Discharge of a mortgage

The court has power to issue an order for the cancellation of a mortgage when the obligation secured has been paid off or ceased to exist

A mortgage creditor has an obligation to cancel a mortgage encumbering a property when the obligation to secure it has been paid off or ceased to exist. In practice, what happens is that the banking institutions keep the mortgages they have registered, with the aim of being able to use them in the future as collateral for a new loan that the debtor may request. However, where the mortgagee requests the cancellation of the mortgage and discharge of the property, the bank is obliged to comply and cancel it.

If the mortgagor does not extinguish the mortgage or refuses to accept payment of it or if the mortgagor cannot be reached, is a company which has ceased to exist, or has died and the personal representative or heirs are unknown, the mortgagee may apply to the district court for an order cancelling the mortgage. The application is submitted with an affidavit and all accompanying documents and notices to the satisfaction of the court, which in the circumstances may issue an order it considers just regarding the cancellation of the mortgage.

The provision of article 36 of the Transfer and Mortgage Law, Law 9/65, is related to the right to cancel a mortgage through the court. The article refers to the procedure followed on the basis of article 35 for the cancellation of a mortgage and is applicable only in the cases expressly mentioned in article 36, i.e. in the event that the secured obligation has been paid off or ceased to exist and the mortgagor refuses or neglects to extinguish the mortgage. When a certified copy of an order cancelling a mortgage is presented to the director of the land registry, they must execute it and notify each mortgagor, both of the mortgage that is being cancelled and of any subsequent mortgage created on the property.

The Supreme Court in the judgement it issued in C.A. No E87/2022, dated March 16, considered such an issue following an appeal by a banking institution against the decision of the court of first instance. Specifically, a mortgage debtor engaged in land development submitted an application for the issuance of an interim order for the cancellation of two mortgages on two properties and a plot of land, in the context of a lawsuit brought against the banking institution. The debtor in his action sought the issuance of declaratory judgements and declarations, as well as general and special damages for breach of duty, fraud, deceit and/or negligence.

The court of first instance, examining the application decided that it was not right for the mortgage debtor, although he had not yet paid the realted debt and there remained a small balance, for the mortgagor to keep the mortgages on the properties worth €4 million, as well as the personal guarantees of the guarantors, as collateral for a debt of only €250.000. Therefore, it issued a mandatory order for the banking institution to discharged the mortgaged properties from the mortgages within one month, applying the provisions of article 36 of Law 9/65 and 32 of Law 14/60.

The Supreme Court decided that the decision of the court of first instance was not correct and did not contribute at all to the active handling of the disputed issues. It also highlighted the key effect it could have on the course and outcome of the lawsuit, the fact of the identical claim of the lawsuit and the issuance of a similar order in the interim application. The court emphasised that the first instance approach was not permissible by the jurisprudence, pointing out that article 36 of the Law provides restrictively for the cases in which a mortgage debtor can, by application, claim the cancellation of a mortgage that was legally registered but its cancellation is justified. The cases mentioned are when the obligation secured by the mortgage has been paid off or has ceased to exist. In this case, as in the cases cited in the jurisprudence, the claims to extinguish the mortgages could only be considered in the context of a lawsuit, since the claim of the mortgage debtor was that the mortgages did not correspond to reality and that no mortgage had ever been signed.

By extension of the jurisprudence, the Supreme Court held that with the order issued by the court of first instance and without the appropriate and proper reasoning on the matter, the banking institution would cancel the mortgages without the mortgagee paying off the debt and it could be considered to have pre-decided the merits of the action. That is, the mortgages granted as collateral for the mortgage loan and/or for the agreement to provide banking facilities, would be considered voidable, illegal and of no legal effect prior to the adjudication of the lawsuit. It therefore annulled the order issued by the court of first instance and ordered retrial of the debtor’s application.

George Coucounis is a lawyer practising in Larnaca and founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]