Trapped Buyers – Significant Court of Appeal Decision

A recent decision by the Court of Appeal in Cyprus has significantly impacted the real estate market, particularly for properties with existing mortgages. This ruling has rekindled the discussion surrounding ‘trapped buyers’ and their susceptibility to foreclosures, raising alarms for many property purchasers.

Background of the Decision

On June 20, a significant court ruling was issued in a case involving the Bank of Cyprus, the land registry, and a property developer. The developer had sold an apartment to a buyer, but the underlying land and building were encumbered with a mortgage. Under a 2015 law designed to assist trapped property buyers, the director of the Paphos land registry had authorised the transfer of the title deed to the buyer.

The Bank of Cyprus, which held the mortgage, contested the land registry’s decision. Initially, the bank lost the case in the district court. However, upon appealing, the appeals court reversed the district court’s ruling in June, siding with the bank.

The appeals court determined that certain provisions of the 2015 law (but not the entire law) were unconstitutional, as they infringed on property rights and the freedom to enter into contracts. Consequently, it ruled that the land registry’s decision to disregard the mortgage was unlawful, maintaining that the bank’s claim on the property must be resolved before the title can be transferred to the buyer.

Crucially, the court ruled that while a lender has the option to transfer a mortgage to another property owned by the borrower, it is not compelled to do so.

In this particular case, the bank contended that the borrower’s (the developer’s) other properties were also mortgaged. The bank assessed that transferring the mortgage to these other properties would not be financially advantageous. Given that a lender is not required to transfer a mortgage, the bank argued it could not be held accountable for refusing to do so.

The court’s decision does not nullify the 2015 law entirely, meaning it does not affect cases where title deeds have already been transferred to previously trapped buyers. However, it has significant implications for pending cases before district courts, which are estimated to number in the thousands.  The key question now is how this latest court ruling will impact thousands of other similar cases involving trapped buyers. It is likely that the contested provisions of the 2015 law will need to be revised once again.

Impact on Trapped Buyers

Currently, trapped buyers are those who have fully paid for their properties but are unable to secure ownership titles because the developers used the funds for purposes other than repaying the mortgages. As a result, these properties remain under the threat of foreclosure if the developers fail to meet their loan obligations.

Legislative Background

In 2015, the Cypriot Parliament passed legislation enabling trapped buyers to transfer property ownership by submitting the sale contract to the relevant district land registry office, contingent on a court order. This law aimed to protect buyers who had paid for their properties but had not received titles. However, the Court of Appeal has now declared this law unconstitutional, as it conflicts with Article 23 of the Constitution regarding property rights.

Current Situation

Since the enactment of this legislation on September 4, 2015, the Department of Lands and Surveys has received 21,495 applications from trapped buyers. Of these, 11,158 buyers have obtained their property titles, while 9,834 applications are still pending. Notably, 7,503 of these cannot proceed because the developers have not yet issued the necessary titles. The recent court ruling has further stalled 2,331 applications that meet the criteria but are now in legal limbo.

Protecting Future Buyers

In light of these developments, we advise prospective property buyers to exercise caution. Key steps include:

1. Conducting a Land Registry Search: Before purchasing property in Cyprus, buyers should obtain a comprehensive search from the Land Registry, which will reveal any encumbrances on the property, including mortgages, tax liens, and other charges.
2. Seeking Legal Advice: Engaging a lawyer is crucial to navigate the complexities of property transactions. A lawyer can verify the property’s status, review contracts, and ensure that the buyer is legally protected. Moreover, lawyers are responsible for any errors in advice that could lead to the buyer being unable to obtain a title.
3. Securing a Waiver: Buyers should ensure that they obtain a waiver from the bank, which states that upon payment, the bank relinquishes its rights over the property. This document is essential in preventing future disputes over ownership.

Legislative Amendments

To prevent future occurrences of trapped buyers, a recent amendment in December 2023 mandates that sellers or developers provide a Land Registry search report to potential buyers. This report must be updated within five days before the purchase contract is submitted. Additionally, the revised law stipulates that the repayment of the purchase amount should be directed to the mortgagee (the bank) rather than the developer.

Conclusion

The Court of Appeal’s decision has significant implications for property transactions in Cyprus, emphasising the need for due diligence and legal safeguards. Prospective buyers must remain vigilant and well-informed to protect their investments. Future legislative measures will likely aim to balance the interests of buyers and financial institutions while ensuring the constitutionality of property laws.