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Bank foreclosure: outline of the legal framework

Bank foreclosure: outline of the legal framework RECENTLY, heated discussions have been going on between bankers, Cyprus property owners and borrowers about the new foreclosure procedure being followed by Banks in Cyprus and notices that have been sent by Banks in Cyprus to borrowers for this purpose.

This discussion, which is partly based on rumours and misinterpretation of the Law, has caused stress and anxiety to a number of borrowers.

It is true that, in 2014, new legislation came into force in Cyprus, which amended the Transfer and Mortgage of Properties Law number 9/1965, expediting the foreclosure procedure in Cyprus.

According to the amending law number 142(I)/2014 and the subsequent amending laws number 87(I)/2018, 118(I)/2019 and 138(I)/2019, Banks in Cyprus can sell mortgaged properties via auctions and e-auctions after 120 days of arrears.

The Bank cannot proceed with the foreclosure of all properties for the purchase of which a housing loan has been granted by the Bank to the borrowers, but which is not secured by a registered mortgage.

The foreclosure procedure can be used only for a “mortgaged property”; namely, a property on which there is a registered mortgage in favour of the Bank.

It is well known that many properties in Cyprus do not have a separate Title Deed. The finance on such properties is usually a housing loan, not a mortgage. Such loans are secured by the assignment of the sale agreement to the Bank and often not by a registered mortgage.

Sometimes housing loans are also secured by a mortgage on a share of the land, upon which the property is constructed, with such mortgage having been registered with the developer’s consent. The provisions of the Law do not apply in cases where the Bank has a registered mortgage on a share of the developer’s land. Although the Bank can send out Notices in compliance with the Law, the Bank cannot proceed with the foreclosure of the borrower’s property as the mortgage is not registered on the property itself.

Borrowers who are in dispute with the Bank regarding their housing loan should be warned that as soon as they accept the transfer of the Title Deeds for their property in their names, the Bank will register the mortgage on the Title Deeds. The borrowers’ housing loan becomes a mortgage. The Bank will be then entitled to proceed with foreclosure of the mortgaged property.

Our assistance is offered to examine the Title Deed situation for borrowers, so as to ascertain if the property can be subject to foreclosure.

If there is a registered mortgage on the property, which is the subject of the housing loan, the Bank can proceed with its foreclosure, following the below procedure:

  1. After 120 days of arrears, the Bank can send out Notice “I” to the borrowers, asking the borrowers to pay the outstanding debt and informing them that the Bank will proceed to foreclosure.
  2. If the borrowers do not comply with the payment of the outstanding amount within the deadline stated in Notice “I”, the Bank can progress the foreclosure procedure, after serving on the borrowers Notice “J” accompanied by a statement of account, indicating the outstanding balance of the loan, interest and cost, and asking the borrowers to pay the outstanding amount within thirty (30) days.
  3. If the borrowers do not comply with the payment of the outstanding amount within the deadline stated in Notice “J”, the Bank can proceed with the service of the Notice “K” on the borrowers, informing them that the Bank will sell the mortgaged property via auction.
  4. The Bank will then proceed with the forced sale of the mortgaged property and use the proceeds of the forced sale against the loan balance.

The borrower or any other interested party can file an Application-Appeal before the Court, where the mortgaged property is located, asking the Court to set aside Notice “K” only for any of the following reasons:

a. The notice does not comply with the provisions of the law.
b. The notice has not been served properly.
c. The notice has been sent before the expiration of the thirty (30) days provided by Notice “I”.
d. An interim order has been issued by virtue of article 32 of the Courts’ Law of 1960 in favour of the borrowers (in a legal action filed by the borrowers against the Bank or in a counterclaim filed by the borrowers against the Bank).
e. An order has been issued for the security of the borrower by virtue of the Insolvency of Natural Persons Law.
f. The borrower has been accepted in the new government debt relief scheme for debts secured on principal private residences, known as Estia, provided that they comply with the eligibility criteria of the said scheme.

The most common reasons used to have a Notice “K” set aside are the existence of an interim order (reason d.) and Estia (reason f.).

As regards reason d. above, the borrowers can file an application before the Court, asking the Court to issue an interim order prohibiting the Bank from proceeding with the foreclosure process (a prohibition order), until the final adjudication of their claim or counterclaim issued against the Bank.

There are a number of conditions to be satisfied according to Cyprus law and caselaw as well as the principles of equity, in order to achieve the issuance of prohibition orders in Cyprus.

The borrowers will need to prove that they have a strong case against the Bank, that they have good prospects to succeed in their claims against the Bank and that, unless the prohibition orders are issued, it would be impossible for justice to be served at a later stage.

The borrowers will need to prove that, based on the balance of convenience, it is just and fair for such a prohibition order to be issued, otherwise the borrowers will suffer irreparable damages.

Borrowers have been successful in achieving the issuance of such prohibition orders for their mortgaged homes, but their success has not been extended to holiday homes or plots of land.

As regards reason f. above, the borrowers can apply to be accepted in the new government debt relief scheme for debts secured on principal private residences, known as Estia, provided that they comply with the following criteria:

  1. The loan agreement is secured with a 1st mortgage on the primary residence of the borrower, with a market value which does not exceed the sum of €350,000.
  2. At least 20% of the outstanding balance of the borrower’s loan was in arrears for more than 90 days prior to 30 September 2017 and up to the date of submission of the Estia application.
  3. The total household income of the borrower for the years 2017 and 2018 should not exceed the following thresholds:

– €60,000 for family with at least four dependent children
– €55,000 for family with three dependent children
– €50,000 for family with two dependent children
– €45,000 for family with one dependent child
– €35,000 for family without dependent children
– €20,000 for single parent households

  1. The household net assets of the borrower, excluding the primary residence, should not exceed the 80% of the market value of the primary residence (to be decided based on the market prices for the years 2016, 2017 and 2018 in accordance with the valuations of the Estia) and the threshold should not exceed the sum of €250,000.
  2. Any cash or deposits that exceed €10.000 or 20% of the net household assets of the borrower, whichever is greater in value, which do not secure any credit facilities of the borrower, will be set-off against the non-performing loan prior to the restructuring process.
  3. The borrower must be a citizen of the European Union with permanent and continuous residence in the E.U. since 2013. Continuous residence is not interrupted if the borrower was abroad:

(a) up to one (1) month per year,
(b) for health reasons,
(c) temporarily for studies.

Such an application for submission to Estia, based on the above criteria, may be submitted within the period of 3 September 2019 – 15 November 2019. Although there are current discussions to extend this deadline because a small number of debtors applied, the deadline has not been extended yet.

The final approval of the Estia applications will be provided by the Ministry of Labour, Welfare and Social Insurance that has been appointed by the Council of Ministers, on 1/11/2018, as administrator of the Scheme.

Once the borrower is accepted in Estia, the Bank will not be able to proceed with the foreclosure of its primal residence which is subject to the mortgage.

Our office can offer assistance to any borrower wishing to make such an application.

Our law firm specializes in banking litigation and urges any borrowers, who wish to take any action in connection with the above or to fully understand how the foreclosure law and Estia applies to them, to contact us.

Christiana Achilleos
Senior Litigation Lawyer
L.G. Zambartas LLC