Owner of a mortgaged property: what are your rights and obligations?

Owning a property that is subject to a mortgage is a common situation, whether you have taken out a loan secured by the propertyor if you have acquired a property already encumbered by such a charge. While a mortgage does not dispossess you of your property, it does create a specific legal framework. You retain essential rights, but you are also bound by certain obligations towards the creditor, whose claim is thus secured. What can you do with your property? What are the limits that must not be crossed? And what happens if you are the new purchaser ("third party holder") and the previous owner's creditor comes knocking on your door?

The purpose of this article is to clarify your situation as the owner of a mortgaged property. We will go into detail about the rights you retain over your property, the obligations you have to fulfil so as not to prejudice the creditor, and the special position of anyone acquiring a property that is already mortgaged.

Rights retained by the owner (settlor)

Unlike other forms of security, such as a pledge, which can involve dispossession, a mortgage leaves the owner in full possession of his or her property. You continue to exercise the fundamental attributes of the right of ownership.

Firstly, you retain the right touser to use your property as you wish: to live in it, to carry out your professional activity, etc., subject of course to any town planning and co-ownership regulations.

You also retain the right to collect fruit of your property. This means that you can collect rent if the property is let, or harvest agricultural produce if it is farmed. This income belongs to you as long as the creditor has not initiated seizure proceedings.

In principle, you retain the right to arrange of your property. You can therefore sell it, give it away, exchange it, or even encumber it with new mortgages. However, this right of disposal is greatly qualified by the rights of the mortgagee. If you sell the property, the mortgage (if registered) will follow it into the hands of the new buyer (this is the "droit de suite" that we discussed earlier). Similarly, if you set up new mortgages, they will take precedence. after those already registered, giving them a lower priority. It is nevertheless possible, under certain conditions, to release the property from this charge.

In short, as long as the debt is paid regularly, the mortgage remains a "dormant" charge that only marginally impedes your enjoyment and management as a homeowner.

Limits imposed to protect the creditor

Although you retain control of your home, the existence of the mortgage imposes an essential obligation on you: not to reduce the value of the property that serves as security for the creditor. Acting in such a way as to depreciate the mortgaged property could have serious consequences.

You are not allowed to place material acts which would damage the very substance of the property or significantly reduce its value. Examples include the demolition of part of a building without equivalent reconstruction, unsafe conversion work that would weaken the structure, or abusive exploitation of resources (such as unjustified clear-cutting of a mortgaged forest). Creditors whose security has been compromised in this way can take legal action to put a stop to these actions and claim compensation.

A potentially serious consequence of the reduction in the value of the guarantee is the forfeiture of term. If, through your fault or negligence, the value of the property no longer sufficiently covers the secured debt, the creditor could, if the loan contract so provides (which is often the case), demand immediate repayment of the entire outstanding capital, in accordance with article 1305-4 of the Civil Code. Imagine having to repay your entire property loan all at once as a result of unfortunate work or a serious lack of maintenance: this is a risk that should not be overlooked.

Your legal acts can also be limited. This is particularly the case for leases any long-term leases you may grant on the property. In order to be fully enforceable against third parties (and therefore against the previous mortgagee), a lease with a term of more than twelve years must be published at the Service de la Publicité Foncière. If you grant such a lease after the mortgage has been registered, and without publishing it, the mortgagee will not be bound by it for its full term in the event of seizure and sale of the property; the lease could be reduced to the first twelve years, or even less depending on the circumstances (in accordance with Article 28 of the Decree of 4 January 1955).

In short, owning a mortgaged property means managing it "as a good father in the family", taking care to preserve the value of the asset that secures your lender's debt.

The special situation of the "third party holder" (purchaser of a mortgaged asset)

What happens if you buy a property (house, flat, premises, etc.) and discover that it is encumbered by one or more mortgages registered by the creditors of the owner? previous owner? Then you become what the law calls a "third party holder".

The third party holder is the person who holds the mortgaged property. without being personally obliged repay the original debt secured by the mortgage. You bought the property and did not take over the seller's debt. Nevertheless, as we have seen (Article 3), you are exposed to resale right the registered mortgagee (article 2454 of the Civil Code). This creditor can come to you to demand payment or seize the property you have just acquired.

Faced with this potentially uncomfortable situation, the law offers you several options when the creditor sends you the famous summons to pay or forfeit (provided for in Article 2456 of the Civil Code) :

1. Paying the debt : This is the easiest way to avoid foreclosure. You pay what the seller owes to the mortgagee. Of course, you then have recourse against your vendor to recover the sum you paid in his place.
2. Purge the mortgage : The purge procedure (articles 2462 et seq. of the French Civil Code) is a specific mechanism that allows the buyer to "clear" the property of mortgages registered by the seller's creditors. In simple terms, you officially notify all registered creditors of the price you have paid (or the estimated value of the property if you have received it by gift or bequest). Creditors then have a period (forty days) in which to accept this price or to request a public auction ("outbidding") if they consider the price to be insufficient. If there are no higher bids, the price is fixed, you pay it (or deposit it), and the property is released from mortgages. The law also provides for a form of "amicable purge" (article 2463 of the Civil Code), whereby an agreement is reached with creditors to allocate the price to their payment, thereby extinguishing their right to follow.
3. Suffering expropriation : You can choose to do nothing and let the creditor proceed with the seizure and auction of the property you own. You will then lose ownership of the property.
4. Opposing exceptions : In some cases, you can contest the creditor's action. The most notable exception isdiscussion exception (article 2455 of the Civil Code): if the original debtor (your seller) still owns other properties that are also mortgaged for the same debt, you can demand that the creditor seize these other properties as a priority before going after the one you have acquired. You can also claim that the mortgage is null and void, that the debt has been extinguished or, more rarely, that the mortgage has been cancelled. warranty exception if, due to a particular situation, the creditor suing you is also the one who owes you a guarantee against eviction (for example, if he is the heir of your vendor).

The choice between these options will depend on your financial situation, the amount of the secured debt in relation to the purchase price, and the value of any other assets of the debtor.

The rights of the third party holder in the event of expropriation

If you, as the third party holder, end up having the property seized and sold by compulsory sale, you are not totally helpless.

You are entitled to reimbursement of expenses. Article 2457 of the Civil Code states that you may recover, from the sale price, the expenses you have incurred for the necessary conservation of the property, as well as those that have increased its value (useful improvements), but only up to the amount of the capital gain recorded at the time of sale. If you have carried out work that has objectively increased the value of the property, you will not lose your entire investment.

What's more, and this is fundamental, you retain a recourse against your seller. Under the warranty of eviction (articles 1626 et seq. of the Civil Code), the person who sold you the property owes you protection against disturbances of rights by third parties, including actions by a previous mortgagee. You can therefore claim not only repayment of the price paid, but also damages for the loss suffered as a result of the eviction.

Being the owner of a mortgaged property, and even more so being the third party holder, raises complex legal issues and involves important strategic choices. A clear understanding of your rights and obligations is essential. If you are in this situation or are considering acquiring a potentially encumbered property, sound legal advice can help you navigate these complexities and protect your assets as effectively as possible. Do not hesitate to contact our firm to discuss your specific case.

Sources

• Civil Code (in particular articles 1305-4, 1626 et seq., 2454, 2455, 2456, 2457, 2462 et seq.)
• Decree no. 55-22 of 4 January 1955 reforming land registration (in particular article 28)