The Secured Loan and the Flawed Mortgage Clause
A notary is asked to certify a loan agreement for BGN 90,000 between a lender company and a borrower who offers his house as security. The draft contains a clause stating that the lender may sell the house 'without court proceedings if the borrower is late by more than 10 days', and a clause stating that the mortgage secures 'all present and future debts of the borrower to the lender, of any kind, without limit'. The house is already subject to a first mortgage in favour of a bank for BGN 60,000. The borrower's wife is not a party, although the house was acquired during the marriage and is family property. The lender wants the deed certified the same day so it can disburse.
1. Are the enforcement and the 'all debts' clauses acceptable in a notarial deed?
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The clause allowing sale without court proceedings on a 10-day delay is not acceptable as drafted. Enforcement of a mortgage generally requires a procedure before the court or, where the law permits, enforcement by a public or private enforcement agent on the basis of an enforceable instrument. A private power of sale in the deed cannot displace that procedure. The 'all present and future debts, without limit' clause is also problematic: a mortgage must secure a defined claim or a defined maximum amount. The notary should require the parties to state the secured claim with precision, including principal, interest and a maximum secured sum. The notary should explain that an unlimited floating-style clause may be unenforceable or may prejudice later creditors, and should not certify the deed until it is redrafted.
2. What is the effect of the existing bank mortgage, and how should the notary deal with it?
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The existing first mortgage for BGN 60,000 ranks ahead of the new mortgage. The notary must check the property register and disclose the prior encumbrance to the lender and borrower. The new mortgage can be registered as a second mortgage, but the lender's recovery depends on the value remaining after the bank's claim. The notary should ensure the deed and the application for registration identify the priority correctly. If the lender expects first-rank security, that expectation cannot be met. The notary should also check whether the bank's consent is required under its own contract, although that is a matter between the parties. The notary's role is to record the true legal position, not to guarantee the lender's recovery.
3. What should the notary do about the wife's position?
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The notary must establish whether the house is family property and whether the wife's consent is required. If the house was acquired during the marriage and is family property, a mortgage over it generally requires the consent of both spouses. The notary should require the wife to appear and consent, or to provide a duly authenticated consent, and should verify her identity. Without that, the mortgage may be vulnerable. The notary should not certify the deed on the lender's timetable. The notary should explain the risk to the lender and borrower, record the wife's consent if given, and refuse certification if it is not. The notary should also consider whether the borrower understands the consequences of default.