One of the most widely used instruments for securing monetary claims is the pledge over immovable property. A mortgage is a limited right in rem which, against the possibility that the debtor fails to perform, entitles the creditor to have the immovable encumbered by the pledge sold and to have the claim satisfied out of the proceeds of that sale. The sale is not carried out by the creditor personally but through the enforcement authorities.
The power the mortgage confers on the creditor goes no further than this: to have the immovable sold. No other possibility arises. Indeed, under the lex commissoria prohibition, the creditor and the owner of the immovable may not agree that ownership will pass directly to the creditor should the debt go unpaid. The mortgage is also a right accessory to the claim: where the claim is assigned to a third party, the right of pledge changes hands with it, and where the claim is extinguished, the pledge is extinguished as well. Nor does the statute of limitations run in respect of a claim secured by a mortgage registered in the land register.
The creation of a pledge does not remove the power of disposal over the immovable; ownership and the powers attaching to it remain with the owner. The owner may continue to deal with the immovable. Where such dealings reduce the value of the immovable, however, or create a risk of doing so, the creditor acquires the right to ask the court to prohibit the conduct in question. Below we address in turn the process running from the creation of the mortgage to its termination, the principles that govern it, and the questions most frequently disputed in practice.
Creation of the Mortgage
The agreement to create a mortgage must be made in official form. The official authority competent to draw up this agreement is the land registry directorate; a mortgage agreement executed before a notary public produces no validity. The agreement must then be followed by registration of the right in the land register. Both official form and registration are therefore conditions of validity.
In a pledge over immovable property the pledgor, that is, the owner of the asset, does not deliver the asset to the creditor. Possession remains with the holder of the right of ownership; in this respect the mortgage differs from the pledge over movables, which requires delivery.
Where the immovable to be pledged is held in joint ownership of the collective type, it may be mortgaged only as a whole and in the name of all the co-owners. Where ownership is held in undivided shares, each co-owner may create a pledge only over its own share. Once a mortgage has been created over a share in this manner, no further mortgage may be established over the immovable as a whole.
Creation of the Mortgage by Court Action
Where a person who has undertaken to create a mortgage over its immovable performs that obligation of its own accord, no difficulty arises. If, on the other hand, the debtor fails to perform the undertaking, the creditor entitled to demand the creation of the pledge may bring an action for registration. If the court finds for the claimant, it will rule that the pledge be created.
One view in the doctrine holds that the right of pledge arises with the judgment the court delivers, so that the judgment is constitutive in nature. On this approach, registration in the land register is not constitutive but merely declaratory. Authors taking the contrary view argue that completion of the registration in the land register is in every case a prerequisite for the mortgage to arise.
Protection of Good Faith in Mortgages
Even where a mortgage has been entered in the land register wrongfully, that is, otherwise than in accordance with the law, third parties acting in good faith who rely on the entry in the register may acquire the right of pledge by virtue of the principle of reliance on the land register. For this protection to operate, however, the claim to which the mortgage is accessory must be valid.
If the claim is invalid, the wrongful mortgage right appearing in the register cannot be acquired even in good faith. This outcome is a concrete manifestation of the principle of accessoriness to the claim, set out in detail below.
The Principle of Accessoriness of the Mortgage to the Claim
A mortgage has no existence independent of the claim it secures. This accessory character makes itself felt as early as the stage of creation: before a right of pledge can be established, a valid claim must exist.
Accessoriness also applies in terms of scope. Article 875 of the Turkish Civil Code No. 4721 lists the elements covered by the security the pledge affords the creditor. Those elements are the principal, the costs of enforcement, default interest, three years’ interest that has fallen due by the date on which bankruptcy is opened or realisation of the pledge is requested, and interest running from the last due date. As can be seen, the scope of the security covers not only the claim itself but also the ancillary items that may arise in connection with it.
A further consequence of the principle is that the right of pledge follows the fate of the claim. If the mortgaged claim is assigned after the pledge has been created, that is, transferred to a third party, the mortgage right passes to the new creditor along with the transfer.
The same accessoriness operates in respect of termination. Where the claim secured by the pledge is extinguished for any reason, the mortgage is likewise extinguished automatically.
The Principle of Specificity in Mortgages
The principle of specificity arises essentially at two points. The first is the amount of the claim secured by the pledge, the second the identity of the immovable that forms the subject matter of the pledge. That both elements be clearly determined matters both to the owner creating the pledge and to the creditor in whose favour it is created.
Specificity of the Pledge Burden
A mortgage may be created only where a specific claim exists. Under Article 851 of the Turkish Civil Code, the amount of the mortgage must be expressed in Turkish currency. Where the amount of the claim is not yet known at the time the pledge is created, a maximum-amount mortgage comes into play. What this institution seeks to achieve is that the pledge burden placed on the immovable be determined at the moment the agreement is concluded. The amount that may later be claimed under the pledge therefore does not increase the burden on the immovable unforeseeably. For this reason, in a maximum-amount mortgage the interest arising subsequently and the ancillary costs attaching to the claim also remain within the maximum amount determined.
Although the rule is that the amount be expressed in Turkish currency, the Civil Code has in certain cases permitted a pledge to be created in a foreign currency. A mortgage may be created in a foreign currency to secure loans extended in, or by reference to, a foreign currency by credit institutions operating within Türkiye or abroad. The currency to be shown here is the currency of the mortgaged claim. The President determines which foreign currencies may be used. Only a single currency may be included in any one rank; more than one currency may not be shown in the same rank.
Where the rank of a mortgage created in a foreign currency becomes vacant, a new pledge may be created in that rank either in Turkish currency at the equivalent of the currency in question or, again, in a foreign currency. If the vacant rank previously held a mortgage in Turkish currency, a pledge may be created in a foreign currency in the amount of its equivalent at the date on which it is created in its place.
Interest may be included within the scope of the pledge alongside the principal. Subject to the restrictive provisions of the Civil Code, the parties may freely agree the rate of interest.
Specificity of the Subject of the Pledge
When a pledge is created, the immovable over which the right is to be established must also be determined. Just as a single immovable may be pledged for the same debt, more than one immovable may equally be made the subject of the pledge. Where a single immovable is concerned, the parcels of a subdivided immovable cannot form the subject matter of the pledge unless they are separately recorded in the land register.
The pledging of more than one immovable for the same debt depends on those immovables belonging to the same owner or on their owners being jointly and severally liable debtors. If these conditions are met and the pledge is created over several immovables, the amount of the claim for which each immovable provides security must be shown at the time the pledge is established. Absent an agreement to the contrary, the security is apportioned by the land registry authority of its own motion in proportion to the values of the immovables.
Which elements of the immovable the pledge covers is regulated in Article 862 of the Turkish Civil Code. Under that provision, the immovable is encumbered together with its integral parts and appurtenances; the rights of third parties over the appurtenances are reserved. While the basic rule in the pledge of movable property is delivery, in a mortgage the appurtenances of the immovable fall within the scope of the pledge without being delivered, notwithstanding their movable character.
The Fixed Rank System
A pledge may be created over a single immovable for more than one claim. Turkish law has adopted the fixed rank system in respect of multiple mortgages over a single immovable. Under that system, where one of the pledges is extinguished the pledge next in order does not take its place; the rank of each pledge is fixed. The rank of the extinguished pledge remains vacant, and the owner may, if it wishes, have a new pledge created in that vacant rank for another claim.
Nor is there any obstacle to the creation of more than one mortgage in the same rank. In such a case, the creditors in the same rank are satisfied out of the sale proceeds falling to that rank in proportion to the amounts of their claims.
Although fixed ranks are the basic rule, the owner of the immovable and the holder of the right of pledge may, by agreement between them, grant the creditor a right to advance into a vacant rank. This right may be annotated on the land register; once the annotation is made, the mortgagee may assert its right against new owners and against other holders of rights of pledge as well.
The scheme described concerns cases in which more than one right of pledge exists over a single immovable. Where, by contrast, several limited rights in rem have been created over the same immovable, rank is no longer decisive: the date of creation of the right is taken as the basis, and priority belongs to the right created earlier.
Mortgage Rights Arising by Operation of Law
As a rule, a mortgage is a right created by the mutual intentions of the parties. Various statutes nevertheless provide for rights of pledge that arise directly by operation of law, without any need for the parties to reach an agreement to that effect.
For some of these statutory rights of pledge, registration in the register is not even required. Registration may be made on request for rights falling within this category; the registration made, however, is declaratory rather than constitutive.
The first of the rights of pledge that arise without any need for registration is the pledge arising out of expenditure incurred by the creditor in order to prevent conduct by the owner tending to reduce the value of the immovable. This right need not be registered in the land register and ranks ahead of other registered encumbrances.
The second arises out of sums paid by the creditor for the preservation of the immovable encumbered by the pledge. Payment to the insurer, on the owner’s account, of insurance premiums the owner has failed to pay falls within this category in particular. That right of pledge ranks equally with the creditor’s principal secured claim and is not subject to registration.
In addition to these, various statutes list further statutory mortgages that likewise arise without any need for agreement between the parties. Unlike those above, however, registration is mandatory in respect of these mortgages.
The Construction Creditor’s Mortgage (Builder’s Mortgage)
Although construction creditors generate an increase in the value of the immovable, they may from time to time be unable to recover the claims that represent the return on their labour. In order to protect this group, the legislature has regulated the construction creditor’s mortgage, a statutory right of pledge.
Who counts as a construction creditor is set out in Article 893(1) of the Turkish Civil Code:
Turkish Civil Code, Art. 893(1)
“Sub-contractors or craftsmen who, in the construction works or other works carried out on an immovable, hold a claim against the owner or the contractor in return for materials and labour because they have expended labour with or without supplying materials”
For a construction claim to arise, a contribution of labour and materials must have been made to the construction and an increase in the value of the works must have been achieved thereby. A further condition required is that the construction was carried out by the owner or with the owner’s consent.
The construction creditor may secure registration of the right by a unilateral declaration addressed to the land registry officer. The statute limits against whom this right may be asserted: the creditor may assert the right of pledge against the person holding the capacity of owner during the period in which the construction was carried out. If the immovable changes hands after the construction is completed, the right of pledge may not be asserted against the new owner.
Registration in the land register is likewise a condition for the creation of the construction mortgage. The difference lies in the person entitled to request registration. Whereas under the general rule the pledge is registered by the owner of the immovable, in the construction creditor’s mortgage it is the construction creditor itself that makes the request for registration. That request must be made no later than three months from the date of completion of the construction work undertaken. For registration to take place, the claim must have been acknowledged by the owner of the immovable; where the owner does not acknowledge the claim notwithstanding that the work has been carried out, the claim is determined by the court. Registration must have been made within three months of completion of the construction work, and this three-month period is preclusive in nature.
The rank of the construction creditor’s mortgage is determined by the date on which the pledge was created. Where a provisional annotation of registration has been made earlier, the date to be taken as the basis is the date of the annotation. Where more than one construction creditor’s mortgage exists over the same immovable, they rank equally among themselves; when the pledge is realised, they are satisfied out of the sum obtained in proportion to their claims.
Means of Preserving the Value of the Mortgaged Immovable
Because the right of ownership remains with the owner even after a pledge has been created, the owner may continue to make various dispositions in respect of the immovable. Some of those dispositions may result in a reduction in the value of the immovable. Since in such a case the mortgagee would be at risk of loss, the Civil Code has provided a series of measures for the preservation of the value of the immovable.
If the owner engages in conduct that reduces the value of the pledged immovable, the creditor may ask the court to prohibit that conduct. The court may authorise the creditor to take the necessary measures. In cases of imminent danger, the creditor may take the necessary measures of its own accord without needing such authorisation. The creditor is entitled to claim from the owner the expenses it has incurred for the measures taken, and it acquires a separate right of pledge over the immovable in respect of those expenses. That right of pledge need not be registered; it ranks ahead of other registered encumbrances.
Statute of Limitations for a Claim Secured by a Mortgage
Claims are as a rule subject to specified limitation periods. Where a claim has been secured by a mortgage, however, and the pledge has been registered in the land register, the statute of limitations does not run in respect of that claim.
Realisation of the Mortgage
Where the debt has fallen due but is not performed, the creditor acquires the right to obtain satisfaction of its claim out of the sale price of the pledged immovable.
Under Article 45 of the Enforcement and Bankruptcy Act No. 2004, even where the debtor of a claim secured by a pledge is a person subject to bankruptcy, the creditor may proceed only by way of realisation of the pledge. Where the amount of the pledge does not suffice to discharge the debt, the creditor may have recourse to bankruptcy or attachment proceedings for the remainder of the claim.
The Lex Commissoria Prohibition
The Civil Code treats as invalid any agreement providing that ownership of the pledged immovable will pass to the mortgagee should the claim go unpaid. The creditor’s claim is satisfied not out of the pledged asset itself but out of the price obtained from the sale of that asset.
When the immovable is sold, the price obtained is paid to the mortgagee. If the sale price exceeds the amount of the claim, the surplus remains with the owner. Where the opposite occurs, that is, where the price falls short of the claim, the creditor is issued with a certificate of pledge deficiency. On the strength of that certificate the creditor may commence proceedings against the debtor; in that event the debtor is liable with its other assets as well.
Termination of the Mortgage
In explaining the principle of accessoriness to the claim, we noted that the principle operates in respect of termination too. Accordingly, where the claim is extinguished for any reason, the pledge is extinguished along with it and as an accessory to it.
It was stated above that registration is a condition for the creation of the mortgage. When the pledge is extinguished, that registration must be cancelled. How the cancellation is to be carried out is disputed in the doctrine. On one view, since the pledge is extinguished with the extinction of the claim, the entry in the land register is automatically left without basis and may be struck out by the owner through a declaratory cancellation. On the other view, the owner cannot carry out the cancellation alone; on that approach the owner must first request cancellation from the holder of the right of pledge and, if the mortgagee does not make a request for cancellation, bring an action to compel cancellation.
On related matters, our notes entitled Action for the Removal of a Mortgage and, on the removal of pledges created by banks, Removal of a Bank Mortgage over a Dwelling may also be consulted.
Spousal Consent for the Creation of a Mortgage over the Family Residence
Under Article 194 of the Turkish Civil Code, neither spouse may restrict the rights over the family residence without the express consent of the other spouse. For this provision to apply, an annotation of family residence need not have been entered in the land register, since the annotation is declaratory rather than constitutive. The rule as to spousal consent is mandatory. This right can neither be waived in advance nor removed by agreement between the spouses. Consent is given expressly and for a specific transaction; no formal requirement is prescribed for the giving of it.
Since a mortgage is a right that restricts the right of ownership, the creation of a pledge over the family residence depends, under that provision, on the consent of the spouse being obtained. The Court of Cassation has likewise stated in its decisions that a mortgage created over the family residence without obtaining the consent of the non-owner spouse is not valid. For the details on this point, our note entitled Invalidity of a Mortgage Created without the Consent of the Spouse may be consulted.
Independent Legal Assessment
Although in practice a mortgage is often perceived as a routine banking transaction, its validity depends on several conditions that are independent of one another. A failure to observe the official form before the land registry directorate, insufficient determination of the secured claim, or an oversight as to the character of the immovable as a family residence may subsequently render the pledge wholly ineffective. The examination carried out at the stage when the credit relationship is established therefore determines the true value of the security from the creditor’s point of view.
From the owner’s perspective the picture must be read the other way round. Because ownership and the power of disposal continue after the pledge has been created, it must be borne in mind that transactions affecting the value of the immovable may give rise to a right of intervention on the creditor’s part. In a concrete file, the following points in particular should be prioritised:
- Verifying whether the pledge agreement was drawn up in official form before the land registry directorate
- Examining whether the secured claim is determined and, if it is not, whether the maximum-amount mortgage structure has been used correctly
- Establishing from the land register the position as to rank and order and whether the right to advance into a vacant rank has been annotated
- Calculating the three-month preclusive period in a construction creditor’s mortgage by reference to the date of completion of the work
- Investigating in fact whether the immovable has the character of a family residence, even in the absence of an annotation
- Ensuring that, where the claim is assigned, the passing of the pledge to the new creditor is reflected in the register
Independent Legal provides advisory services and litigation support throughout the entire process in disputes arising out of pledges over immovable property, from the creation of the mortgage through to its realisation and cancellation.