Access the Ukrainian version: Огляд законодавчих змін щодо кредитів та іпотек в Україні

On 01 November 2018, the President of Ukraine signed the Law "On Amendments to Certain Legal Acts of Ukraine on Resumption of Lending" (the “Law”) adopted by the Verkhovna Rada of Ukraine on 03 July 2018. The Law eliminates most of legislative gaps that existed in the loan and mortgage legal environment of Ukraine.

In this connection the Law introduced several significant changes that can be considered as rather positive for borrowers, inter alia, it: 

• Cancelled the requirement for a compulsory notarization of a pledge of the transport vehicles. The said change should reduce the cost of services for the bank clients who get a car by way of automobile loan financing.
• Changed the procedure of notification of the borrower about changing the interest rate on loan agreements with a variable or "floating" interest rate. From now on, the bank must notify the borrower about the change of such interest rate not 15 days prior such change as before, but within 15 days following the date when the new rate applies. However, if the borrower does not agree to such rate, he/she shall be obliged to repay the entire amount of the loan at the old interest rate, but not later than 30 days upon the receipt of the notice on the change of the floating interest rate index.
• The mortgagee (the bank) is obligated to release all encumbrances related to the mortgage within 14 calendar days upon the repayment by the borrower the mortgage obligation. At the same time, the Law does not establish any liability for the violation by the bank of such an obligation.
• In case of judicial foreclosure on the mortgaged property, the initial price of immovable property at which the mortgagee may, on the basis of a court decision, appropriate or sell the mortgaged property to a third person, may be determined by the court on the basis of a petition of the mortgagor or mortgagee. This will make it possible to avoid situations when the property passed into the ownership of the mortgagee at the price set in the mortgage agreement, which is used to be usually substantially understated in favor of the mortgagee. Moreover, if the mortgaged property, on the basis of a court decision, is subject to sale at a public tender in the process of enforcement proceedings, the price of the mortgaged property will be determined not by a court decision, as it was before, but by an appraiser in course of enforcement of a court decision. This will allow to sell the mortgaged property at real market prices for real estate. The maximum discount that a mortgagee can expect in the event of the acquisition by the owner of the mortgaged property on a public tender is 30% of the initial market value of the real property – in case of three consecutive public tenders were declared void.

At the same time, the Law introduces a number of innovations that significantly strengthen the position of Ukrainian creditors, in particular banking institutions:

• Some problematic issues related to the termination of the suretyship agreement have been resolved. Particularly, in accordance with the current version of the Civil Code of Ukraine, the surety was released from liability to the creditor in the event of an increase in the debtor's obligation (amount, term, interest rate, fines), if such an increase was made without the written consent of such surety. From now on, according to the changes introduced by the Law, in a similar case, the surety continues to be liable along with the debtor (borrower) in the amount that existed until the date of increase of the obligation secured by that surety. Also, the deadline for filing claims by creditors to the surety is 3 years from the date of maturity of the surety-secured obligation or 3 years from the date of the conclusion of the surety agreement (unless a specified period of the secured obligation is established).
• From now on, the liquidation of the debtor's legal entity does not terminate the surety, pledge or mortgage, if the creditor has managed to file a claim against the surety/pledgor/mortgagor before the record of liquidation of the debtor has been entered into the register of legal entities.
• The rights of the creditor in the process of foreclosure of the mortgaged property have been significantly strengthened. Until now mortgage holders were significantly limited in extrajudicial methods of foreclosure without the participation of the mortgagor (debtor)such as an appropriation of mortgage in mortgagee’s ownership and a sale of mortgage to a third person. One of the reasons for this was an express legislative provision, according to which, in case of extrajudicial foreclosure of the mortgaged property, all further claims of the mortgagee to the debtor ceased to be valid, even if after such foreclosure a significant portion of the loan remained unpaid. The new law abolishes this provision and, from now on, the mortgagee may extrajudicially foreclose both one or several mortgaged properties, as well as other movable or immovable property of the debtor or surety or file a claim with court for debt recovery.
• The new law eliminates the controversy concerning the mortgage of reconstructed property and unauthorized constructions and extended the regime of mortgage relations to the real property that has been reconstructed or constructed without authorization after the conclusion of a mortgage agreement. In addition, the mortgage will be automatically applied to newly created real property located on the mortgaged land plot.
• The list of methods for judicial foreclosure has been expanded; in particular, from now on, court may order to foreclose the mortgaged property by way of appropriation of the mortgaged property by the mortgagor or by way of its sale to a third person (previously a court decision could provide for only sale of the mortgaged property at a public tender in course of enforcement proceedings).
• The new law establishes the obligation of the transport vehicle registration authorities to check, at the time of registration, the existence of encumbrances over such a transport vehicle according to the State Register of Encumbrances of Movable Property.

It should be noted that the changes introduced by the Law will come into force since 04 February 2019 and will apply to contractual relations between creditors, debtors and their sureties that exist and arose on the basis of agreements concluded both after and before the date when the Law comes into force. The only exception is the provision on extrajudicial foreclosure of mortgaged property (which allows a creditor in the event of foreclosure of a mortgage to foreclose other property of the debtor and the mortgagor if the mortgaged property is not sufficient to meet secured liabilities), which will be applicable only to mortgage agreements concluded after the Law comes into force.