Important news for secured creditors in Latvia
Secured creditors in Latvia may in the near future face a number of regulatory changes that will directly affect their rights.
Firstly, as of 31 December 2012, mortgage creditors do not have rights to request postponing collection against real estates and its sale via an auction. Secondly, the Parliament plans to supplement the sequence of satisfaction of claims, stating that separate claims are of higher priority compared to mortgage creditors’ claims. The said changes will directly affect the rights of mortgage creditors, reducing the chances of full debt collection, unless certain protective measures are performed in due manner and time.
The rights of the mortgage creditors till 31 December 2012 to postpone collection against real estates were initially prescribed as the transitional period for the protection of creditors’ rights. The purpose was to prevent selling real estates via auction when their value was the lowest. In practice, it meant that the mortgage creditor could prohibit auctioning of the real estate, if the collection against the property was initiated by another party.
Currently several proposals have been expressed to extend the said term. Furthermore, it is offered to state a retroactive effect thereto, namely, preventing the legal “gap” since 31 December 2012. Nevertheless, having considered the discussions expressed in the Parliament in respect to this issue, it is quite unlikely that the said term could be extended. In other words, creditors should already now take into account that the collection on the part of the third parties could be implemented against the pledged real estate at any moment, and the pace of the auction cannot be suspended.
Besides, there are amendments planned to the laws and regulations in respect of the sequence of the satisfaction of claims, stating that separate claims are of higher priority, compared to mortgage creditors’ claims. In practice, it means that mortgage creditors in the case of an auction will receive the sum of money with the prior deduction of the sum of priority claims thereof.
The most topical discussions in this respect regard the claims for the collection of the management fee of residential house and public utility payments. Having considered the arguments, it can now be stated with high probability that the managers’ claims would soon gain priority over the mortgage creditors’ claims. Therewith, the creditors should take into account the possible consequences of this regulation, and take the necessary measures to minimise the risks of impossibility of collection.
Analysing the discussions expressed during the period of development of the draft law, it can be concluded that, most likely, there would be such regulation adopted according to which the manager would be able to implement priority collection, if:
1) there is an effective court ruling on the claim;
2) the manager’s claims do not exceed 10 per cent of the money, received for the sold pledged real estate;
3) the value of the real estate will be lower than the value of the pledge.
At the same time, attention should be paid to the fact that there are also other proposals, providing for more considerable restrictions of the rights of mortgage creditors, for example, directing collection even without a court ruling, where the bailiff pays sums of money to the property manager merely on the basis of the notice regarding the amount of debt; establishment of real charge on the basis of the notice of the manager, which would automatically have priority over the claim of the mortgage creditor.
It is worth noting that the legislator also plans to introduce amendments to other laws and regulations, with the purpose to facilitate and make the implementation of managers’ claims more efficient. In this respect it is expected that the property managers:
1) will not be able to procrastinate bringing claims to court;
2) will be able to request the immediate securing of claims, corroborating the pledge right notes with the land register;
3) will be partially released from the payment of litigation and collection expenses;
4) will be able to implement the more rapid adjudication of collection matters in the court.
Also pursuant to the latest case law, the public utility providers reserve direct claim rights against real estate owners, if property managers have not settled payments with the respective public utility provider. Both the referred to amendments and the case law in the near future will increase the number of collection matters, and speed up their review. Therewith, mortgage creditors have to take into account the more frequent selling of the pledged properties via auction initiated by third parties.
In order to minimise the risks related to uncontrolled auctioning of pledged real estate and hence limited collection and losses, law firm TRINITI advises the mortgage creditors to:
1) make sure that the existing and future value of the real estate exceeds the value of the pledge (of course, in some cases it is easier said than done). An important suggestion here – in case several properties are used to secure one loan, it is advisable to divide the loan into parts corresponding to the values of the pledged properties;
2) ammend the loan agreements so that the creditor has the right to request early repayment of the loan, as soon as any priority collection features are detected, as well as to state the obligation of the debtor to systematically confirm the fulfilment of liabilities towards the priority creditors;
3) assess the options to change the procedure for granting loans, already initially stating the reservation of a certain amount of loan for possible property managers’ claims;
4) receive the authorisation of the debtor to review the data in the debtors’ register.