Specific performance in the collateral assignment agreement

"Presupposes the issuance of a title deed and failure by the buyer to fulfil his obligations to the bank"

The collateral assignment agreement is commonly used by a property buyer to facilitate his loan and by the bank to secure the buyer's financial obligation for his loan. The bank, as an assignee, may deposit the agreement in the Land Registry, provided the sale contract is already deposited, so that the assignee acquires the encumbrance created by its deposition. The choice of the collateral assignment agreement serves both the buyer of a property without a separate title deed, such as a house or an apartment under construction or a plot of land under subdivision, and the bank to obtain collateral for the lending of his purchase, since there is no separate title deed for the mortgage to be registered.

In the event, that the buyer as collateral assignor does not fulfill his obligations arising from the assignment agreement, the assignee may file a lawsuit for specific performance of the sale contract, so that a Court order is issued for the registration of the property in the name of the buyer and the simultaneous registration of a mortgage on the new title deed. For the specific performance to be ordered, two things are required, firstly the issuance of a title deed and secondly the buyer’s failure to fulfill his obligations towards the bank.

The specific performance in the collateral assignment agreement is related to the fulfillment of the vendor’s obligation to transfer the property, but also the buyer’s obligation to pay the sale price and the taxes that fall on him. The bank with the collateral assignment agreement acquires the rights of the buyer arising from the sale contract, but the option to exercise them makes the bank liable to fulfil any obligations of the buyer under the sale contract, such as the payment of any balance of the price, taxes and fees owed by the buyer. The provisions of the Sale of Land (Specific Performance) Law, L.81(I)/2011, provide protection both to the buyer and to the bank, with the expectation that at the same time during the transfer there will be a simultaneous registration of a mortgage on the new title deed of the property.

The bank is not entitled to claim that by the assignment agreement it acquired only the buyer's rights and is therefore entitled to request the transfer of the property without fulfilling the buyer's obligations to the vendor. As Judge N. Mathikoloni wrote in the judgment she issued on 10.5.2023, with the assignment agreement it is the buyer’s rights that are assigned, but it is understood that from the moment the bank chooses to exercise those rights, the bank enters into the position of the buyer, and consequently it must also undertake any obligations that fall on the buyer, such as the payment of the balance of the price or the taxes and fees he owes from the time of delivery of possession of the property, or as the sale agreement entered into by the parties.

The case involved claims raised by a bank against a buyer under a loan agreement and to provide security to the bank he assigned his rights under the purchase agreement on the property, which he bought from a land development company and which the bank joined in the lawsuit. In addition to the amount due from the loan agreement, the bank was requesting a specific performance of the sale contract once separate title deeds are issued, to register the property in the name of the buyer or the bank or any other person which the bank wanted to indicate, as well as declarator judgements that it has the right to mortgage the property to be transferred to the buyer, cancellation of the sale contract and its withdrawal from the Land Registry, right to possess and sell the property and the rights deriving from the assignment agreement.

It was an admitted fact that the assignment agreement was not deposited by the bank in the Land Registry and therefore the Court decided that the lawsuit cannot be considered a lawsuit for specific performance, since it had to be deposited first at the Land Registry. The Court, referring to the jurisprudence, held that it is a party's duty to join a person as a party, since the decision affects his property rights. In this particular case, the vendor signed and was therefore a party to the assignment agreement and remains to this day the registered owner of the sold flat for which a separate title deed is issued. Therefore, in relation to the vendor, only a declaratory older justified that the bank has the buyer’s rights arising from the assignment agreement.