- Mortgage Currency
- November 5, 2014
- Law Firm: BSJP Brockhuis Jurczak Prusak Sp.k. - Warsaw Office
It happens in banking practice that a loan is granted in a foreign currency, whereas it follows from the contents of the loan agreement concluded by the parties that both payment of the loan to the borrower and then subsequently its repayment to the lender (bank) are to be effected in the Polish currency. The granting of a loan in a foreign currency is rather intended here to ensure that it is suitably adjusted for inflation through each and every time determining its amount in PLN based on the exchange rate set out in the agreement for the currency in which the loan is granted. This type of a banking practice, where the parties identify one currency for the liability and a different one for satisfying it, is in compliance with the principle of freedom of contract and is legally permissible. In this context it would be worth, however, to take a closer look at certain legal regulations relating to the above issue and above all keep them in mind when establishing a mortgage securing this type of debt, in particular when identifying the currency for the secured debt and the mortgage can to a different extent affect the scope of rights held by the lender against the personal debtor (borrower), and those held by the lender against the mortgagor (owner of the property encumbered by the mortgage).
Pursuant to the legal regulations currently in effect, unless otherwise agreed by the parties, the amount of the mortgage is expressed in the same currency as the debt secured (Art. 68 sec. 3 of the act on land and mortgage register and mortgage). This provision gives the parties considerable freedom as regards the currency in which the mortgage is to be established, for the mortgage does not have to be expressed in the same currency as the debt secured by it. The decision in respect of what currency to choose is left to the parties, where, importantly, they cannot for example choose an alternate currency or a different currency for different parts of the mortgage amount.
In practice, however, in the event of granting a loan in a foreign currency, the security in the form of a mortgage is also expressed in the same currency.
As a result of a provision set out in the loan agreement relating to repayment of the loan granted in the Polish currency (or alternatively at the same time allowing for repayment in a foreign currency), the creditor, when the borrower fails to voluntarily repay the loan despite the loan’s maturity, will generally approach its personal debtor with a demand for repayment of the loan in the Polish currency following its conversion at the applicable exchange rate as per the relevant provisions of the loan agreement. Undeniably, the lender does hold this type of a right, however, it is commonly forgotten that a similar demand cannot in principle be addressed to a mortgagor (not being a personal debtor) liable only on account of the encumbrance and only to the extent resulting from an encumbrance in the form of a mortgage established in a foreign currency. The creditor would only be able to demand repayment of the loan in the currency in which the mortgage is expressed, for the right of the creditor to demand from the debtor that the loan is repaid in the Polish currency (following its conversion at the applicable exchange rate as agreed in the agreement) as held by the creditor against the personal debtor under the loan agreement does not have a direct effect on the relationship of the creditor with the mortgagor.
The demand for repayment of the debt in the Polish currency issued to such mortgagor would theoretically, without changing the mortgage (changing its currency), be possible in the event that the creditor is able to demonstrate that changing the currency does not result in increasing the extent to which claims can be made against the property encumbered by the mortgage, for it is only then that the consent of the property owner is not required to change the mortgage. The above follows from the explicit wording of Art. 684 of the act on land and mortgage register and mortgage, where it is stipulated that if the property owner is not the personal debtor, the consent of the property owner is required in order to change the currency of the debt secured by means of a legal transaction increasing the extent to which claims can be made against the property encumbered.Furthermore, it is worth adding that the provisions of the act on land and mortgage register and mortgage currently in effect are more liberal than the previous legal regulations applicable up until 20th February 2011. At the time, a principle was in effect under which the mortgage currency and the currency of the debt secured by the mortgage had to be the same and could not under any circumstances be modified if chosen by the parties. Pursuant to the transitional provisions set out in the act amending the act on land and mortgage register and mortgage, the principle continues to apply to mortgages (to the extent identified there) established prior to the amendment effected.