What to Do If a Property Is Encumbered with a Mortgage or Right of Use?

Many inherited and co-owned properties are not “free” of encumbrances – often, a mortgage or a right of use is registered against them. This raises questions such as: “Can such a property be divided?” and “How do these encumbrances affect the value and rights of the heirs?” In this article, we will examine the legal specifics and the consequences for the co-owners.

Mortgage on the Property

According to Articles 149 and following of the Obligations and Contracts Act (OCA):

• A mortgage is a real security interest on real estate for a given credit (most often a bank loan).

• It “follows the property” – i.e., if the property is divided or sold, the mortgage remains registered and binds the new owner.

• In the division of inherited property with a mortgage, the court takes the encumbrance into account, but the mortgage is not automatically extinguished by the division. The creditor (the bank) retains the right to direct enforcement against the mortgaged share, regardless of which heir has received it.

Right of Use on the Property

The right of use is regulated by Articles 56–62 of the Property Act (PA).

• This is a limited real right that grants the user the right to inhabit or use the property without being its owner.

• The right of use is non-transferable (cannot be sold or donated) and is for life – it terminates upon the death of the user (Article 59 PA).

• In the division of a property subject to a right of use, the co-owners must take into account that actual use remains restricted until the end of the user’s life. This affects the practical value of the property.

Specifics in the Division Proceedings

In dividing such a property, the court:

• Establishes the registered encumbrances (mortgage, right of use, seizure, etc.) through a check in the Property Register.

• The division may be carried out, but the heirs accept the property with the existing encumbrances.

• If the property is sold at public auction (in cases where it cannot be divided in kind), the encumbrances are reflected in the sale.

Case Law of the Supreme Court of Cassation (SCC): Judicial division does not extinguish the mortgage and does not remove the right of use – they remain registered even after the division.

Impact on Market Value

• A mortgaged property is less attractive to buyers, as the buyer assumes the risk of potential enforcement by the creditor.

• A property with a right of use has a significantly lower market value, as actual use is restricted.

• Court-appointed experts must take these circumstances into account when assessing the property.

Conclusion

The division of property with a mortgage or right of use is entirely possible, but co-owners must be aware that the encumbrances remain in force even after the division. This affects the actual market value of the property and the possibilities for disposal.

This article does not constitute legal advice or a legal opinion related to a specific case or subject. If you or your relatives are involved in such a complex matter, you should consult a lawyer for assistance.