1. Subsequent hypothec (pledge) which disregards the previous hypothec, in particular through stating in the subsequent hypothec agreement that ‘there is no prohibition in respect of the pledged buildings and structures and no pledge in favour of third parties’ is invalidated in case the pledgor did not receive the previous pledgee’s consent on disposing of the subject matter of the pledge, even if the subsequent pledgor did not know or clearly should not have known of the limitation of the pledgor’s right to dispose of the property.

2. In case the ‘land use right [title]’ is hypothecated, the subsequently built buildings and structures are also deemed to be hypothecated.

The facts of the case

In 2015 the first bank extended a credit to the first debtor. The first bank (pledgee), the first debtor and the pledgor concluded the hypothec agreement to secure this debt. As a security the first bank received ‘asphalt, concrete and stone sorting plant’ along with the ‘land use right’. These properties were registered in the cadastre books under No 14/344.

In 2017 the second bank extended a credit to the second creditor. The second bank (pledgee), the second debtor and the same pledgor again concluded the second hypothec agreement to secure the credit. As a security the second bank received ‘administrative, recreational, guardhouse, bitumen storage area, four-legged load-bearing device, weighing and ABS building and facilities’. These properties were also registered in the cadastre books under the same number.

The first bank claims that conclusion of the second hypothec agreement violated Art 277 CC, Art 27 of Law on Pledge and Art 11 of Law on Hypothec. Although the buildings and the land use rights thereto were pledged in the first bank’s name, the pledgor subsequently pledged them without the first bank’s consent. This makes the second agreement void under Art 116 CC.

The court of first instance invalidated the second hypothec agreement. The court of appellate instance concurred. The second bank appealed.

The Supreme Court dismissed the appeal.

The Supreme Court’s position

[The Collegium has cited Art 277 II CC and Art 21 III (3) Law on Pledge (restated with Law of 1 May 1998 No 614-I) both of which state a dispositive rule under which the pledgor may alienate the subject matter of the pledge, transfer it for lease or free use to another person or otherwise dispose of it only with the consent of the pledgee.] When concluding the second hypothec agreement the second bank examined neither the title of the pledgor to the land unit on which the building and structures are located, nor whether the land unit was previously pledged. The pledgor possessed the land use right to the land unit — that was pledged to the first bank — on the basis of ‘the right of permanent use’.

The court of appellate instance and of first instance came to correct conclusion dismissing the appeal and invalidating the second hypothec agreement, because it violated Art 277 II CC and Art 21 III (3) Law on Pledge considering [a] that within the framework of a single object of immovable property, two hypothec agreements have been concluded and discrepancy exists within the [number of] buildings and structures, [b] that [such buildings and structures] are located on the single land unit, [c] that the land use right has also been pledged with the first hypothec agreement, [d] that additional facilities were built on the disputed land unit and subsequently pledged in the interest of the second bank, knowing that the pledgor [previously] pledged the land use right in the interest of the first bank, [e] that the second hypothec agreement was concluded regardless of the fact that the land use right was previously pledged to the first bank and without notifying the first bank and obtaining its consent.

Additionally, the courts rightfully dismissed the second bank’s arguments that at the time it entered into the second hypothec agreement, under Art 126 CC it did not know or clearly should not have known of the pledgor’s right to dispose of property was limited. The argument [a] that the first bank did not make an entry in the Pledge Register and did not perform state registration of the hypothec, [b] that the objects of pledge under the first hypothec agreement are different and [c] that the cadastral number of the pledge object is different does not cancel the rights of the first bank to enjoy the land unit on the basis of the hypothec agreement. Thus, the building and structure of the pledgor under the first notarised hypothec agreement was registered in the Book of Pledged (Hypothecated) Buildings and Structures. The automated information system ‘Notarius’ also indicates that the notary’s office imposed a ban in 2015 on the basis of the first hypothec agreement on the pledged ‘buildings and structures of asphalt, concrete and stone sorting plant’. Accordingly, having assessed the arguments of the second bank with regard to clauses 3 and 3.7 of the second hypothec agreement, where it is stated that there is no prohibition in respect of the pledged buildings and structures and no pledge in favour of third parties, the appellate court reasoned [its dismissal of the appeal with the fact that] when concluding the hypothec agreement, the second bank did not verify on what [title] the pledged land unit belonged to the pledgee and the [title] to the land unit was not verified as to whether it was encumbered by a pledge.