The mortgage burdens the share of the plot and the building and not the apartment

During the construction of apartment buildings, in their attempt to sell apartments, developers often facilitate buyers in securing a loan from a bank by offering a mortgage on a share of the plot or land that corresponds to the apartment. They believe they are helping the buyer and that the other apartments are not affected. In fact, the bank asks them to sign ‘standard’ documents that they sign without studying or getting advice on, without realising the obligations they are undertaking towards the bank. In the future, when it is too late, they will blame the bank for cheating them as they take on the debt themselves.

This practice is also shared by real estate agents who, out of ignorance, put future buyers of flats which are mortgaged in a difficult position. In fact, despite advice, they state that they know better and that only the apartment for which a loan was granted was mortgaged. They refer to assignment agreements by which banks acquire buyers’ rights under sale contracts and which they file with the land registry, ignoring that the mortgage deed is an encumbrance and that it is a separate agreement between the bank and the land developer.

In order to avoid rights of interested persons being affected, sellers should determine the coefficient of value of each apartment that will arise based on the town planning permit and deposit it with the district land office before the sale of any part.

Also, where a seller mortgaged a share to assist a buyer, they must secure from the bank for a new apartment buyer a statement acknowledging that the encumbrance created by depositing the sale contract at the land registry, in accordance with the provisions of the Sale of Land (Specific Performance) Law 81(I)/2011, will precede the existing mortgage. The relevant recognition and declaration will be valid and binding on the bank upon the submission of the sale contract at the relevant district land office. In addition, the bank must state that upon the issuance of the separate title deed for the apartment, it will release the apartment from the mortgage.

Repeatedly, land developers have made it difficult for new buyers of apartments with a previous mortgage burdening them.

In one case, a land developer ended up at a banking institution where he was shown a document in the form of a letter from him to the bank. It was a standard letter that the bank prepared and requested the seller sign, which he did without reading the document. He realised for the first time that with this document he was giving the bank the right to collect and transfer money from any of his accounts with the bank against or to repay the amount of the buyer’s loan. In essence, he undertook to repay the buyer’s loan if they did not pay installments on top of the mortgage he granted.

The developer complained about the treatment he received from the bank and asked for his restitution. The practice of signing any document without prior study and advice is not correct.

The new buyer, being diligent, insisted and asked the bank through the seller to issue a written declaration and acknowledgment that the encumbrance created by the filing of the sale contract would take precedence over that created by the earlier mortgage registered in the name of the bank. It is known that encumbrances such as a mortgage, a sale contract or a memo receive priority and validity depending on the time of their deposit and registration at the land registry. There can be an arrangement so that a sale contract filed later takes precedence over an earlier mortgage.

George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca. E-mail: [email protected], tel: 24818288