In recent years, there has been a significant increase in residential development, as well as a substantial rise in the financing of real estate acquisitions through mortgages, regardless of whether the purchase is made for investment purposes or for personal use. A mortgage is a form of security by means of which the performance of the debtor’s obligation to repay a debt is guaranteed.
In practice, the mortgage has established itself as one of the most widely used means of securing obligations. It is most commonly used in connection with bank loans, but it may also be created in favour of private individuals and businesses in relation to various civil and commercial transactions.
Although the concept is widely known, clarifying certain legal aspects of mortgages may provide clarity and reassurance to prospective mortgagors or purchasers of mortgaged property, as well as save time, costs and effort.
What is a mortgage and how is it created?
A mortgage is an encumbrance over immovable property. It serves as security for a monetary obligation. Through it, immovable property is provided as collateral to ensure that the obligation will be performed. If the debtor fails to repay the debt, the creditor is entitled to satisfy its claim from the value of the mortgaged property through a forced sale.
- The mortgage follows the property over which it is created
This means that if the property is transferred to another person, the mortgage remains in place, and the new owner acquires the property encumbered by it. It grants the mortgage creditor priority in satisfying its claim from the value of the property in the event of non-performance by the debtor.
- Under Bulgarian law, there are two types of mortgages:
- a contractual mortgage, which is created by agreement between the parties; and
- a statutory mortgage, which arises by operation of law in expressly provided cases, for example in favour of a seller of property for the unpaid portion of the purchase price.
- A contractual mortgage is created by a notarial deed
A contractual mortgage is created by agreement between the creditor and the owner of the property serving as security, but it takes effect upon its registration in the Property Register. It follows that, in order to produce legal effect, it is necessary not only to comply with the notarial form of the mortgage agreement, but also to register the mortgage in the relevant registers.
The notarial deed must clearly identify the parties, the secured claim and the immovable property. However, for the mortgage right to arise, the deed must be registered in the Property Register. From that moment, the mortgage becomes enforceable against third parties and determines the ranking of creditors if there is more than one mortgage over the property. A first-ranking mortgage provides the most secure form of collateral, insofar as the debt corresponds to the value of the property.
Mortgage securing a third party’s debt
It is not necessary for the owner of the property to be the debtor under the obligation. The law allows a property to be mortgaged to secure a third party’s debt. The owner of the property is referred to as the mortgagor. The mortgagor does not owe the debt personally but agrees that their property will serve as security for the obligation of another person. Such situations are frequently encountered in practice. For example, parents may mortgage their property to secure their child’s loan, or one commercial company may secure the obligation of another company.
If the principal debtor fails to perform their obligation, the creditor has the right to enforce against the mortgaged property. The mortgagor has the procedural rights of a debtor and may raise against the creditor all defences that the principal debtor could invoke—for example, that the obligation has been discharged or that it is time-barred. The mortgagor is liable for the third party’s debt only with the mortgaged property; their other assets may not be subject to public sale in respect of that debt.
If the mortgagor pays the debt or loses the property through a public sale, the law grants them the right to seek recourse against the principal debtor for everything paid on their behalf.
Mortgage securing a future claim
A mortgage may be created to secure an obligation which has not yet arisen at the time of the agreement. Judicial practice accepts that the law allows for the creation of a mortgage securing a future claim—such a mortgage is not void, but is created under a suspensive condition, namely that the claim arises.
Although there is no express provision providing for the conclusion of a contractual mortgage under such a suspensive condition, the law does not exclude this possibility. Article 153 of the Obligations and Contracts Act provides for the satisfaction of mortgage creditors from the value of property over which several mortgages have been created, even if the secured claim had not arisen at the time of their creation. Accordingly, the law recognises as valid a mortgage agreement concluded before the secured claim has arisen, provided that all other mandatory requirements for the validity of the mortgage agreement are met. In this respect, see Judgment No. 73 of 07 March 2000 in civil case No. 1157/1999 of the Supreme Court of Cassation.
The law provides that the creation of a mortgage is invalid if, whether in the mortgage agreement (the notarial deed), in the application for registration of a statutory mortgage, or in the act on the basis of which it is filed, there is uncertainty as to: (i) the identity of the creditor, the owner or the debtor; (ii) the identification of the property and the secured claim; or (iii) the amount for which the mortgage is created.
Accordingly, the future claim must be clearly identified; the parties to the future legal relationship and the legal basis of the claim must be specified, and the secured claim must be determined or determinable as to amount.
The mortgage produces effect from the moment the respective claim arises. Judicial practice accepts that a mortgage agreement may be concluded before, simultaneously with, or after the agreement from which the obligation arises. Accordingly, it is possible to secure by mortgage a claim that has already arisen.
Mortgage over a right to build and over a future building
The subject of a mortgage may be a separately identifiable property—land, a building, a separate unit or an ideal share thereof, including a limited real right, such as a right to build, provided that the property or the right is transferable and belongs to the mortgagor. Otherwise, in the event of a public sale, the creditor would not be able to obtain preferential satisfaction from the price of the mortgaged property. For the same reason, publicly owned property, usufruct rights, and non-independent limited real rights (e.g. easements) cannot be mortgaged.
Accordingly, a mortgage may be created not only over land or an already constructed building, but also over a right to build. A right to build may be mortgaged upon its creation as well as at a later stage, and the mortgage covers not only the property in its condition at the time of creation but also extends to all subsequent improvements within the scope of the permitted development. Thus, where a right to build is mortgaged, the mortgage also extends to the building to be constructed on the basis of that right. This occurs when the building reaches the “rough construction” stage.
Where land is mortgaged, the mortgage may also extend to future accretions to the property in the form of buildings constructed during the term of the mortgage, provided that it has been agreed upon conclusion of the mortgage agreement that the mortgage will also apply to such future accretions in accordance with an approved investment project. This includes the future building together with the separate units within it—residential units, offices, garages and others. In such cases, the mortgage right arises upon completion of the building, and from that moment the creditor may seek satisfaction by enforcing against the developed property, provided that ownership at that time belongs to the person who created the mortgage. According to judicial practice, this constitutes an agreement subject to a condition, with the relevant moment being the completion of the building at the “rough construction” stage, evidenced by Act Form 14. This means that if, after registration of the mortgage, a separate unit in the building is sold, the new owner will acquire that unit encumbered by the mortgage.
What happens in the event of a change in property boundaries under Article 16 of the Spatial Planning Act
A specific situation arises in proceedings under Article 16 of the Spatial Planning Act, where property boundaries are altered in connection with amendments to development plans. In such proceedings, owners provide part of their properties for the construction of public infrastructure—such as streets or utilities—and in return receive newly formed regulated land plots, with a reduction in the area of their properties up to a percentage determined by law.
The law expressly provides that the mortgage is not extinguished. It automatically transfers to the newly formed property that replaces the original one. In this way, the stability of the security is preserved, ensuring that the creditor’s rights are not affected by planning changes.
Enforcement of the creditor’s rights under the mortgage
If the debtor fails to perform their obligation, the mortgage creditor may initiate enforcement against the property by taking the steps provided by law. The creditor is entitled to obtain a writ of execution and to commence enforcement proceedings before a bailiff in order to realise its claim through the mortgaged property. A restriction on disposal is imposed, an inventory is carried out, and the market value of the property is determined. The proceedings are conducted before and through a private enforcement agent.
The mortgage gives rise to limited proprietary liability of each current owner of the mortgaged property. The proceeds from the public sale of the property are distributed among creditors, with the mortgage creditor being satisfied with priority over other creditors. Where more than one mortgage exists, the ranking between creditors is determined by the date of their registration. Upon completion of the sale, the purchaser acquires the property free of mortgage encumbrances, as these are extinguished by operation of law.
This article does not constitute legal advice. If you require legal assistance, please contact us.
