Bought a House That Turned Out to Be Mortgaged: The Supreme Court Explained How to Protect Your Rights

Purchasing real estate does not always guarantee the absence of legal problems, even after state registration of ownership rights. In practice, a new owner may discover a mortgage or re-registered encumbrance after buying a house, limiting their right to dispose of the property. The Supreme Court, in its ruling, clarified the appropriate method of judicial protection in such disputes and what claim should be made for effective protection of the owner's rights.

The plaintiff requested the cancellation of mortgage records and the prohibition of alienation, arguing that at the time of concluding the purchase agreement, there were no records of encumbrances in the state registers.

Case Summary

In October 2022, the owner of a residential house filed a lawsuit against JSC CB "PrivatBank" and a private notary to cancel the mortgage and encumbrance records.

The plaintiff stated that on 15 April 2015, she purchased a residential house with outbuildings under a purchase agreement. At the time of notarising the agreement, the notary checked the state registers, which contained no information about prohibitions on alienation, mortgages, or other property rights regarding this real estate. The absence of such encumbrances was also recorded in the purchase agreement itself.

Only in January 2022, after receiving an information certificate from the State Register of Property Rights to Real Estate, did the owner learn that in December 2017, a private notary of the Dnipro City Notarial District re-registered a mortgage and prohibition of alienation on her house.

The basis for state registration was a mortgage agreement concluded in August 2007 between the bank and the previous owner as security for a loan agreement amounting to $89,459 USD, with a term until 4 August 2017.

The plaintiff emphasised that she did not enter into any loan or mortgage agreements with the bank, was not a guarantor or property guarantor for loan obligations, and has no outstanding obligations to the bank.

After discovering the encumbrance, she contacted the bank requesting the grounds for its registration. Initially, the bank refused to provide information, citing banking secrecy. Later, the bank informed her that the previous owner had taken a loan secured by the mortgage on this house and that the loan debt remained unpaid.

The bank also notified its intention to enforce the mortgage if the debt was not repaid. Subsequently, the owner received a demand naming her as the mortgagor and stating that after a 30-day period, ownership of the mortgaged property would be registered to the bank.

The plaintiff argued that the re-registration of the mortgage was illegal since at the time of the purchase agreement, there were no encumbrance records in the state registers. She also noted that the bank initiated the termination of the mortgage in 2015, and a record of its termination was entered into the State Register of Property Rights.

Based on these circumstances, the owner asked the court to cancel the mortgage and prohibition of alienation records entered in December 2017.

Decisions of the Courts of First and Appeal Instances

The Vinnytsia City Court denied the claim. The court of first instance held that the claimant failed to prove the termination of the mortgage, as she did not provide sufficient evidence of full fulfilment of the loan obligation secured by the mortgage. The court also noted that the claimant did not present circumstances indicating that the private notary violated legal requirements during the state registration of the mortgage right and encumbrance.

Moreover, the court concluded that the claims were unproven and that the proper method of protecting the violated right in this case is a claim for termination of the real estate encumbrance.

The Vinnytsia Court of Appeal upheld the local court's decision but provided its own reasoning.

The appellate court noted that the dispute arose in connection with protecting the rights of a new real estate owner who acquired the property when there were no mortgage encumbrance records in the state registers.

According to the appellate court, the proper method of protection in such legal relations is a claim to recognise the absence or termination of the right, which effectively protects the new owner's rights.

The appellate court also pointed out that a bank letter served as the basis for terminating the mortgage in 2015, but significant discrepancies were found during its examination.

Specifically, the bank letter incorrectly stated the date of notarisation of the mortgage agreement and its registration number. Additionally, the document was signed by a bank official for whom the court found no evidence of proper authorisation. The appellate court believed these circumstances cast doubt on the bank's valid will regarding mortgage termination amid unpaid loan debt.

What the Supreme Court Decided

The Supreme Court, composed of judges from the Second Judicial Panel of the Cassation Civil Court, first emphasised that the dispute concerned the protection of rights of a residential house owner who, after purchasing the property, faced re-registration of a mortgage right and encumbrance based on a mortgage agreement concluded by the previous owner.

The claimant chose to seek protection by filing a claim to cancel the mortgage and encumbrance records entered into the State Register of Property Rights to Real Estate.

First, the Supreme Court addressed the claims made against the private notary.

The court recalled that, according to the principle of dispositiveness, the claimant determines the defendants, subject, and grounds of the claim, but establishing the proper defendant is the court's duty.

The Supreme Court reiterated the legal position of its Grand Chamber that a dispute over cancelling state registration of a property right is between the person who considers their rights violated and the person in whose name the property right is registered. Such a person is the proper defendant in the case.

The state registrar, including a private notary, is not a proper defendant in disputes about cancelling state registration of property rights or encumbrances. However, the state registrar is obliged to execute the court decision on cancellation regardless of their participation in the case.

Therefore, claims against the private notary were dismissed because they were filed against an improper defendant.

Turning to the claims against the bank, the Supreme Court thoroughly analysed the issue of the proper method of judicial protection.

The court noted that, according to Articles 15 and 16 of the Civil Code, everyone has the right to judicial protection of their violated right or interest, but the method of such protection must be effective, correspond to the nature of the violation, and ensure real restoration of the violated right.

The Supreme Court emphasised that an effective method of protection should exclude the need for repeated court appeals to achieve the same result. Therefore, choosing an improper method of protection is an independent ground for denying the claim.

The court highlighted the legal nature of a mortgage, noting that it serves to secure an obligation with real estate and restricts the owner's right to dispose of the property. A key characteristic of a mortgage is that the encumbrance does not cease solely due to a change in ownership.

The Supreme Court also referred to the legal position of its Grand Chamber, which states that merely removing a mortgage record from the state register does not terminate the mortgage, as the Law of Ukraine "On Mortgage" does not provide for such grounds for termination. Similarly, cancelling a court decision that formed the basis for removing the record does not reinstate the mortgage, as its validity depends not on the registry entry but on the existence or absence of legal grounds for termination.

The Supreme Court emphasised that if a property owner or another interested party believes a mortgage right has terminated or never existed, the appropriate method of protection is a claim to have the mortgage right recognised as terminated or absent.

A court decision granting such a claim, in accordance with paragraph 9 of part one of Article 27 of the Law "On State Registration of Property Rights to Real Estate and Their Encumbrances," provides the basis for state registration of mortgage termination.

The Supreme Court further noted that a state registrar's decision, once the relevant entry has been made in the State Register of Property Rights, exhausts its effect. Therefore, unilateral cancellation of the registration record is not a proper method of protecting rights in such circumstances.

In the context of this case, the appropriate method for a new owner to protect their rights, if they believe the registered mortgage right is absent, is to file a claim against the person in whose name the mortgage right is registered, seeking recognition of the absence of such a right.

Given that the plaintiff filed claims to cancel the mortgage and encumbrance records rather than a claim to recognise the absence of the mortgage right, the Supreme Court concurred with the lower courts' conclusions regarding the selection of an improper method for protecting the violated right.

Consequently, the Supreme Court dismissed the cassation appeal and upheld the lower courts' decisions, amending their reasoning concerning the proper defendant and the appropriate method of protecting the right.

The cassation court ruling in case No. 127/22533/22 takes legal effect from the moment of its adoption, is final, and is not subject to further appeal.

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