What a creditor looks for in credit and commercial debt relationships is most often something more than a promise to pay. The principal institution meeting that need is the pledge. As a limited right in rem created in the creditor’s favour over a particular asset or item of property, the pledge secures the debtor’s obligation to pay and represents a guarantee from the creditor’s point of view.
The power the pledge confers on the creditor is narrower than is supposed in practice. Using the pledged asset, deriving benefit from it or disposing of it does not fall within the sphere of authority of the holder of the right of pledge; in a pledge over immovable property the creditor does not even obtain possession of the asset. The only possibility left to the creditor is to have the value forming the subject of the pledge sold when the debt is not paid and to obtain the monetary equivalent of its claim out of the price arising from that sale, in priority to others.
Throughout its existence the pledge shares the fate of the claim it secures. When the debtor performs the debt the pledge is removed and the asset is freed of the encumbrance; where performance does not take place, the creditor may realise the pledged value and recover its claim. In this respect the pledge constitutes a guarantee for the creditor and an obligation for the debtor. The institution has two basic forms: the pledge over immovable property and the pledge over movable property. In the first, the agreement must be concluded in official form and the right must be registered in the land register; in the second there is no question of registration, and in its place delivery of the asset forming the subject of the pledge to the creditor is required.
Pledge over Immovable Property
The provisions relating to the pledge over immovable property appear in detail from Article 850 of the Turkish Civil Code No. 4721 onwards. Under those provisions the subject of the pledge is an immovable recorded in the land register. A holder of a right of pledge who is unable to obtain payment of its claim has the power to have the immovable realised through the enforcement authorities and to be satisfied out of the sale price in priority to others. Because that power is a right in rem, it may be asserted against everyone. The statute provides for three types of pledge over immovable property: the mortgage, the mortgage debt certificate and the land charge certificate.
Mortgage
A mortgage is a security right created in the creditor’s favour with a view to securing a particular debt of the debtor, and it may be established over an immovable or a movable asset. Where the debt is not paid when due, the creditor obtains the opportunity to recover its claim through the sale of the mortgaged asset. The details of the subject are set out in a separate note entitled What Is a Mortgage?
Mortgage Debt Certificate
In a mortgage debt certificate, a debt is embodied in an instrument over which a mortgage has been created. In order to secure the creditor’s claim, the debtor creates a mortgage over a particular asset and, together with that, draws up a debt instrument. Where payment is not made, the creditor may meet its claim by having the mortgaged asset sold.
Land Charge Certificate
A land charge certificate is an instrument establishing that the creditor has demanded payment from the debtor. The debtor is taken to have agreed to make payment to the creditor should it fail to pay its debt on the date determined or within the period provided for. The instrument thus affords the creditor a legal basis in the event that payment does not take place.
Principles Governing the Pledge over Immovable Property
The Principle of Specificity
When the pledge is created, the amount of the claim must be entered in the land register in Turkish currency. Where the amount has not yet been settled at the moment of creation, the parties may also create a pledge by agreeing the maximum sum for which security is to be provided; in that event a maximum-amount mortgage comes into play.
The exception to the rule that the sum be shown in Turkish currency concerns loans extended by foreign credit institutions in a foreign currency. With a view to enabling such loans to be secured, it has been made possible for the pledge to be created in a foreign currency.
Specificity is not required in respect of the claim alone; the immovable to be encumbered by the pledge must likewise be recorded in the land register and determined.
The Principle of Publicity
For a pledge over immovable property to arise there must be a ground of acquisition, a request for registration must be made, and registration must be effected in the land register.
The pledge agreement over the immovable, which constitutes the ground of acquisition, is subject to official form; the authority conferring official character on the agreement is the land registry directorate. Once the agreement has been concluded, the request for registration must be submitted. Since that request is a transaction of disposal, it may be made only by the owner or by the owner’s authorised representative.
Given that the pledge arises upon registration, its termination is likewise dependent upon cancellation of the entry. The power to request cancellation belongs to the holder of the right of pledge.
Whether the extinction of the claim brings the pledge over the immovable to an end automatically is disputed in the doctrine. One view accepts that the pledge over the immovable comes to an end with the extinction of the claim; on that approach the owner may have the mortgage entry struck out by a request for cancellation that is declaratory in character. On the other view, no power to request cancellation directly arises for the owner when the claim is extinguished. What the owner must do is first ask the holder of the right of pledge to make a request for cancellation; should the creditor not take that course, an action for the correction of the land registry record may be brought by the owner. The notes entitled Action for the Correction of the Land Registry Record and Action for the Removal of a Mortgage address this matter separately.
The Fixed Rank System
Under this system the immovable is divided into ranks corresponding to particular values. Because the ranks are independent of one another, a separate right of pledge may be created in each of them. The power to determine the order and the amount of the pledge lies with the owner of the immovable. The reason the system is called that of fixed ranks is the following: where the pledge situated in an earlier rank is cancelled, the pledges in the later ranks cannot advance into the rank that has fallen vacant.
The Principle of Security
The scope of the security burden covers the immovable itself, its integral parts and appurtenances, together with rental income and insurance indemnities.
As regards the claim secured, the scope comprises the principal, the costs of enforcement and interest, the rate of interest agreed by contract, and the necessary expenses incurred for the preservation of the immovable; premiums paid to the insurer on the owner’s account because the owner has failed to pay them are a typical example of such expenses.
It is not open to the holder of the right of pledge to realise the immovable by its own hand; the sale is conducted through the enforcement authorities. Agreements to the effect that ownership of the asset forming the subject of the pledge will pass directly to the pledgee creditor where the claim is not paid are treated as invalid; in the literature this prohibition is termed lex commissoria.
The sum obtained from realisation is distributed among the pledgee creditors in accordance with their ranks. Creditors situated in the same rank are satisfied in proportion to their claims.
Preserving the Value of the Pledged Immovable
The existence of a pledge over an immovable does not remove the owner’s right of ownership; the power of disposal remains with the owner, who may carry out various transactions in respect of the immovable. Where such dispositions lead to a fall in the value of the asset, however, the holder of the mortgage right may ask the court to prohibit the conduct in question. Upon that request the court may confer on the creditor the power to take the necessary measures. In cases of imminent danger the creditor may take the measures of its own accord without waiting for such a power to be conferred on it. The creditor may claim from the owner the expenses it has borne for the measures; it further acquires, in respect of those claims, a right of pledge over the immovable that arises without any need for registration and ranks ahead of other registered encumbrances.
If, notwithstanding all these provisions, the value of the pledged immovable has fallen, the creditor may ask the debtor to provide other security for its claim or to have the immovable restored to its former condition. Where sufficient security is not provided within the period allowed by the court, the creditor may demand payment of that portion of the claim which corresponds to the shortfall in security.
Pledge over Movable Property
In a pledge over movable property the subject of the pledge may be a movable asset, an animal, a right or a claim. Here too the holder of the right of pledge who is unable to obtain its claim will be able to obtain satisfaction by having the value forming the subject of the pledge sold.
Principles Governing the Pledge over Movable Property
The Principle of Accessoriness to the Claim
A pledge over movable property is accessory to the claim it secures. Invalidity of the claim renders the pledge invalid as well; when the claim comes to an end the pledge is likewise extinguished.
The claim becoming time-barred, by contrast, does not extinguish the pledge. Even where the limitation period has expired, it remains possible to recover the claim by realising the pledged asset.
Where the claim is assigned, the right of pledge also passes to the new creditor taking the assignment.
The Principle of Publicity
In a pledge over immovable property publicity is secured by registration in the land register. Since there is no question of registration in a pledge over movable property, the vehicle of publicity is delivery. Possession of the pledged asset must be transferred to the creditor or, where the parties have so agreed in the contract, to a third person.
The Principle of the Protection of Reliance
Even where the person creating the right of pledge in fact lacks the power of disposal, a person who establishes possession in good faith over the movable forming the subject of the pledge acquires the right of pledge to the extent that the acquisition is protected within the framework of the provisions on possession.
The Principle of Specificity
The movable, animal, right or claim forming the subject of the pledge must be determined.
The point of departure from the pledge over immovable property is the following: the amount of the claim secured need not have been determined at the time the pledge is created. What matters is that the claim be capable of being measured in money at the moment the sale takes place.
The Principle of the Indivisibility of the Security
The scope of the security burden takes in not only the asset forming the subject of the pledge but also its integral parts and appurtenances.
The pledge constitutes security in respect of the whole of the claim. Any obligation on the holder of the right of pledge to return the pledged asset can arise only where the debt has been paid in full.
The Principle of Priority
More than one pledge over movable property may be created over the same item of property. What is decisive in a pledge over immovable property is the rank in which the pledge is situated; in a pledge over movable property, by contrast, the criterion is the date on which the pledges were created. The pledge created earlier comes first in order. Accordingly, out of the price obtained as a result of realisation, the claim of the pledgee creditor with the earliest date is met first.
Termination of the Pledge over Movable Property
Where the right of pledge is extinguished through payment of the claim or for some other reason, the creditor becomes obliged to return the pledged movable to the person entitled. For that obligation to arise the creditor must have obtained the whole of its claim. Where part of the debt has been paid, the creditor is not obliged to return the pledged movable or any part of it.
Since delivery is a constitutive element in a pledge over movable property, the creditor’s losing possession and coming to a position in which it cannot recover the asset from the third person holding it brings the pledge to an end. Where, however, the asset has with the creditor’s consent been left in fact to the control of the pledgor alone, the effects of the pledge are suspended for that period; in such a case the right of pledge is not taken to have come to an end.
Liability of the Holder of the Right of Pledge
The pledgee creditor holding the right of pledge is liable for loss arising from the pledged movable being lost, destroyed or reduced in value. The creditor can escape liability only if it proves that it was not at fault in the occurrence of those outcomes. A creditor who of its own accord transfers the pledged movable to another person or pledges it anew is held liable for all loss arising from that conduct.
Frequently Asked Questions on the Right of Pledge
Is a mortgage agreement drawn up before a notary public valid?
Agreements creating a pledge over immovable property, mortgages included, must be concluded in official form. The power to confer official character on the agreement belongs to the land registry directorate. A mortgage agreement drawn up before a notary public therefore carries no validity.
Is the spouse’s consent required when a mortgage is created over the family residence?
The Civil Code does not permit one spouse to restrict the rights over the family residence without obtaining the consent of the other. Since the creation of a mortgage is likewise a transaction restricting the rights relating to the family residence, obtaining the spouse’s consent is essential. Where consent is absent, the mortgage will be invalid.
Is delivery of the assets mandatory in a commercial enterprise pledge?
The basic rule in a pledge over movable property is delivery of the asset. The requirements of commercial life have nevertheless made a different practice necessary in respect of the pledging of commercial enterprises. In a commercial enterprise pledge, the movables belonging to the enterprise may be made the subject of the pledge by being registered in the Trade Registry. The owner of the enterprise is thereby able to carry on its commercial dealings without transferring possession of the assets with which it conducts its activity.
Independent Legal Assessment
In pledge disputes the element determining the outcome is most often not the economic size of the security but the scrutiny of form and specificity at the stage of creation. A pledge over immovable property created without compliance with official form, or a pledge over movable property in which the element of delivery has not been realised, may afford the creditor security on paper while remaining ineffective at the enforcement stage.
Not only the creation of the security but also its preservation throughout its existence calls for separate monitoring. In a concrete file the following headings should be prioritised:
- Scrutinising at the stage of creation whether the pledge agreement satisfies the requirement of official form
- Showing the claim in the land register in Turkish currency and, where necessary, in the form of a maximum-amount mortgage
- Documenting that delivery has in fact taken place in a pledge over movable property and that possession has been maintained
- Obtaining the spouse’s consent before the transaction in the case of immovables having the character of a family residence
- Analysing the relationship of rank and order by reference to a realisation scenario and, should the value of the security fall, asserting a claim for additional security within time
Independent Legal provides advisory services and litigation support in disputes arising out of the law of pledges, from the structuring of security arrangements through to the realisation of the pledge.