A mortgage is, in essence, an entry made against immovable property for the purpose of securing a claim, and one that must be deleted once the debt comes to an end. There are two typical reasons for a mortgage in favour of a bank appearing on the title deed of a dwelling: the loan taken out by the purchaser for that dwelling, or the debt owed to the bank by the contractor who built the structure. In both cases the entry must be deleted from the land registry; the question of which debt the mortgage was created for, and on what date, however, directly determines the route to be followed.
The starting point for any assessment of the subject is the standard of care to which banks are subject. The Turkish Commercial Code No. 6102 imposes on merchants a duty to act prudently. Banks, as legal persons, are also addressees of that duty; moreover, in view of the nature of their activities, the standard has been raised still higher in their case. The essential justification for the removal of a bank mortgage on a purchased dwelling likewise rests on this heightened duty of care owed by banks.
Below we address the nature of the mortgage, the procedure for its creation and deletion in the land registry, the route to be followed in respect of the two different types of mortgage, and the court before which the dispute is to be heard.
The Nature of the Mortgage
A mortgage confers on the rightholder the power, in the event that the debt is not paid, to have the immovable property sold by way of compulsory enforcement and to satisfy their claim out of the proceeds. At the foundation of the institution lies the idea of securing a claim against a particular immovable property. The mortgagee occupies a priority position at the stage where the immovable property is converted into money and the proceeds obtained are distributed. The details of the concept of the mortgage are addressed in our note entitled What Is a Mortgage?.
Since a mortgage is a right in rem acquired by registration in the land registry, the debtor’s sale of the immovable property or resort to simulated transfers does not release them from their debt. For a detailed assessment of simulated transactions, our note entitled Concealing Assets from an Estate – What Is Testator’s Simulation? may be consulted.
Creation and Deletion of the Mortgage
For the purposes of the Turkish Civil Code No. 4721, the creation of a mortgage is subject to the general principles governing the establishment of rights in rem. Accordingly, the owner of the immovable property is to apply to the land registry directorate for registration, and the land registry official is to effect the registration in line with that application. The mortgage right over the immovable property arises at the moment registration is completed. The entry made in the register must indicate the identity of the creditor and the amount covered by the mortgage.
Deletion of the entry is likewise possible by way of an application made at the land registry. Once the debt has been paid, the creditor in whose favour the mortgage was created may have the entry removed by applying to the land registry directorate for its deletion. Where the creditor fails to take this step despite payment, the owner may secure the deletion of the mortgage from the register by bringing an action.
The Bank Mortgage on the Purchased Dwelling
Where a mortgage appears on the title deed of the dwelling acquired, it must first be investigated which debt that entry secures, since the procedure for removal varies according to the reason on which the mortgage is based.
The bank mortgages encountered in practice are largely traceable to two sources. One is the mortgage created by the bank in consideration of the loan taken out by the purchaser to acquire that dwelling. The other is the mortgage placed on the immovable property on account of the loan drawn down by the contractor to finance the construction before transferring the dwelling to the person entitled to it. In the second scenario the process is markedly more difficult; nonetheless, where the necessary conditions are satisfied, the courts may order the removal of the mortgage.
The Mortgage Created on Account of the Owner’s Loan Debt
The level reached by property prices makes acquiring a dwelling without taking out a loan all but impossible today. For this reason, those wishing to become homeowners set aside a certain deposit and meet the balance with financing obtained from a bank.
The bank, for its part, stipulates against the possibility of repayment falling into arrears that a mortgage be created in its own favour over the dwelling purchased until the debt is entirely discharged.
Before a mortgage of this kind can be deleted from the register, the loan debt owed to the bank must first be discharged. Once the debt has been paid in full, the bank secures the removal of the entry of its own motion by means of a discharge letter sent to the land registry directorate.
Where the discharge letter is not sent, the omission is for the most part remedied by contacting the bank, and the mortgage over the immovable property in respect of which no debt remains is removed.
Where, despite the discussions held, the bank unjustifiably and unlawfully maintains the mortgage over a dwelling in respect of which there is no loan debt, the solution lies in litigation. In such an action, deletion of the entry may be secured by proving that the claim secured by the mortgage has been paid.
The Mortgage Created on Account of the Contractor’s Debt
Large-scale construction projects give rise to a heavy cost burden for contractors. In order to meet that burden, the properties are sold to purchasers while still at the construction stage, with an undertaking that they will be transferred once the building is completed.
Since sales made before completion are often insufficient to cover the cost, contractors have mortgages created in favour of banks over these very properties, whose price they have collected and which they have promised to transfer, and finance the construction with the loans obtained in this way.
Where the contractor is unable to repay that loan, purchasers who have paid the price in full find a bank mortgage on the title deed of their own home. In such a situation, recourse to litigation is unavoidable if the mortgage is to be removed.
As a rule, the acquisition of a person who acquires a right in rem in reliance on the land registry is protected. Indeed, there is no legal obstacle to a bank creating a mortgage over the independent units built by the contractor who appeared in the register as owner at that date.
That said, the liability envisaged by the law in respect of banks is of a special and heightened nature. It may be concluded that a mortgage created at the instance of a bank which knew, or ought to have known, that the independent units built would be sold to third parties does not rest on good faith and is to be regarded as invalid.
This approach was set out as follows in the leading judgment of the 7th Civil Chamber of the Istanbul Regional Court of Appeal, File No. 2019/1861, Decision No. 2019/1943, dated 28.11.2019:
Istanbul Regional Court of Appeal, 7th Civil Chamber, File No. 2019/1861, Decision No. 2019/1943, 28.11.2019
“Since it is beyond dispute that a bank placing a mortgage over immovable property appearing in the land registry as subject to a construction servitude has, by reason of being both a prudent merchant and an institution of trust, acquired expertise as to the persons to whom it will extend credit and the security in rem to be provided against that credit, it cannot be asserted that the structures situated on the plot and the people living within those structures were unknown to the banks or that they were unaware of the existing situation. Under Article 2 of the Turkish Civil Code, everyone must comply with the rules of good faith when exercising their rights and performing their obligations. Furthermore, the law does not protect the manifest abuse of a right. The most important and mandatory limit on the exercise of all rights is to act in conformity with the rules of good faith. The liability of banks has been heightened because, in a sense by reason of their performing a public service, they are defined as institutions enjoying public trust. What is taken into account in heightening that liability is the broadening of the scope of liability arising from breach of the duty of care and the ensuring that banks are liable for the acts and conduct within their fields of activity even where they are only slightly at fault, and indeed even where they are not at fault at all. Banks, which are subject to such a heightened presumption of liability, must act with a duty of care far weightier than the prudent merchant’s duty of care regulated in the Turkish Commercial Code. In the course of the credit allocation process, which is a banking transaction, carrying out a risk analysis in respect of the customer to whom credit will be extended, taking security against the credit, establishing the customer’s income and setting a term for the credit have become the ordinary practice of commercial life and of banking transactions.
The respondent bank did not carry out the necessary investigation and, although it was in a position to know and to ascertain the existing situation, failed to discharge that duty of investigation, and since it therefore did not display the requisite diligence and care, it cannot be said to have acted in good faith”
The judgment establishes that the bank ought to have foreseen that the independent units built would be transferred to third parties, and that in such a situation the bank cannot be said to have acted in good faith.
Accordingly, even where a bank mortgage stands on the title deed of the dwelling purchased on account of the contractor’s debt, it is legally possible to have that entry removed by bringing an action.
The Court with Subject-Matter and Territorial Jurisdiction
In an action for the removal of a mortgage, subject-matter jurisdiction is determined according to the nature of the dispute. In disputes concerning dwellings acquired in the capacity of consumer, the Consumer Courts have jurisdiction. Where the immovable property has been acquired for commercial purposes, the Commercial Courts assume jurisdiction under the Turkish Commercial Code No. 6102. For actions brought before either court, having had recourse to a mediator is a procedural requirement. Detailed information on this subject is contained in our note entitled Mandatory Mediation in Consumer Actions.
Territorial jurisdiction is determined under the provisions of the Code of Civil Procedure No. 6100. As a mortgage is a right in rem, the court of the place where the immovable property is situated is regarded as having exclusive territorial jurisdiction in an action for its removal.
Independent Legal Assessment
The first thing to be done in a claim for the deletion of a mortgage is to examine the land registry record and the mortgage deed in order to establish which debt relationship the entry rests on and on what date it was created. Whereas in mortgages arising from the purchaser’s own loan the dispute is generally resolved by proof that the debt has been discharged, in mortgages arising from a contractor’s loan the debate centres on whether the bank can be regarded as having acted in good faith.
What is decisive in the second group of files is whether the bank was, on the date of the mortgage, in a position to know the state of the building and that the independent units had been sold to third parties. The establishment of a construction servitude, the existence of promise-to-sell agreements and flats actually occupied are strong indications in this direction.
In a given file, we recommend that the following matters be assessed in advance:
- Examining the land registry record, the mortgage deed and the dates of the construction servitude on a comparative basis
- Collecting in full the promise-to-sell agreement and the payment documents
- Requesting the discharge letter from the bank in writing where the loan debt has been discharged
- Preparing the requests for an on-site examination and for records that will reveal the bank’s level of knowledge on the date of the mortgage
- Clarifying, for the purposes of subject-matter jurisdiction, whether the immovable property was acquired as a consumer or for commercial purposes
- Making the pre-action mediation application in good time, as a procedural requirement
Independent Legal provides advisory services and conducts litigation, from the mediation stage through to the conclusion of the proceedings, in disputes concerning the deletion of bank mortgages over dwellings.