Interpretative judgment of the Bulgarian Supreme Court on certain aspects of mortgage renewals

In March 2021, the Bulgarian Supreme Court issued an interpretative decision in case 3/2018 (the "Decision") that sheds light on the legal effects of the deletion of a mortgage on the grounds that the 10-year validity period since its registration has expired. It is mandatory for the Decision to be applied by all Bulgarian agencies dealing with the registration of real estate securities. It is also significant for lenders engaged in long-term finance projects who may face certain risks regarding the preservation of their securities if they fail to renew the registration of their mortgage on time. Below we briefly address the key aspects of the Decision.

Background

Under Bulgarian law, mortgage contracts have to be registered with the Real Estate Registry in order to be valid and enforceable. Once registered, a mortgage remains valid for 10 years. However, this may be extended both before and after the 10-year period has expired. Renewing the registration before expiration of the period secures the existing ranking position of the mortgage and ensures its continuous effect. If, however, the creditor renews the registration following the expiration of the 10-year period, the renewal only has effect from the date of the new entry. Failing to renew the registration on time thus leaves the creditor unprotected in the event that another security is registered or the property is transferred to a third party in the period between expiration of the 10-year period and the renewal.

The key aspect of the Bulgarian legal framework relevant for the Decision is that once the 10-year validity period of the mortgage registration has expired, interested parties may apply for its deletion. The effect of such a deletion and the possibility for a secured creditor to re-register a deleted mortgage have long been the subject of controversial discussions and inconsistent case-law. In its recent Decision, the Supreme Court provided clarity on the matter.

The Act of Deletion

The Supreme Court takes the view that the deletion is a technical act and does not, by itself, terminate the mortgage right. The act of deletion solely serves to inform third parties that the property is no longer encumbered by a mortgage. The mortgage right, as an accessory right, is generally terminated upon termination of the secured claim. The deletion from the register leads to a termination of the mortgage only in the cases explicitly listed in the law: when the deletion is based on creditor’s consent or on a court decision. A deletion requested by the debtor (or another interested party) based on the expiration of the mortgage registration is not one of the cases that results in termination of the mortgage. The Supreme Court clarified that the rationale behind the validity period of the mortgage registration is that in many cases the secured claim has ceased to exist within the 10-year period but that fact is not always reflected in the Real Estate Registry.

The Right to Re-register

In the opinion of the Supreme Court judges, while creditors who have omitted to renew the mortgage within the 10-year period should suffer the negative consequences of such omission, they may not be deprived of their real estate security altogether. Even after the deletion of the mortgage on the grounds that the registration period has expired, creditors are still able to re-register their mortgages in the Real Estate Registry. However, they will lose the preferential ranking vis-à-vis other creditors who have entered their securities prior to the re-registration. Furthermore, the re-registered mortgage will not have effect towards third parties (or their successors) who acquire the property prior to the re-registration of the mortgage.