
Importantly, the law permits the creditor to sell a mortgage note to third parties without the mortgagor’s consent, pledge the note or otherwise dispose of it.
The form of a mortgage note is to be approved by the State Securities and Exchange Commission.
Enforcement of mortgage
Under the law, the following procedures are available to the creditor to enforce mortgage claims:
(a) through court proceedings;
(b) by way of obtaining a notary writ; and
(c) through out-of-court (“self-help”) remedies.
A notary, after obtaining proof that there has been a violation of the principal contract, will issue a writ, which is the basis for the creditor to apply to the State Execution of Judgments Service for enforcing the mortgage agreement.
The “self-help” remedies may be applied if specifically so provided in the mortgage agreement. Such “self-help” remedies consist of the following:
- first, the creditor may take ownership (repossess) of the property without the debtor’s consent, and
- second, the creditor may itself sell the mortgaged property to a third party without the debtor’s consent and then apply the proceeds from such sale to compensate the creditor for its claims.
Such “self-help” remedies were not specifically permitted under the current Law “On Pledges”. Under the Law “On Pledges”, the creditor could enforce a mortgage only though a court or through a notary, unless otherwise provided in a mortgage agreement.
Enforcement of a mortgage agreement is the basis to evict the owner of residential property from such property. By law, the owner is required to vacate the property within one month upon receipt of a written notice from the creditor.
The eviction does not apply to tenants of mortgaged apartments, if the apartment lease agreement was entered into before conclusion of the mortgage agreement and the creditor was notified of such lease agreement or the lease agreement was registered pursuant to a prescribed procedure.
Eviction of owner from mortgaged property
Law “On Mortgage Lending, Operations with Consolidated Mortgage Debt and Mortgage Certificates”
This law regulates the procedure of pooling the mortgaged assets for the purpose of the issue of mortgage-backed securities (mortgage certificates) and the operations with the mortgage certificates in the securities market.
Mortgage pooling
Authorized Ukrainian commercial banks or other licensed financial institutions may pool mortgage loans and mortgage agreements for purposes of backing the issue of mortgage certificates. Mortgage certificates are securities secured by the underlying mortgage pool, which are subject to registration with the State Securities and Exchange Commission. Respective changes were made to the Law “On Securities and Stock Exchange” permitting the issue of securities in the form of mortgage certificates.
After pooling mortgage loans and mortgage agreements, the banks or other financial institutions are permitted to sell the mortgage pool to another bank or financial institution.
The owner of a mortgage pool may issue mortgage certificates. It may engage a licensed trustee to place the securities on the market and manage payments with respect to the mortgage certificates.
The main restrictions of the law with respect to pooling mortgage loans are the following:
- the amount of each mortgage loan granted by a bank or other financial institution for the purpose of purchase, construction or reconstruction of immovable property may not exceed 70% of the immovable property’s value;
- the banks or other financial institutions may pool not less than three mortgage loans valued in aggregate of at least EUR 200,000;
- the amount of the issue of mortgage certificates should be at least EUR 100,000;
- information on the issue of mortgage certificates should be registered in the State Securities and Exchange Commission.
Trust ownership
The law introduces the concept of trust ownership, which is new to Ukrainian civil law.
A trustee managing the mortgage pool is deemed to have trust ownership over the mortgage pool transferred to it by the lender. Only an authorized Ukrainian bank or other financial institution having a special license from the National Bank of Ukraine for trust management of securities may act as a trustee and manage the mortgage pool.
The scope of the trust ownership includes the right to own, use and dispose mortgage assets. Mortgage assets do not form part of trustee’s property in the bankruptcy proceedings or in the process of liquidation. A court decision against the trustee may not be enforced in respect of the mortgage pool.
The scope of the authority of the trustee may be restricted by the bank in the trust agreement to be entered into between the bank and the trustee.
Enforcement procedures
The law permits a bank to sell mortgaged property to a third party without a court’s permission, if so allowed under the terms of a mortgage agreement. In the event that the creditor and the debtor do not reach agreement regarding the price of the sale, the valuation of mortgage assets is to be conducted by an independent valuator.
Place of notarisation
A mortgage agreement must be notarised. As a new development, the law permits a mortgage agreement to be notarised at the place of location of the collateral, or at the location of the creditor or debtor. This new rule modifies the rule under the current Law “On Pledges”, pursuant to which a mortgage agreement should be notarised only at the place of location of the collateral. The new rule should simplify the procedure for entering into mortgage agreements.
The Law “On Financial-Credit Mechanisms and Property Management At Construction of Residential Property and Transactions with Immovable Property”
The law regulates the legal mechanisms for financing construction of residential and other immovable property.
General
Under the law, a bank or other authorized financial institution may establish so-called construction financing funds (CFF), and real estate operations funds (REOF) for the purpose of constructing immovable property. Such funds are not legal entities and they represent accumulation of investors’ funds.
A bank or financial institution will act as a trustee of investor funds for the purpose of constructing immovable property.
A bank will then contract with a developer to construct the object of construction using the accumulated funds.
Construction Financing Fund (CFF)
The purpose of creating a CFF is the construction of residential property for individual investors. There are two types of CFF’s - type A and type B. Under type A, the CFF developer itself defines the main characteristics of the object of construction and it also bears the risk of insufficiency of investor funds. Under the Type B fund, when constructing the object, the developer is obliged to take into account the bank’s recommendations with regard to the object of construction and the bank bears the risk of insufficiency of investor funds.
The bank should adopt by-laws of a CFF and other internal documents regulating the functioning of a CFF.
The developer is required to secure its obligations with regard to construction of the property by way of mortgaging to the bank its property rights with respect to the property that is in the process of construction.
Real Estate Operations Fund (REOF)
A Ukrainian licensed bank may attract investor funds for the purpose of constructing real property by issuing securities (REOF certificates), which are offered for sale to investors through open subscription or through a securities broker. Such certificates are subject to registration with the State Securities and Exchange Commission.
A bank may use the funds received from the issue of REOF certificates only for purposes of financing construction of real estate. Upon expiration of the term of operation of a real estate financing fund, the investors are entitled to receive a portion of income derived from the activities of such fund.
The Law “On Introducing Changes to Certain Legislative Acts of Ukraine”
The law amends the provisions of the new Civil Code, effective as of 1 January 2004. The law introduces into the Civil Code the concept of trust ownership. Under Article 316 of the new Civil Code, trust ownership is regarded as a special type of ownership right. Trust ownership arises on the basis of law or a property management agreement.
(The Law of Ukraine “On Mortgages” No 898-IV dated 5 June 2003, the Law of Ukraine “On Mortgage Lending, Operations with Consolidated Mortgage Debt and Mortgage Certificates” No 979-IV dated 19 June 2003, the Law of Ukraine “On Financial-Credit Mechanisms and Property
Management On Construction of Residential Property and Transactions with Immovable Property” No 978-IV dated 19 June 2003, the Law of Ukraine “On Introducing Changes to Certain Legislative Acts of Ukraine” No 980-IV dated 19 June 2003)
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