The Constitutional Court’s Decision on Cahide Demir’s Application with regards to the Right to Property
Introduction
The Constitutional Court, in its decision dated 14.09.2021 on application no. 2018/25663 (“Decision"), found that applicant Cahide Demir’s right to property was violated on the ground that the mortgage on her real estate, established to secure a third party’s debt, had not been released by the relevant bank despite the fact that the debt had been discharged. The bank claimed that the same third party was indebted to the bank from other transactions. The Decision was published in the Official Gazette dated 20.12.2021 and numbered 31695. The Decision rendered by the Constitutional Court is notable in terms of assessing the scope of the mortgages established by the banks for the loans they provide.
Factual Background
The facts of the case are as follows: The applicant's son-in-law, E.K. had taken a housing loan from a bank (“Bank”) on 12.08.2008 and a mortgage was established on the applicant’s real estate to secure the housing loan in favor of the Bank. The first page of the mortgage deed includes this statement: “Considering the immovable in question is registered in the name of Cahide DEMİR, the proprietor has applied in person and requested that the whole property be mortgaged as a guarantee of any and all debts arising from any loans that E.K has taken or will take from .... Bank A.Ş in the amount of TRY 120,000.00 and at the 1st degree and 1st ranking at the interest rate of 68% until release of which is notified by the bank.”
The second page of the deed includes the paragraph which reads as follows: “She hereby agrees to mortgage the real estate to secure any principal and surety loan debts of [E.K.] incurred or to be incurred due to his loans .... and for any of his principal and surety debts incurred and to be incurred from other banking and borrowing transactions and also for any principal debts of the mortgagors incurred and to be incurred by the bank in any way.”
The borrower, E.K. paid his loan and paid off the debt on 12.08.2011. Subsequently, the borrower wrote two cheques on behalf a company with which he had a commercial relationship. One of these was drawn on 23.07.2014, the other on 16.10.2014, and were endorsed and submitted to the Bank. Then the Bank has initiated a debt collection proceeding against the Borrower to collect the amount of these two cheques and the proceeding became final.
After the loan debt was paid off by the borrower, the applicant asked the Bank to release the mortgage on her own real estate. The Bank notified her that the mortgage would not be released on the grounds that the borrower was indebted to the Bank due to the cheques he has drawn up in favor of the trading company, apart from his housing loan, and that a debt collection proceeding has been initiated for the debts and that the debts were covered by the mortgage.
On 14.11.2014, the applicant filed a lawsuit to release the mortgage. She indicated in the statement of claim that because the housing loan constituting the basis of the mortgage had been paid off, the failure to release the mortgage was contrary to the law. In its reply petition, the Bank contended that in accordance with the mortgage agreement, up to 120,000 TRY of any and all debts that the borrower incurred fell under the scope of the mortgage and that the maximum liability mortgage did not constitute a guarantee only for a single debt. According to the Bank, the debt from the endorsed cheques was covered by the mortgage, and the release of the mortgage was not possible due to the nonpayment of the debt.
The court of first instance held that the mortgage should be released. The bank appealed to the regional court of appeal. The regional court of appeal reversed the decision and dismissed the case on the grounds that the mortgage established on favor of the Bank was in the nature of a maximum liability mortgage and that a maximum liability mortgage can only be released if there are no more secured receivables. However, the mortgage not only secures the credit agreement, it also secures the principal and surety debts that the Borrower has incurred and which he may incur in the future for other banking and borrowing transactions. The Applicant appealed this decision, indicating in her petition that there was a contradiction as to the scope of the mortgage in the first and second pages of the mortgage deed. The Applicant claimed that it was improper to deem the debts of the Borrower to third parties within the scope of the mortgage. The Court of Cassation upheld the decision rendered by the regional court of appeal. Subsequently, the Applicant lodged an individual application with the Constitutional Court.
In her individual application, the Applicant stated that while establishing the mortgage, only the debts of the Borrower to the Bank were taken into account. There was no intention to include his debt to third parties in the scope of the mortgage. She claimed that she did not know the content of the standardized agreement drafted by the Bank nor had she been informed by the Bank on the loan agreement. She further argued that the mortgage automatically became null and void as the debt ceased in accordance with the principle that the mortgage exists based on the receivable it secures.
The Constitutional Court’s Assessment
The Constitutional Court noted that the concept of mortgage harbors the risk of losing the ownership of the real estate, although it is not a transaction on its own giving rise to loss the ownership. On the other hand, it asserted that the establishment of a mortgage on a piece of real estate affects the value of the real estate at a certain level and restricts the opportunity of the owner to dispose of the real estate. It suggested that a mortgage is a restriction on the property imposing a considerable burden on the owner.
In the present case, the constitutional court held that the mortgage deed did, in fact, contain contradictory provisions. Although the first page of the deed states that debts arising from loans taken or to be taken by the Borrower are covered by the mortgage, on the second page the deed also covers debts arising from other banking and borrowing transactions, as well other debts incurred against the Bank in any way. According to the Court, the Regional Court of Justice considered only the provision in the second page of the mortgage deed in its decision, and the Court of Cassation failed to make any assessment; although the Applicant, in the proceedings before the Court of Cassation, had alleged that these contradictory provisions demonstrated a contradiction in the way that they were understood by the parties.
From the Constitutional Court’s perspective, the regional court of appeal’s decision had placed a heavy burden on the applicant that she could not have reasonably foreseen. It held that this decision gave rise to a risk to the applicant to undertake any debt of the Borrower to third parties other than the Bank, either incurred before 12.08.2008 when the mortgage was established or to be incurred thereafter. In this context, the Applicant faced serious uncertainty and unpredictability. In addition, the Constitutional Court pointed out that a substantial commercial advantage had been provided in favor of the Bank in the assignment of liability owed by the Borrower against third parties, and that this had destroyed the fair balance that needs to be established between the benefits of the Applicant and those of Bank acting in the capacity of the mortgagee.
In the light of these assessments, the Constitutional Court concluded that the positive obligations of the state set forth in Article 35 of the Constitution had been violated on the grounds that it is necessary to make it clear whether there is harmony between the will of the parties regarding the scope of the mortgage, and that the expansion of the debt covered by the mortgage to such an extent that the Applicant could not reasonably foresee it and thus subjecting the Applicant to an disproportionate burden had given rise to a serious imbalance between the interests of the mortgagee and the mortgagor. The Constitutional Court found a legal interest in retrial in order to eliminate the consequences of the violation of right to property and sent a copy of the Decision to the court of first instance.
Conclusion
The Constitution Court has demonstrated once again in its decision that the scope of the mortgage must be more clearly established due to the nature of the right of mortgage. The decision is remarkable in that the expressions added to the mortgage deed are compatible with each other in the established practices of banks.
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