Cyprus: Foreclosure Law setbacks resolved

Author: | Published: 9 Dec 2014
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Andreas Neocleous & Co

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Elias Neocleous
The Memorandum of Understanding that Cyprus concluded with its international creditors in 2013 committed the government to introducing a so-called Foreclosure Law. This legislation seeks to amend the procedure for the forced sale of mortgaged property to allow for private auctions. The initial target date was the end of 2013, but the deadline was extended to require legislation to be enacted by mid-2014 and implemented by the end of the year.

The existing system allowed recalcitrant debtors to delay the realisation of mortgaged property for years by means of strategic applications to the courts for orders to cancel auctions, by objecting to the reserve price set by the Land Registry or on a number of procedural grounds. This would mean that the average time taken to enforce a mortgage would be 10 years, and a determined debtor could extend the delay well beyond that.

Many politicians and others regarded the proposed Foreclosure Law as draconian, warning that it could have severe social consequences, and sought to insert safeguards (for example, to protect family homes). The troika of providers of international financial support (the European Central Bank, the European Commission and the International Monetary Fund) had made it clear that they viewed enactment of the Foreclosure Law as a precondition for the release of the next tranche of funds, and on September 6 2014, after many delays, the House of Representatives finally passed the Foreclosure Law in the form the troika required.

However, at the same time it passed six other bills that would inevitably mitigate the effects of the new law. The troika decided these were incompatible with the terms of the financial support package, leading it to suspend the disbursement of the next tranche of financial support. Two of the additional bills were sent back to the House of Representatives for reconsideration, and were subsequently dropped; on advice from the attorney general's office, the other four were referred to the Supreme Court for a judgment as to whether they were compatible with the constitution.

Article 140 of the Cyprus constitution allows the President to refer any law or decision passed by the House of Representatives to the Supreme Constitutional Court (since 1964 this jurisdiction has been exercised by the Supreme Court) at any time prior to its promulgation for its opinion on whether the law or decision or any specified provision of it is inconsistent with any provision of the constitution. If, having heard the arguments on both sides, the Supreme Court decides that the law or decision or any provision in it is inconsistent with any provision of the constitution, the law, decision or provision may not be promulgated.

On October 31 2014, the Supreme Court unanimously ruled that the four bills referred to it were unconstitutional, as they violated the principle of separation of powers. The Supreme Court's decision gives the banks a much-needed tool for dealing with non-performing debts, and clears the way for the release of the next tranche of financial support.

Elias Neocleous