A Closer Look at Mortgages

Definition of a Mortgage

A mortgage is asecurity interest granted by the borrower on real property in favor of a lender, usually a bank.

In practical terms, the mortgage serves as security for the lender in the event that the borrower defaults on payments. The lender can therefore force the sale of the property in order to recover the loan.

Mortgage Registration and Priority

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In France, a mortgage must be drawn up by a notary and registered with the Land Registry.

The priority of the mortgage

Sometimes, multiple lenders hold mortgages on the same property.
The priority rank is a fundamental criterion that determines the order of priority for repayment when the property is sold. The priority rank is determined simply by the respective dates on which the mortgages were registered.

It should be noted, however, that in the event of a company’s liquidation, the mortgage lender may be superseded by creditors holding a general lien—such as the Treasury or the company’s employees—and may potentially lose all or part of its claim.

How a Mortgage Works

A mortgage grants the creditor (lender) the right of priority and the right of recourse.

The right of first refusal

The right of preference allows the lender, in the event of nonpayment of a debt, to demand the forced sale of the property at a public auction.

In other words, if the loan agreement is not honored, the lender has the right to have the property sold and thereby recoup the loan amount from the proceeds of the sale.

Resale Royalty

Under the right of first refusal, as long as the mortgage has not been paid off, the borrower cannot sell the property without first repaying the loan, unless the new buyer agrees to accept a mortgaged property.

Example: To finance the purchase of a property, a real estate developer issues a €500,000 bond with a 12-month term, secured by a first-lien mortgage. If the borrower fails to repay this loan within the time frame specified in the contract, Raizers, acting as the bondholders’ representative, may seekforeclosure on the property in order to force its sale and thereby recover the principal.

Mortgage Discharge

One year after the loan’s final payment date, the mortgage registration automatically expires, but it may be extended if the loan has not been repaid.
In the event of a resale before the loan is fully repaid, the purchaser of the property will request the release of the mortgage, as the creditor may have the property sold even if the owner has changed. The mortgage is discharged with the mortgage registrar through a notary. This process incurs fees that are the responsibility of the seller.