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Important changes to mortgage law

The Act on the Land and Mortgage Registry Books and Mortgage is among the key laws governing the day-to-day practice and operations of banks and their clients in Poland. It sets forth the principal rules according to which the Land and Mortgage Registry Books are maintained by the courts and on which entries are made to the Books. At the same time, it defines a mortgage under Polish law, what kind of receivables (claims) may be secured thereby and what types of property or rights a mortgage may encumber.

A landmark and long-awaited change to the Act entered into force on February 20 2011, bringing among others about two particularly significant changes.

First, the division between the so-called ordinary and ceiling mortgages has been abandoned. The change has been warmly welcomed because even seasoned practitioners have sometimes had difficulties in deciding which one to apply in order to properly secure more sophisticated structures (though, over the years, some commonly-accepted practices have been developed).

Following the recent change, there will be only one type of mortgage, resembling the previous ceiling one. Such mortgage will secure a receivable up to a specified (maximum) amount. In addition to the principal, interest and other related claims may also be secured. The parties must only remember to set the maximum amount at a level sufficient to cover all claims intended to be secured.

Before the change to the Act entered into force, securing of receivables in syndicated financings was always an issue. This was due to the "one instrument – one receivable" principle, which – although formulated before World War II – dominated in Poland with respect to all types of in rem security instruments until very recently. Under that principle, one mortgage could secure only one receivable. Thus, to secure a syndicated financing the parties usually had to rely on a parallel debt (or similar) structure, which, while commonly known still remained untested. Alternatively, parties had to establish separate mortgages for the benefit of the creditors individually, which was a costly exercise.

The amended Act provides for a relief in this respect, too. It is now possible to secure numerous claims of one creditor by one mortgage. And if there are more creditors – they may appoint a so-called mortgage administrator who will hold the mortgage in its own name but for the benefit of all the secured creditors. It is worth noting that the mortgage administrator need not be a creditor – a third party may act in this capacity as well.

Unfortunately, however, the provisions on the mortgage administrator have not been aligned to those pertaining to the pledge administrator under the Act on Registered Pledge and Pledge Registry. In particular, it still remains to be seen how practice and the courts will construe a requirement that the receivables being secured by a mortgage established for the benefit of a mortgage administrator serve "the purpose of financing of the same venture".

Borys D Sawicki

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