The Cyprus Property Problem

[Janner]

Hi,

I've had a few rants recently but I'm still struggling to understand what the actual problem is. This is my understanding;

The developer borrows money from the bank to buy land/build properties. A title deed is issued for the land but I understand that this is inseparable from anything built on the land. The bank lodge a claim to that title as they have a charge over the land as well (and anything built on it). Therefore, at this stage, the developer has his name on the title for the land and the bank has a 'second charge' in affect on that title. So, along comes purchaser, to the bank who allows them to borrow. The security for the bank is that they still have a second charge over the land. I think this is right!

So, at this point does the purchaser have any claim over the title for the land? I assume not. This practice, I understand, is not illegal in Cyprus but maybe contrary to EU legislation and this is what the long running legal dispute is about.

If the developer stops paying their loan to the bank the bank can take the land off the developer and sell it to recoup their loss. Again, I think this is right?? If this happened then the purchaser lose their homes. Those who paid in full for the property lose everything and those with a mortgage lose whatever they have put in so far but will not have to pay the remainder as they no longer have the property. Please correct me if I am wrong.

I read recently that many developers are not paying their loans. If this is the case, have any banks taken the land back and booted out the occupants of the properties sat on it?

If some developers are not paying their loans why do the banks allow this as I'm sure they wouldn't allow me not to pay my loan.

What is the specific legal battle? Is it the lawyers fault or the banks fault?

I still cannot believe that an EU country is allowed to do this. I am paying for something that I don't own. The title may never be issued unless the developer pays back their entire loan for that titled piece of land, which according to what I have read is very unlikely!

Does anyone have an educated guess and what may happen? I've heard that similar things happen in other EU countries but what was the outcome? How many other countries operate their title deed system this way?

Is there any will within Cyprus to change this system?

What is the timescale with the EU ruling?

I appreciate there are a number of questions but please keep the answers as easy to understand as possible. Just when I think I understand the problem I read something that makes me think I don't!

Janner

[Nigel Howarth]

Hi Janner

Para 2 - The bank has the first charge (claim) over the land.

Para 3 - When the buyer deposits his/her contract of sale it creates another claim over the land. (As claims are dealt with on a first-come first-served basis, the bank's charge takes precedence).

Para 4 - Yes, if the forecloses on the developer for whatever reason, it can then apply to sell the land to recover its losses. If people have taken out mortgages with the same bank to buy property built on that land the bank (in theory) would not take their homes away.

Para 5 - There are a number of cases going on at the moment where people are fighting the banks to keep their homes - cases in Paphos, Nicosia and the Paralimni area.

Para 6 - Banks will reschedule the loan - in some cases to prevent them having to be reported as 'non-performing'. (This is the same thing that you would do if you could not maintain your mortgage repayments - negotiate with the bank).

Para 8 - Mis-selling - a number of cases have been referred to the EU. Developers, banks, lawyers are all implicated.

Para 9 - Matters of immovable property are outside the jurisdiction of the EU - it's up to the member state. However, there are directives relating to Consumer Protection and this is what the EU is looking into as we speak.

Para 10 - The EU should conclude its investigation into Cyprus later this month and I will report on any material that is made available.

Para 11 - The Interior Ministry introduced new legislation last year to improve consumer protection - however, this does not go far enough.

Regards,

[Janner]

Good Morning Nigel,

Thank you for your easy to understand reply. Just one question though. You mention that some home owners are fighting the banks to keep their homes. Does this mean that the banks are trying to sell the land to recoup their loses from the developer? You mention the banks (in theory) would not be able to do it because of the purchasers charge over the property. However, if there is only one title for the land and no individual titles for the properties do the purchasers have a charge on the title for the land or the property? If its for the land then I assume that because the bank has first charge they take precedent over the purchaser who has second charge. Also, I've read about more paperwork being lodged claiming rights to a property many times over. Why would the bank lend to say the last person in the chain knowing that they (bank) don't really have any security as it would be wiped out by all the claims on the title beforehand!

Thank you.

Janner

[Janner]

A few questions!

If the developers are not paying their loans where are the banks getting their money from?

Has a bank has taken back land because a developer has not paid their loan and did this mean that the properties on that land have also been taken over by the bank?

I've heard that the EU will be making some sort of judgement of Cyprus in June. What is this about?

CPAG last updated their page in December 2011. What stage are they at with the EU?

Would anyone have a guess at what the outcome will be? Will the EU say it is ok for purchasers to have been misled and that their homes can be taken due to not knowing about developer debt?

I would appreciate some answers.

Thanks in advance.

Janner

[Nigel Howarth]

Hi Janner,

I suggest that you register at my Cyprus Property News to get updates on what's happening in the property market - it's free.

To answer your questions.

Q1. This is a problem - not only for the estimated €6 billion owed by the developers but also the banks' exposure to the Greek debt and other loans at risk. See the IMF report, dated November 2011, at ‘Cyprus: Selected Issues Paper; IMF Country Report No. 11/332‘.

Some money is coming in, most notably from Russia I believe.

Q2. Yes - there are cases going on as we speak - purchasers are putting up a fight.

Q3. See 'EU seeks answers from Cyprus on Title Deeds'.

Q4. As soon as CPAG has anything to report, it will post something on its website.

Q5. I am not in a position to second-guess the outcome of the EUs deliberations.

Regards,

[Nigel Howarth]

Hi digital1234

Typically developers mortgage the land on which they are building to help pay for the construction of the development (and possibly the land). This represents the 'first charge'.

Properties built on the land are sold to and the people buying lodge their contracts at the Land Registry (these represent the 'second charge') and pay the developer.

If the developer goes bust, the bank will try to seize the developer's assets and sell them to recover the money it is owed.

As the bank has a 'first charge' on the land, it can try to seize the land and everything built on it.

The fact that people may have paid the developer in full for their homes and have been living in them for several years does not change the situation - the banks can try to seize their homes and sell them to recover the debt.

Regards,