The most common way of protecting a claim against the risk of non-payment is the creation of a right of pledge (mortgage) over an asset belonging to the debtor or to a third party. Mortgages established over immovable property give the creditor a durable and powerful security. Where the debt is not paid when due, converting that security into cash requires an enforcement route with rules of its own — namely "enforcement proceedings for the realisation of the mortgage (pledge)".
This type of proceedings does not follow the same framework as ordinary enforcement without a judgment, either in the procedure to be observed or in the time limits to be respected. At every link in the chain running from the filing of the request for enforcement to the sale of the immovable at auction, there are technical requirements and statutory obligations binding on the creditor.
Below we examine in detail the procedure to be operated in recovering claims secured by a mortgage or by a pledge over movables, the distinction between enforcement with and without a judgment, the rights afforded to the debtor, and the problem areas frequently encountered in practice.
The Concept of Immovable Pledge (Mortgage)
The Nature of the Right of Pledge
A pledge is a limited right in rem created over an item forming part of the assets of the debtor or of a third party in order to secure a claim. By virtue of this right, the creditor may, where payment is not made, request that the pledged asset be converted into money and obtain payment from the proceeds in priority to others.
The right of pledge is dealt with under two headings according to the type of asset over which it is created.
- Pledge over Movables: Created over movable values such as vehicles, machinery, valuable goods or instruments of debt. As a rule it arises upon transfer of possession to the other party; by contrast, special legislation such as the Commercial Enterprise Pledge Act and the Financial Leasing Act allows a pledge over movables to be created without any transfer of possession.
- Immovable Pledge (Mortgage): Created over immovable property in the nature of a dwelling, a plot of land, a field or business premises. Its creation depends on registration in the land registry, and it becomes valid only where the formal requirements are complied with. The mortgage, one manifestation of the immovable pledge, is the security instrument most frequently resorted to in securing claims.
Principal Mortgage and Maximum-Amount Mortgage
A mortgage is created in one of two forms, according to whether the secured claim is determinate.
- Principal Mortgage: Created for a fixed debt whose amount is known in advance. The figure shown in the land registry expresses the claim itself; the entry is recorded, for example, as a "principal mortgage of TRY 300,000". At the enforcement stage the amount the creditor may claim is limited to that figure.
- Maximum-Amount Mortgage: Preferred in respect of claims whose amount is not yet determined or which will arise in the future. Only the maximum figure that may not be exceeded is entered in the land registry; an entry reading "maximum-amount mortgage up to TRY 500,000" is an example. It is frequently encountered in the general credit agreements of banks, in current-account relationships and in commercial credits. Even where the final amount of the debt is uncertain, the mortgage takes effect within the limits of the maximum amount entered in the registry.
The creditor’s right of priority over the pledged immovable is preserved in both forms; the maximum-amount mortgage, however, creates a broader and more flexible field of protection in practice.
The Scope of the Security Provided by a Mortgage
A mortgage gives the creditor a security in rem attached directly to the immovable rather than a personal one. That quality makes it a strong and enduring security from the standpoint of recovery. A change of hands in the immovable does not extinguish the mortgage; changes in ownership therefore do not affect the existence of the security.
The subject matter of a mortgage is not confined to debts that already exist and whose amount is fixed. Claims that may arise in the future, debt relationships not yet established but expected to arise, and obligations made subject to a condition or a time limit may likewise be secured by a mortgage. This flexibility makes the mortgage functional in bank credits, commercial contracts, current-account relationships and guarantee-type security structures.
The maximum-amount mortgage in particular offers an effective solution for claims whose amount cannot be established at the outset or which increase and decrease over time. The creditor is thereby protected against risks that may emerge in the future, while the sustainability of the debt relationship between the parties is also supported.
The Obligation to Have Recourse to the Pledge First (Enforcement and Bankruptcy Act Art. 45(1))
Under Article 45(1) of the Enforcement and Bankruptcy Act No. 2004, where recovery of a claim secured by a pledge — for example by a mortgage — is sought through enforcement, the creditor must first proceed by way of realisation of the pledge.
This obligation is confined to the law of enforcement. The creditor may, if it wishes, bring an action for the debt against the debtor before the general courts. However, the judgment obtained at the end of those proceedings cannot be enforced by way of general attachment; that judgment may be used only to commence enforcement based on a judgment by way of realisation of the pledge.
The rule of "recourse to the pledge first" is a matter of public policy; the parties cannot set it aside by agreement.
Priority of the Pledged Asset
As a consequence of the principle, the creditor may not turn to the debtor’s other assets, and may not have attachment levied over those values, before the pledged asset given as security has been converted into money.
The rule has the following reflections in practice: the creditor may not operate the general route of attachment, whether based on a judgment or not; the debtor’s salary, bank accounts or movable and immovable property may not be made directly subject to attachment; the proceedings may be conducted only over the asset secured by the pledge, and no move may be made to the remainder of the debtor’s assets unless the pledged asset is sold.
Exceptions to the Rule
Although the principle of "realisation of the pledge first" is of general application, in certain cases the creditor may have recourse to general attachment or bankruptcy without awaiting the sale of the pledge. These exceptions fall under three headings.
- Claims Embodied in a Negotiable Instrument: Where the claim arises from a negotiable instrument such as a promissory note, a cheque or a bill of exchange and is at the same time secured by a pledge, the creditor may directly commence attachment or bankruptcy proceedings specific to negotiable instruments. In that event the obligation to have recourse to the pledge first does not operate.
- Claims Arising from Housing Finance and from TOKİ: In claims falling within the scope of Housing Finance Agreements, or in claims arising from mortgages created in favour of the Housing Development Administration (TOKİ), the creditor may pursue enforcement by way of general attachment.
- Interest and Instalment Items Secured by the Mortgage: Where items falling outside the principal debt, such as interest, instalments, rent or service charges, are covered by the mortgage, the creditor may commence general attachment or bankruptcy proceedings without awaiting realisation of the pledge. Separate proceedings for ancillary claims of this nature are frequently seen in practice.
Conditions for Commencing the Proceedings
Enforcement by way of realisation of the pledge is regulated in Articles 148 et seq. of the Enforcement and Bankruptcy Act No. 2004 and is a route available only to creditors whose claim is secured by a mortgage.
A Valid Mortgage Registered in the Land Registry
The mortgage forming the legal basis of the proceedings must have been created in accordance with Art. 856 et seq. of the Turkish Civil Code No. 4721 and entered in the land registry. In that regard there must be a valid right of pledge that complies with the official form and is registered in the land registry. Proceedings cannot be commenced on the basis of a mortgage that has been discharged, has expired or has come to an end for some other reason.
The Claim Must Have Arisen and Fallen Due; Default of the Debtor
By virtue of Art. 149(1) of the Enforcement and Bankruptcy Act, this route may be taken only where a secured claim exists. The claim must also have arisen, that is, have actually materialised. If the claim is subject to a condition, that condition must be fulfilled; if it is subject to a term, that term must have arrived — in short, the claim must have fallen due.
It is not possible to operate this route of enforcement in respect of a claim that has not yet arisen, whose term has not expired, or in respect of which the condition for falling due has not been fulfilled.
Forms in Which the Proceedings May Be Conducted
In recovering a claim secured by a mortgage, the creditor uses the route of "enforcement by way of realisation of the mortgage" set out in Articles 148 et seq. of the Enforcement and Bankruptcy Act. These proceedings may be operated in two different forms: enforcement without a judgment within the framework of Art. 150(a) of the Enforcement and Bankruptcy Act, or enforcement based on a judgment under Art. 149 et seq. of that Act.
The criterion determining which route is to be followed is whether the claim or the mortgage right rests on a judgment or on a document having the character of a judgment.
Realisation Without a Judgment (Enforcement and Bankruptcy Act Art. 149(b))
The route of enforcement without a judgment is provided for the creditor who holds nothing beyond the official deed or the land registry entry evidencing the mortgage, and no judgment or document having the character of a judgment. On this route the process operates as follows:
- The creditor files the request for enforcement with the enforcement office of the place where the immovable is situated.
- The land registry entry or the mortgage agreement evidencing the mortgage is annexed to the request.
- The enforcement office serves a payment order on the debtor and, where the immovable belongs to a third party, also on the owner who granted the pledge.
- The debtor has the right to object to the payment order within 7 days.
- Where the objection is directed at the right of pledge, the creditor may apply to the court seeking removal of the objection to the right of pledge.
It is also open to the creditor to request that the proceedings be continued by way of general attachment. If the debtor does not object within the 7-day period and does not make payment within 30 days, the creditor may request the sale of the immovable.
Note: The route of enforcement without a judgment is also open in respect of claims secured by a maximum-amount mortgage and claims that will arise in the future. This practice is frequently encountered in bank credits.
Realisation Based on a Judgment (Enforcement and Bankruptcy Act Art. 149)
Under Article 149 of the Enforcement and Bankruptcy Act No. 2004, enforcement based on a judgment in respect of mortgage-secured claims may be operated only where the claim or the mortgage right rests on documents of a particular character. The cases in which the creditor may directly commence enforcement based on a judgment are as follows:
- The claim or the mortgage right rests on a judgment or on a document having the character of a judgment
Alongside court decisions, notarial deeds and arbitral awards are also counted within this category. A creditor relying on a document of this kind may apply directly to the enforcement office.
- The mortgage agreement schedule contains an unconditional acknowledgment of a monetary debt
Such a schedule is regarded as a document having the character of a judgment within the meaning of Art. 68 of the Enforcement and Bankruptcy Act. In this situation, frequently seen in principal mortgages, the creditor may pursue enforcement based on a judgment.
- The creditor is a credit institution and the claim arises from a credit relationship that has fallen due
In current-account claims arising from a credit agreement and having fallen due by reason of non-payment, and in cash or non-cash credit claims, the credit institution may proceed directly by way of enforcement based on a judgment. The basis of this special facility is Art. 150(ı) of the Enforcement and Bankruptcy Act.
Note: In enforcement based on a judgment the debtor has no general right of objection; the proceedings can be stayed only by producing a decision for the stay of execution.
Commencing the Proceedings
A creditor wishing to recover a mortgage-secured claim by this route completes the request for enforcement in the proper form and files it with the enforcement office having territorial jurisdiction. The proceedings begin upon the filing of that request.
The Enforcement Office with Territorial Jurisdiction
By virtue of Art. 154 of the Enforcement and Bankruptcy Act, jurisdiction in the realisation of a mortgage belongs to the enforcement office of the place where the immovable is situated. The debtor’s place of residence plays no part in this determination.
The Request for Enforcement and the Documents to Be Annexed
The request for enforcement is the written application submitted by the creditor to the enforcement office for the purpose of recovering the claim, and it may be drawn up in the form of enforcement based on a judgment or without a judgment. Under Article 58 of the Enforcement and Bankruptcy Act, the request must contain the following elements:
- The name, surname and address of the creditor and of its representative, if any
- The name, surname and address of the debtor
- The amount of the claim and the mortgage right constituting its basis
- The date on which the claim falls due and the date on which default arose
- The type and rate of the interest claimed
- The type of pledge (mortgage, pledge over movables, maximum-amount mortgage, etc.)
- Whether the pledged asset is movable or immovable and where it is situated
- The route of enforcement chosen (based on a judgment / without a judgment)
Documents to be filed in enforcement without a judgment: the land registry entry or official deed evidencing the mortgage right, the contract or instrument evidencing the claim if any, and the request for enforcement form.
Documents to be filed in enforcement based on a judgment: the court decision or the document having the character of a judgment (for example, the mortgage agreement schedule), the land registry entry relating to the pledged immovable, and the request for enforcement form.
Additional points: Where the pledge was granted by a third party, or where ownership of the immovable has subsequently passed to a third party, that person must also be named in the request. Where other rights of pledge created subsequently exist over the same immovable, the holders of those rights must likewise be shown.
The Debtor’s Right of Objection
In enforcement without a judgment brought by way of realisation of the pledge, the debtor may object to the payment order served on him. That objection may stay the proceedings and compel the creditor to have recourse to the courts. The right of objection is, however, subject to specific rules as to time and form.
The Period for Objection
Under Article 150(a) of the Enforcement and Bankruptcy Act, the period for objecting to the payment order is 7 days. Time begins to run on the date the payment order is served on the debtor. Within that period the debtor may apply to the enforcement office in writing or orally and raise his objection.
The Subject Matter of the Objection
The objections the debtor may raise in due time may take three forms: the objection may be directed solely at the claim (on grounds such as the existence or amount of the debt, or default); solely at the right of pledge (on grounds such as the validity of the mortgage, its having come to an end, or its erroneous application); or it may target both the claim and the right of pledge together.
There are consequences here that must be borne in mind:
- A debtor who objects only to the right of pledge and does not object to the claim is deemed to have accepted the claim.
- A debtor who objects only to the claim and leaves the mortgage right outside the dispute is deemed to have accepted the mortgage right.
- If no objection is raised at all, both the debt and the mortgage right become final.
The Effect of an Objection on the Proceedings
An objection to the payment order stays the proceedings. How matters develop thereafter depends on the point at which the debtor has directed his objection.
Removal of the Objection and Annulment of the Objection
Where the debtor has objected within the statutory period, the creditor must, in order to continue the proceedings, choose one of the routes that will set the objection aside.
Removal of the Objection Before the Enforcement Court
Where the creditor holds a document falling within the scope of Art. 68 or Art. 68(a) of the Enforcement and Bankruptcy Act, such as a notarial deed, an instrument whose signature has been acknowledged, or an official document containing an acknowledgment of debt, removal of the objection may be sought from the enforcement civil court. The court examines the documents submitted and decides whether or not the proceedings are to continue. If removal of the objection is ordered, the proceedings become final and the sale of the mortgaged immovable may be requested.
Annulment of the Objection Before the General Courts
Where the creditor does not hold a document within the meaning of Art. 68 of the Enforcement and Bankruptcy Act — for instance where the claim is of an ordinary character — it must bring an action for annulment of the objection before the general courts. That action must be brought within 1 year of the date of the proceedings. If the debtor’s objection is found to be unjustified, the objection is annulled and the proceedings continue. Where judgment is given in the creditor’s favour, the proceedings become final and the sale stage may be reached.
The Sale Process
The realisation stage begins, once the proceedings have become final, upon the creditor’s request, and is aimed at putting the mortgaged immovable up for sale so that the claim may be met. The sale procedure is subject to the strict rules of form and time limits laid down in the relevant provisions of the Enforcement and Bankruptcy Act.
The Request for Sale and the Time Limit
Once the proceedings have become final, the secured creditor must request the sale of the immovable within 1 year of service of the payment order or of the writ of execution (Enforcement and Bankruptcy Act Art. 150(e)). If the sale is never requested, or if the request is withdrawn and not renewed within the period, the proceedings lapse. The lapse of the proceedings does not, however, extinguish the right of pledge; the creditor may commence fresh proceedings by way of realisation of the pledge at a later stage.
Preparing for Sale: Valuation and the Auction Notice
Where the request for sale is made in due time, the enforcement office has a valuation carried out in respect of the pledged immovable (Enforcement and Bankruptcy Act Art. 150(d)).
- Valuation: Conducted by an independent court-appointed expert, who determines the market value of the immovable. The report drawn up is served on the debtor and on the other interested parties.
- Objection to the valuation: The report may be challenged by way of complaint to the enforcement court within 7 days of service.
- Auction notice: Once the valuation has become final, the enforcement office announces the auction through the e-sale portal.
The opening of the auction must be set for a date at least 15 days after the date of the notice. Moreover, no fresh valuation may be carried out until 2 years have elapsed since the previous one (Enforcement and Bankruptcy Act Art. 128(a)(5)).
Conduct of the Auction
On the appointed day the sale is conducted by public auction in electronic form. For the auction to be concluded, the bid submitted must exceed 50% of the valuation and must at the same time exceed the amount that will cover the claim together with the costs (Enforcement and Bankruptcy Act Arts. 129 and 115).
If no bid satisfying these conditions is received at the first auction, or if the highest bidder does not deposit the price, the process moves to a second auction. The opening day of the second auction is fixed at the latest within one month of the date on which the first auction closed.
Distribution of the Sale Proceeds
The distribution of the money obtained from the sale of the pledged immovable is carried out in accordance with Articles 138, 139 and 140 of the Enforcement and Bankruptcy Act. The proceeds are transferred to the creditors in observance of the order of priority. The importance of these rules becomes particularly apparent in files where there are several creditors and the sale proceeds do not cover all the claims.
Priority Among Secured Creditors
In claims resting on an immovable pledge, ranking is determined on the basis of the order of registration and the degree recorded in the land registry. A claim secured by a mortgage entered in the first degree in the land registry ranks ahead of mortgage-secured claims in the second and third degrees. Where more than one mortgage is entered in the same degree, the date of registration is taken as the criterion.
The Order of Distribution
Articles 138, 139 and 140 of the Enforcement and Bankruptcy Act determine the order in which the proceeds are to be distributed. Accordingly, payment is made first to the secured creditor out of the amount obtained from the sale; where there is more than one secured creditor, the order of priority explained above applies. If money remains after the secured creditors have been satisfied, a ranking table is drawn up according to the dates of attachment and payment is made to the unsecured creditors who have had attachment levied over the immovable. If any sum remains after payment has been made to all the creditors, that balance is returned to the debtor.
Supplementary Attachment Where the Proceeds Are Insufficient
Where the money obtained from the sale does not cover the secured creditor’s claim in full, the creditor may have recourse to the general route of attachment for the outstanding part and request a supplementary attachment (additional attachment). Recovery from the debtor’s assets outside the pledge thereby becomes possible.
The Ranking Table and Complaint
In files where there is more than one creditor, the enforcement office prepares a ranking table. The table sets out clearly the amount of each creditor’s claim and the position it will occupy in the order of recovery.
Creditors may challenge that table by way of complaint to the enforcement court within 7 days. The court examining the complaint rules on whether the table is to be corrected.
The rules under this heading are among the areas in which the greatest number of errors are made in practice and which give rise to the most objections and litigation. For that reason it is important that everyone who is a party at the sale and distribution stage should follow the process closely and obtain legal support where necessary.
Note: The mortgage relied on as the basis of the proceedings may have been created wrongfully, that is, contrary to law. In such a case the owner whose immovable is subject to an unjustified restriction may protect his right of ownership by bringing an action for the discharge of the mortgage. In disputes of this technical nature, obtaining professional legal support is of great importance.
Independent Legal Assessment
Enforcement by way of realisation of the pledge gives the creditor a powerful means of recovery while imposing an equally formal discipline. The determination of the competent office by reference to the place where the immovable is situated, the making of the request for sale within the one-year period, and the correct characterisation of the mortgage agreement schedule are matters capable of changing the fate of the file. An error in any one of these elements most often results in the lapse of the proceedings or in the choice of the wrong route of enforcement.
For the debtor and for the third party who granted the pledge, the scope of the objection is decisive. It should not be overlooked that an objection directed solely at the claim or solely at the right of pledge produces the result of an implicit acceptance of the other element. In practice we recommend that the following points in particular be assessed in advance:
- Determining whether the mortgage is a principal mortgage or a maximum-amount mortgage, and the maximum sum that may be claimed
- Examining whether the claim rests on a document suitable for enforcement based on a judgment, and in particular the acknowledgment of debt in the agreement schedule
- Investigating whether one of the exceptions to the rule of recourse to the pledge first is present on the facts of the case
- Drafting the objection expressly so as to cover both the claim and the right of pledge
- Diarising the seven-day period for complaint against the valuation report
- Planning the option of a supplementary attachment from the outset against the possibility that the sale proceeds prove insufficient
Independent Legal provides advisory and litigation services throughout the entire process of recovering mortgage-secured and pledge-secured claims, from the preparation of the request for enforcement to the stage of complaint against the ranking table.