Mortgage on lease rights?

The Supreme Court of Latvia has adopted two decisions (Case No. SKC – 667 and SKC – 575), respectively on September 8 and November 3, 2004, thereby recognizing that no lease rights registered with the land book can serve as mortgage subjects. However, the justification of the decisions of the Supreme Court was rather contradictory. 

Firstly, the Supreme Court admitted that by registering a loan agreement with the land book, the lessee, according to the Civil Law of the Republic of Latvia, receives property rights that are applicable against any third persons. According to the classification provided in the Civil law, property rights belong to immovable property, if they relate to immovable things. As far as a lease agreement, which is registered with the land book may be concluded only on immovable property, any usage rights deriving from such an agreement would always be connected with immovable property issues. Therefore, the possibility arises to register a mortgage on the lease rights of the immovable property. However, the Supreme Court rejected such a conclusion, alleging that a lease agreement, after acquisition of the effect of property rights, turns into personal servitude. Whereas, the Civil law prohibits alienation of any usage rights deriving from personal servitude, from any other person, except the owner of the property.
Secondly, the Supreme Court has justified its decision, indicating that lease rights have the nature of obligation rights. According to the Civil law, obligation rights, irrespective of the subject (movable or immovable property), are always to be considered movable property. As far as a mortgage can be registered solely upon immovable property, the lease rights cannot be the subject of the mortgage.
Notwithstanding the contradictory nature of both the decisions, it is expected, that the Supreme Court will in the future support the formerly expressed opinion. Therefore, one may forecast that the lease rights of the immovable property as means of security will be applied in praxis only in very rare cases. Especially, taking into account the fact, that the decisions of the Supreme Court have raised another issue: Will the ceding of lease rights registered with the land book be permissible also in the further? According to the first argument of the Supreme Court the answer would be an explicit „no”, because one can cede only obligation rights. However, the second argument allows such a possibility. As to know, the position of the Supreme Court concerning this issue is not quite clear. However, it is highly probable that it will declare ceding of lease rights registered with the land book lawful.
Published: IBA Real Estate Law Newsletter Vol. 9. No 1, July 2005
Sergejs Rudans
Liepa, Skopina / BORENIUS, Riga

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