The Supreme Court changes its position regarding clearing of a mortgage debt in case of asset division
This year, the Supreme Court adopted two resolutions (resolution of 28th of March 2018, reference number III CZP 21/18 and resolution of 25 July 2019, reference number III CZP 14/19), in which it defined the principles of clearing of mortgage debt in the event of division of joint marital asset. First, the Supreme Court accepted that in a case concerning the division of joint marital asset, including a real estate encumbered with a mortgage securing a bank loan granted to the spouses, the court – granting this property to one of them – determines its value excluding the value of the mortgage, unless significant reasons for including it occur. Secondly, the spouse who, after the decision on the division of joint martial asset has become final, has fulfilled the obligation secured by a mortgage established on the joint real estate, may claim the reimbursement of relevant part from the other spouse. In other words, the Supreme Court took the view that mortgage debt (except extraordinary circumstances) cannot affect the value of the property determined in the procedure for the division of property, and thus cannot reduce the repayment from the spouse receiving the apartment as a result of the division to the other spouse. However, each of the spouses may demand settlement with the other spouse of the amounts paid to the bank for repayment of the mortgage. It should be borne in mind that granting a flat to one of the spouses as a result of the division of property does not mean that the other spouse is released from credit obligations towards the bank. If the bank loan was borrowed by both spouses, despite the division of property, each of them still remains the bank’s debtor. This means that the bank is entitled to demand from each of the spouses as the borrowers the payment of fixed loan installments. The difference after the division of property is only that the spouse taking over the mortgaged apartment becomes the sole mortgagor towards the bank.
It should be emphasized, however, that the Supreme Court allowed in exceptional cases the possibility of reducing the value of the property by the amount of mortgage debt. According to the Supreme Court, this may occur due to the special personal or property situation of former spouses or in a situation of disproportion between the value of the burden and the value of the property. In practice, it seems that such a situation will take place when the financial situation of the spouse which was not granted with property justifies the supposition that he will not participate in repayment of loan installments and it will not be possible to settle with him future installments paid in full by the other spouse.
The above rulings change the current position of the Supreme Court. In previous rulings, the Supreme Court expressed the position that the value of the property being the subject of the division of joint asset should be determined taking into account the mortgage charged on the premises (such as, inter alia, the decision of the Supreme Court of 26th of October 2011, reference number I CSK 41/11). By applying this position, the courts deducted the value of the mortgage debt from the value of the property, thus reducing the repayment value granted to the other spouse.
It should be expected that the change in the jurisprudence of the Supreme Court will translate directly into the practice of district and circuits courts adjudicating in division cases, which should depart from the current practice of reducing the value of real estate by the value of mortgage debt. It also seems that the abovementioned resolutions of the Supreme Court will also apply to analogous cases related to the division of property of a civil partnership and dissolution of co-ownership of real estate not covered by joint marital asset.
Changing the mortgage clearing rules does not eliminate the problem of loan repayment after the division of property. The court’s split order does not definitively close the issue of clearing mortgage debt repayments between the split participants. Therefore, the recommended solution is to make a contractual division of property or to dissolve co-ownership of the property and to make settlements with obtaining the bank’s consent (if possible) to release from the credit debt of the division participant who does not take ownership of the property. This often involves long and difficult negotiations between the division participants and the bank. Usually, however, settlement of the parties is a better solution than long and expensive court proceedings.