Local courts took the stance that mortgage over the land does not extend to objects subsequently built on the mortgaged land. In one recent case the Supreme Court of Republika Srpska („RS Supreme Court”) took an entirely opposite stance. Applicable laws support the stance of the RS Supreme Court. Clear treatment of this issue by the courts is important for both mortgage creditors and buyers of subsequently – built objects.

Bosnia and Herzegovina („BH“) is comprised from two entities, i.e. Republika Srpska („RS“) and Federation of BH („FBH“) and special district i.e. Brčko District of Bosnia and Herzegovina („BD“). The property rights on immovables are regulated on the level of RS, FBH and BD. The laws of RS, FBH and BD incorporated the Roman law principle pursuant to which the legal status of objects and the land on which such objects are built should be the same. The consistent application of such principle means that in case when the land is mortgaged, then the object built on such land will also be mortgaged. There are only a few exemptions to such a principle (e.g. in case of granted concession and in case of construction right established over respective land).

Court practice denying Mortgage Extension Rule

In 2019 the District court in Banjaluka (RS) rendered a decision pursuant to which the mortgage established over the land does not, by virtue of law, extend to the objects built on such land after the establishment of mortgage. The court argued that the mortgage agreement must explicitly specify that the mortgage will extend to the subsequently built objects on that land, which was not the case. Consequently, the mortgage creditor could not settle its claim by selling respective subsequently built objects in the enforcement proceeding.

In another case, the Municipal court in Bugojno (FBH) rejected to inscribe ownership over immovable property in land books in favour of person who purchased such property in enforcement proceeding. The immovable property was sold to the elected purchaser in the enforcement proceeding initiated for the settlement of claim secured by mortgage established on such property. After the establishment of mortgage two new floors were built on mortgaged property. Pursuant to the court, these changes altered the property after the establishment of mortgage and such alterations prevent inscription of purchaser as new owner in land books. The respective court decision was confirmed by the second-instance court.

The Approval of Mortgage Extension by the RS Supreme Court

In October 2023, the RS Supreme Court rendered decision allowing enforcement over objects built after establishment of mortgage over land on which such objects were built. The mortgage was established in 2013 over the land on which the building was under construction. In 2014 the plaintiff concluded an agreement on purchase of object in the respective building as a purchaser. In the time of conclusion of the respective agreement, object was not inscribed in land books and the plaintiff knew that the mortgage was inscribed over the land.

The court found that the rights from the land extend to the objects permanently attached to such land. Thus, the court concluded that the plaintiff purchased mortgaged object.

Conclusion

The abovestated stance of the RS Supreme Court is in accordance with the RS laws and should serve as a guidance to the lower-instance courts in RS. We are not aware if the same stance has been adopted in practice of FBH and BD courts. Since the laws in RS, FBH and BD treat this matter equally, then this issue should be treated the same, i.e. as treated in abovestated RS Supreme Court decision. We are not aware if BH Constitutional Court, as a final court authority in BH, share the views of the RS Supreme Court with respect to this matter. Therefore, it might be appropriate to explicitly state in the mortgage agreements that the mortgage will extend to the objects built upon establishment of mortgage.

Having abovementioned in mind, purchasers of the objects under construction should carefully examine the legal status of the land prior conclusion of the purchase agreement. Unlike in certain EU jurisdictions, BH does not have adequate statutory rules on protection of purchasers of the objects under construction. Therefore, these purchasers could only acquire contractual guarantees for protection of their rights if the seller is willing to provide some.

Author:  Djordje Dimitrijevic, Counsel, Head of Real Estate, Dimitrijevic & Partners