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Legal aspects of pledge and deposit in the Republic of Armenia

The right of pledge, collateral or deposit is the legally defined property right of the landlord/lady in respect of the legally owned property. The deposit is the most effective means of providing financial or other obligations of the debtor in the framework of the RA legal system. In accordance with Article 70 (seventy) of the Civil Code of the Republic of Armenia states that upon liquidation of the legal entity (person) the claims of creditors secured by a pledge/deposit must be satisfied at first instance and the demands of other creditors that are not secured by a pledge/deposit, at fifth instance. Pledge/collateral/deposit is defined as an additional accessory to the obligation to ensure the performance of the principal obligation of the legal entity to the creditor.

When drawing a deposit contract

The pledge/deposit will arise by virtue of the contract. Collateral may also occur on the based on the law with the appearance of the circumstances specified in the contract. In the contract, the property must be provided, which is considered to be a pledge to enforce the obligation of a deposit. The contract agreement shall be in writing and must indicate the name (s) of the parties and their places of residence (location), the subject of a pledge, the essence of the obligation secured by the pledge, as well as the size and period of performance of the obligation. If the actual contract is concluded with a notary office and/or after the state registration, the agreement is in compliance with these requirements. Failure to do so will invalidate the contract.

The subject of mortgage

The subject of pledge/deposit may be any property, including material things within the property or other tangible things and property rights (claims). Property withdrawn from commercial circulation such as rent and claims inseparably connected with the personality of the creditor IE: alimony claims, claims for compensation for damage caused to life or health, may not be pledged or taken as a deposit. Replacement of the collateral is done only with the consent of the depositor unless a drawn up statute or contract provides otherwise.

In the Republic of Armenia, the best and most reliable way to ensure the creditor’s obligation is secured by real estate or other property, which is subject to mandatory registration with the State Registry of Real Estate of RA. The reliability of this type of collateral is based on the fact that it gives the mortgagee the opportunity to rest assured that the debtor will not be able to conceal the object of the pledge, transfer ownership of it to a third party, as the real estate registration authorities will refuse to register the transaction involving the transfer of ownership of real estate property, without the consent of the lender (mortgagee). Legally secured real estate collateral, land development rights, the guarantee of the right to purchase real estate under construction in an apartment block, or a separate building is called a ‘mortgage’.

In the Republic of Armenia, a guarantee may be provided consisting of material things and property rights, which will be purchased by the mortgage provider in the future. This may include products, property or business that are in circulation. In this situation, they remain with the mortgage provider. The provider can change the composition and shape of the mortgage contract only if the total value does not become less than the one specified in the contract. In this case, any operations conducted in respect of the pledged goods/services are entered in the registry book of records of mortgages, which is conducted and recorded by the mortgage provider.

In the Republic of Armenia, a guarantee of property rights is in full force from the moment of drawing and signing the legally binding deposit contract, or from the moment of passing a property to the mortgage provider as ‘deposit’. Mortgaged property may be the subject of another pledge (subsequent pledge) unless otherwise provided by the pledge contract. The risk of accidental loss and damage to the property lies with the mortgage provider unless otherwise provided by the contract. The mortgage holder is responsible for full or partial loss if the property has been transferred to him/her and he/she cannot prove that the necessary efforts were provided for the preservation of the collateral/deposit.

Any mortgaged property and/or business, including services can be used by the mortgage provider without the mortgage holder’s consent, unless otherwise provided in the mortgage contract. However, to transfer or use the collateral for income based on rent, use freely for other purposes, or dispose of the collateral otherwise, the mortgage provider can only do this with the express consent of the mortgage holder. The lender must notify in writing, the person entitled to gratuitous use of property, or the tenant that leased or used the property pledged that the lender intends to use in manners described above.

Should a transition of ownership of the mortgaged property to another person occur, IE: in case of death of the original holder, the pledge remains in full force. The new owner acquires the status of the holder. The lender has the right to use the property transferred only in cases when it is stipulated by the contract, as per above rules.

The foreclosure of the mortgaged property and its implementation in RA

In accordance with Article 249 of the Civil Code of the Republic of Armenia, failure to fulfill the principal obligations on the collateral, a foreclosure may occur without going to court, provided such conditions were included in the pledge agreement. This is also valid in case of there being an agreement between the lender and the holder and/or a third person whose property is subject to collateral (if agreement incorporated third party property). If the above conditions are not fixed by the contract, or agreement between the parties, then the foreclosure is subject to the rules of Article 2491 of the Civil Code of RA, according to which execution may be levied on the collateral only by the decision of the appropriate court.

Should it come to the sale of property, it should be realized (sold) at a public auction. However, the parties are allowed to provide other conditions of implementation of sale in the mortgage contract. However, we must remember that it is prohibited to freely choose the conditions of the sale of mortgaged property, unless the said property is supplied as bail, by the Compulsory Enforcement Service of Judicial Acts of the Republic of Armenia.

The funds that have been raised from the sale of collateral, must be used by the lender to repay the mortgage and/or debt. If the amount is insufficient to cover all the demands, the lender may require the receipt of the missing amount from the holder’s property that is not secured by the loan. However, with respect to the remaining part of the debt the lender will not enjoy the same privileges and freedoms as that secured by the original contract. Should the raised sums exceed the amount of principal obligation, the lender is obliged to return the excess part to the holder. If the auction is declared invalid, then by the mutual consent of both parties, the lender has the right to buy the mortgaged property and set off the amount in the purchase price of the claim.