The relatively new foreclosures legal framework enables faster sale & registration of mortgaged properties in the name of purchasers and banks/asset management companies (AMCs), but disputes do arise thereafter as to the possession of the acquired assets: Purchasers frequently bump into purported lease agreements not previously disclosed to them in the foreclosure notice and banks/AMCs seek to challenge the right of occupiers to continue possessing the foreclosed properties despite being aware of the existence of the leases in advance. Resolution of the disputes in the event of deadlock is bestowed upon District Courts, which are called upon to decide on a number of issues, including whether or not the lease is binding upon the purchaser, hence whether or not the purchaser can take possession of the purchased property.

Resolution of such disputes necessitates the examination of legal, factual and contractual issues on a case-by-case basis. At the outset, the Court needs to come to a verdict as to whether a valid lease exists or whether such a lease was a sham perpetrated to forestall or prohibit the relinquishment of possession of the premises to the purchaser. Provided that a valid lease was entered into by the former registered owner (mortgagor), the next issue that must be decided is whether such agreement was entered into prior or after the registration of the mortgage.

In the event that the signing of the lease agreement, or the commencement of the lease period under an oral lease agreement, preceded the registration of the mortgage at the Land Registry, the Court will proceed with the examination of whether the bank/mortgagor (later deciding to purchase and register the property in their name upon the lapse of six months after an unsuccessful foreclosure) or the purchaser of the foreclosed property, as applicable, was aware of the existence of the tenancy prior to the purchase of the property in issue.

As regards banks/AMCs opting to purchase the property which is subject to the mortgage, the Land Registry forms which are mostly prepared by the banks/mortgagees and signed by both parties (i.e. the bank and the property owner) on the date that the mortgage is registered against the property may provide some assistance as to whether the existence of the lease was in the contemplation of the mortgagee bank at the time of the registration of the mortgage: Such forms at the prescribed wording set out a table in which the property owner (mortgagor) is asked to record whether the property sought to be mortgaged is rented. This table is largely overlooked and usually left blank, hence prompting the question as to whether in fact the existence of any lease was ever disclosed by the property owner (mortgagor) to the bank (mortgagee).

Albeit limited, the case law of the Supreme Court is clear: If the purchaser of the foreclosed asset (whether that may be a third party or the bank/AMC per se) was aware of the existence of the lease prior to the acquisition of the property, then they are bound by the lease and they do not have the right to challenge its validity or existence; they must abide by the terms thereof as constructive trustees of the tenant. Any exit scenario which will allow them to take possession of the property will depend upon the terms of the lease, except in the event that the tenant was converted into a statutory tenant by application of the Rent Control Law; this can prove to be a severe impediment to the bank/AMC/investor for recovering possession of the property that was purchased and the tenant can prohibit the new owner from entering into possession thereof.

The aforesaid principles imply that if the purchaser of the property is unaware of the existence of the lease up to the acquisition of the property, then they are not bound thereby and they can claim possession of the property from the occupiers thereof insofar as they do not acquiesce in the lease by their acts or omissions (e.g. by receiving rent, acknowledging the validity of the lease, etc.). Seeking the issuance of an injunction to prohibit trespassing by the occupier of the property is also possible, but not guaranteed; its issuance will operate as a catalyst in bringing the dispute to an end, save as to the right of the occupier to claim damages if the injunction is later cancelled by the Court, or the Action for repossession is dismissed.

Little guidance is provided by current Cyprus case law as to the instance whereby a property owner accepts the registration of a mortgage against his property and thereafter rents the property to a tenant in breach or non-compliance with the restrictive covenant provided in the standard mortgage agreements prohibiting the lease of the property to third parties without the prior consent of the bank (mortgagee). Case law drawn from the United Kingdom suggests that such a lease is only binding between the tenant and the property owner (mortgagor), but not between the tenant and either the bank or any subsequent purchaser of the property upon foreclosure; in the absence of acquiescence, both the bank and a prospective purchaser shall be entitled to claim possession of the property upon becoming the registered owners thereof.

To avoid unpleasant surprises, investors seeking to purchase property in either public auctions (foreclosures) or from banks/AMCs are encouraged to undertake enhanced due diligence on this aspect in advance and to the extent reasonably possible obtain assurances from the seller that they have not become aware of any actual or potential claim to the possession of the property.

Likewise, investors and individuals seeking to rent commercial and residential premises, respectively, are encouraged to inquire into whether the premises sought to be rented are mortgaged and in the event that the answer is affirmative, to either get the prior consent of the mortgagee or obtain alternative protection of their interests by contractual arrangements to the extent reasonably practicable. It is worth noting that there is no obligation to register any lease agreements or notify the existence of any lease arrangements to any authority in Cyprus (except from the declaration of income proceeds to the Tax Commissioner for income tax purposes), hence the existence of a lease shall not appear in any registry maintained by any Authority (including the Land Registry) which is publicly accessible to investors.

For any assistance in respect of the above, don’t hesitate to contact me by e-mail at nikolas@coucounis.law.