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Foreclosure protection for deed-less buyers

Parliament has asked the Cyprus government to exempt from foreclosure buyers who bought property from insolvent developers and who risk losing their homes even though they may have paid for them in full.

Foreclosure protectionPARLIAMENT urged the government on Wednesday to find a solution for people who bought houses from insolvent developers without acquiring title deeds and who risk losing their properties even though they may have already paid for them in full.

The issue was raised during discussion of a bill tabled by main opposition AKEL to ban foreclosures in such cases.

“There is an emergency situation in the real estate market and people who meet their obligations are at risk,” AKEL MP Giorgos Loukaides said.

Many buyers are now in trouble as the crisis continues and property developers fold.

The developers’ land and buildings are counted as assets that need to be offset against their debt to banks, which gives lenders a claim on people’s properties that had been mortgaged by the developers even if the purchasers had paid the developer for them in full.

The banks readily lent to property developers, especially between 2004 and 2008, fuelling an unsustainable frenzy of activity which roughly tripled prices.

The outdated legal framework enabled property developers to sell on property that was already mortgaged.

Land registry official Charalambos Charalambous told MPs that issuing title deeds would not solve the problem since the developer’s mortgage takes precedent over that of a borrower.

A finance ministry official said a team of technocrats from the ministry, the Central Bank, and the land registry would assess the problem and the cost of these loans by the end of May.

She said the ministry was trying to find solutions but cautioned that AKEL’s bill provided an incentive to those who bought a house through a sales contract to never seek to acquire a title deed in an attempt to avoid foreclosure even where it might be warranted.

Editor’s comment

The Memorandum of Understanding (MoU) that has been agreed between the Cyprus government and the Troika of international lenders refers to this particular issue in Section C – ‘Legal framework for private debt restructuring’, paragraph 1.31. Namely:

The Task Force on registered, but untitled, land sales contracts will, by end-September, finalise a study assessing the magnitude of registered, but untitled, land sales contracts and underlying mortgages, in close cooperation with the working group reviewing the issuance of title deeds under the MoU provision 5.3. Based on this assessment and the recommendations developed so far, the Task Force will coordinate the work of the authorities involved and develop, by end-October, an action plan addressing at least,

(1) the removal of administrative hurdles for the transfer of title,

(2) the provision of tools to encourage the release of encumbrances on properties to facilitate title transfer, and

(3) the development of contractual standards for land sales contracts and connected loan and mortgage arrangements.

Readers' comments

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  • @Whirlybird Rtd on 2015/03/12 at 6:58 pm – It is generally accepted that the system is not fit for purpose. Even the Interior Minister Socrates Hasikos has acknowledged the problem and has promised to reform the Cyprus property industry to “protect and enshrine the rights of property buyers”.

    Whether this is yet another empty promise from a government minister remains to be seen.

    In your situation, the only things you really need to be concerned about are mortgages and other claims against the property that were taken out before your contract of sale was deposited at the Land Registry.

    For claim that were lodged after your contract was deposited, you will need a court order to have them removed. A friend of mine has been through this process and the judgement is made in the buyers favour providing the judge is satisfied that the seller and the purchaser didn’t collude in the sale to avoid the sellers debt.

    But in addition to these ‘memos’ there remains an issue if the seller hasn’t paid their taxes as the transfer cannot take place until the seller has paid Capital Gains Tax and Immovable Property Tax relating to the property. But this too can be overcome and I’m currently gathering information from someone who managed to get the deed to the property they bought even though the seller hadn’t paid their tax.

  • Whirlybird Rtd says:

    “Land registry official Charalambos Charalambous told MPs that issuing title deeds would not solve the problem since the developer’s mortgage takes precedent over that of a borrower.”

    Our developer owes the taxman approximately 92 thousand Euros plus 6 thousand Euros to another. This is written on a memo to our estate plus he has taken out 11 mortgages, the first starting 2 months after our registration date.

    The house was built in incremental stages with the relevant payments and on completion he was given a final payment, (no mortgage involved) this is probably the same as many other buyers. How can we and the others be held accountable for the developers debts when we have not borrowed from anyone??

  • @scruffy on 2015/03/12 at 2:51 pm – I can’t see any reason why the foreclosure law and the insolvency legislation couldn’t be retrospective. But we’ll have to wait and see what the law says when (and if) it’s approved by Parliament.

  • scruffy says:

    @ Nigel.

    Would I be right in thinking that, even if successfully passed, this AKEL proposal would be unlikely to affect those whose properties are on land that has already been foreclosed on.

    I’m sure I read somewhere that foreclosure can only be reversed by a court order.

    Perhaps you would have knowledge of this.

  • Johnny Cyprus says:

    Yes Nigel – how about “Siga Siga”? It really means doing nothing here though.

    Anyway, sorry to be a bit of a bore about this matter, but there is the other side of the coin.

    At the height of the market a few years back, buyers expected property prices to continue upwards for ever. Many bought with a view to selling the property on for profit as soon as they could find someone willing to pay more.

    They were quite happy not to have their title deeds, because, it was explained to them, that they would be able to simply transfer the sale contract, albeit at a higher price, together with it’s associated Specific Performance rights, to a second hapless buyer. Thus avoiding a huge sum in Property Transfer Tax on their own purchase. No need for anything so mundane as Title Deeds.

    Some did so and realized a handsome profit, passing the ‘baby’ onto someone else.

    Are we to feel sorry for everyone who planned this course, but was unable to find a buyer before the market collapsed?

    Not to mention all those buildings with rebar sticking out of the top, that are occupied, but not technically complete and consequently untaxed. There are many residencies and commercial properties like this blighting the landscape and no doubt the ‘owners’ may have been feeling pretty smug about their savviness to date.

    Should they be afforded special protection at the expense of those who trusted the Banks with their savings?

    They are rhetorical questions of course and I don’t expect an answer!

  • @Johnny Cyprus on 2015/03/12 at 12:34 pm – Yes, the date for the Task Force to complete the action plan was October 2014.

    The MoU issued in May 2014 said “The authorities established a Task Force to prepare a study assessing the magnitude of registered, but untitled, land sales contracts and underlying mortgages and to develop recommendations by end-June” so it had already slipped four months in the space of four months.

    But you should be aware by now that there isn’t a word in Greek that expresses the same sense of urgency as the Spanish word mañana.

  • @Johnny Cyprus on 2015/03/12 at 11:21 am – This lack of transparency is a major problem – the Land Registry refuses to advise you how they valued your property and you can’t even find out who owns the house/apartment next to yours.

    It’s crazy and the secrecy merely reinforces the atmosphere of suspicion and mistrust that pervades the Cyprus property market.

    The change that enabled potential buyers to find out if there were any issues with the title to the property they were thinking of buying was introduced in 2010 – long after the island’s property market collapsed.

  • Johnny Cyprus says:

    Nigel – your refer to the MoU above and for the sake of clarity, perhaps we should remind ourselves that the date for the Task Force to complete the action plan was end of October 2014.

    The Memorandum as a whole sets many other targets and tasks, and will make amusing reading for anyone inclined to peruse it.

  • Johnny Cyprus says:

    Mike,

    For a new build, I think if you were to ‘buy’ the plot and complete the transfer of title, ensuring that it was free of any mortgage, at the outset, then you would be in the clear.

    Of course you would have to obtain the title deeds and to pay the PTT on the value of the land. You would legitimately escape a very large part of the Tax in the process.

    You could then build your house in confidence.

    There is no other way of doing it safely.

    However, until recently you could not get access to the Land Registry records to check if was already mortgaged, unless you could prove that you had a stake in it. That was the ‘Catch 22’ of buying real estate in Cyprus. Many of us fell foul of it.

  • @Johnny Cyprus on 2015/03/12 at 10:39 am – It is indeed difficult to see how the mess can be sorted out. Currently we do not know how many houses are encumbered by developer mortgages and other debts preventing transfer of title to their rightful owners. (But I would have thought a couple of enquiries on the Department of Lands & Surveys database would give us the figures).

    You may recall that last December I helped organise a Title Deed lecture in Paphos by a former senior officer at the Department of Lands & Surveys. Those attending were asked to complete questionnaires. From an analysis carried out on those questionnaires around 80% of respondents had mortgages and memos preventing the transfer of title, another 12% had planning issues, 7% where the developer had gone into liquidation.

    I cannot say how accurately the questionnaires were completed – and it was a very small sample (around 50), but it may give an indication of the size of the problem.

  • @Mike on 2015/03/12 at 10:26 am – There is a very real risk of people losing their homes even though they have paid for them in full or are paying for them. There are two development companies at the eastern end of the island in liquidation – and the liquidator is advertising the whole site for sale even though people living in some of the houses have paid for them in full. (I have to add that others living on the development have stopped making their loan repayments as a consequence – why should they throw good money after bad?)

    Like you, I bought my house the ‘Cypriot way’ after being given some very good advice from an agent a few years earlier. The Property Transfer Fees I paid were based on the market value of the land. When we moved to Cyprus 13 years ago and built our home on the land it cost me around €50 to have the house added to the deed (it didn’t cost a fortune).

  • Johnny Cyprus says:

    Thank you for explaining that Nigel.

    Of course there was too, the old Specific Performance Law in place long before July 2011. In those days people were again assured by the Developers and their own Lawyers that SP gave them protection in the event of default on any developer loan secured on their property.

    This has all proved to be quite untrue. The current panic measures to afford some kind of retrospective protection are testimony to the misleading statements of the past.

    It is difficult to see how the mess can be sorted out.

    A large development is likely to have been undertaken by a limited liability company using extensive bank finance secured on the development as a whole. If the terms of the loan are not complied with, it is likely that the first recourse of the Bank would be to seize the share capital of the borrower, thus acquiring control and effective ownership of the development and wiping out the original developers in the process.

    The bank might then be able to sell the development on to a third party, reducing it’s exposure, but probably having to facilitate restructured loans to the new owners.

    Probably the development would be incomplete, with some empty plots, some part builds and some completed properties. Many might be partially or fully paid for by the public.

    However it is unlikely that any properties without title deeds could be completely released from the original imposed security. The lender would almost certainly have taken a big hit and have had to write off a shed load of debt.

    Unless the bank takes this loss without recourse to the original security and unless the new owners can obtain unsecured finance, then I don’t see how the buyers situation can be improved. It would be very difficult to release the security in such a restructuring.

    All this could have been avoided.

  • Mike says:

    Gentlemen

    Either I am missing something or perhaps people are (with justification) scared. As I understand it there was never a real risk of people losing their homes for which they had paid or for which they were servicing via mortgage. This was clear in the original MOU. Any property not being serviced for example due to Swiss Franc mortgage may have been at risk and subject to legal proceedings.

    On the subject of title not being applied for may I respectfully draw your attention to the traditional Cypriot way of doing things (as in my case). I own the land or buy it, either way I have unencumbered title for it. I then build a house on it to live in which costs me to do. Why would I want to pay more (much more) just for a bit of meaningless (to me) paper when I already own the land.

    My house is a home, not an investment, never to be sold and only to be used by family and future generations. Why would I want to pay thousands more for no benefit to me. I do understand the need for title if the property is bought as an investment or needing to be sold etc. That is clearly obvious but the point remains that this is Cyprus and that’s how we have worked (very effectively) for centuries.

    The modern phenomenon of buying property, using mortgages, using agents, using lawyers and Banks, have not integrated well with traditional ways of doing things and laws were and are lacking in that regard. There will always be con-artists who are just outright crooks in any major transaction but I do believe the intention of all this procrastination was and is to protect the big borrowers and banks as we knew that the honest buyers would have been ring-fenced in accordance with the MoU otherwise nothing would have been accepted by the troika even if our government had passed the legislation.

    Hopefully the honest foreign buyers will be given a way to be protected, I’m sure they will, but we do need to recover the billions owing be we know who.

    I’m rushing this so hope it has come out as intended.

  • @Johnny Cyprus on 2015/03/12 at 9:32 am – The major problem with the new Specific Performance Law (N81(I)/2011) which came into effect on 29th July 2011 was that it was not retrospective and therefore did not protect buyers who had been duped into buying property on mortgaged land prior to that date.

    Those who bought after that date are treated as secured creditors in the event of the company going insolvent – and they can also repay an element of the developer’s debt to secure a bank waiver when they purchases (assuming they knew there was a debt). More information at New specific performance law increases safeguards.

  • Johnny Cyprus says:

    As long ago as July 2011 the amended Sale of Property (Specific Performance) Law was passed by the previous government.

    Buyers of property subject to mortgages taken out by the Developers were assured that they were protected by the provisions of the amended Law.

    The Law was introduced with a great fanfare and assurances about it’s effectiveness were aired by ministers and property experts alike.

    Now it seems that there still remains much cause for concern on behalf of owners whose properties form part of the security for a NPL.

  • Peter Davis says:

    @ Scruffy,

    I worked out my title deeds would be C£6,250 on the cost of my home on the sale’s price in 2002.

    When the time came 10 years later it was now in euros. Fortunately we still have the capital to pay, many people by now were starting to feel the financial hardship and no doubt had spent the money set aside. To our developer, we paid his fees + fines of just over €4,000, a cost not calculated for 10 years earlier, but we could just manage that as well. The developer showed me a pile of over 110 deeds on his table where the owners either wouldn’t or couldn’t afford them.

    It was a happy day at the land registry we were to get ownership of our home, …until we were told by one official that the cost of the deeds was being recalculated to the 2007 price of our house, several thousand more Euros than we should have paid, we couldn’t afford. Why I asked? Because she replied, that is when it was worth the most. But it’s now 2012 and prices are still falling I pointed out.

    What then took place was then a period of illegal bartering and demands of blackmail, with words if you pay this now here, I will give you a discount, with a reply I either owe it or I don’t. We were on the point of walking out of land registry with my wife in tears, she was saying we will sell and leave, when I snatched the file off the table to the words “That file mustn’t leave the building” and I ran out of the building leaving my wife behind and my car in their car park, I ran through the town and down backstreets. The Land Registry had nothing left, I had all the proof with all the figures that were entered and then deleted, in a shop photocopying all whole file I got a phone call from my wife, our developer had turned up. If I returned the file and all the copies a deal could be made.

    Our developer spoke with the head honcho and a deal was struck where I paid an extra €400 above the 2002 purchase price and I got my deeds, they got the file back, the copies were destroyed and some of the originals also to cover up what went on. These were torn up in my presence.

    You can’t make people pay for their deeds, many haven’t got the money others just won’t pay ball and be fleeced.

  • Chris H says:

    Yes Scruffy, it is and has always seemed obvious to me how this and previous governments could generate income but never have.

    I like others have no mortgage on my property and paid for it fully in 2004 but have no Title Deeds. If government had got it’s finger out so to speak it could have arranged for people like me to pay for the title with requirements from the developer or use some of the tax they would receive to make sites suitable for title issue.

    This would have left them with less of an issue than they currently have BUT I suggest this hasn’t happened as all along they have not wanted to effectively shut the door on recouping loans of the developers against such homes then or in the future.

    This is just wrong and demonstrates why this country continues to suffer, some of the generated monies which I am sure would be in the millions could have gone to those Cypriots who are struggling. Behind every title is government revenue when deeds are issued but still they fail to move forward and help the Cypriot population.

  • Scruffy says:

    So, as I have been saying in other posts, thank God for the delays in passing the foreclosure laws. This is proof is it not, that the government had no intention of protecting this particular vulnerable group.

    This Task Force are only now going to assess the situation when in fact a study should have been finalised almost 6mths ago.
    Now they are going to have a look and hope to find a solution by end of May.

    Can anyone explain what the gobbledygook spouted by the Finance Ministry person actually means re those who would deliberately never seek to collect their deeds?

    Surely, this situation would be simply avoidable by making it illegal not to take possession of the deeds when they are available.

    I’m afraid that lame excuse sounds like the government trying to find excuses for not protecting those who find themselves in the title deed trap.

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