In the Croatian legal system, the relation between two legal principles – the principle that no one can transfer more rights to another than he himself has, on the one hand, and the principle of public trust in land registry, on the other – has been the subject of significant analysis and numerous discussions and Croatian Constitutional Court decisions.
The relation between these two principles is often analyzed from the perspective of the mortgagees (e.g., banks) who acquire their mortgages in reliance on the land registry status of the real estate. However, at the moment of enforcing their mortgages and collecting their receivables, mortgagees are sometimes confronted with third party non-registered owners of the real estate, who often successfully challenge the validity of the mortgage, claiming that the person registered in the land registry as the owner of the real estate, who provided the mortgage, is not in fact the actual owner. The impact that this may have on legal certainty and the principle of legitimate expectations is disastrous. Acquiring real estate rights (including a mortgage) on the basis of public trust in the land registry should represent a simple legal institute, which may be summarized in the following manner: (1) an acquirer of a real estate right concludes an agreement with a person who is registered in the land registry as the owner of the relevant parcel of land; (2) at the same time, the legal status of the real estate parcel registered in the land registry differs from the actual (non-registered) legal status of the property, however the acquirer has no knowledge of this mismatch. Now, to avoid being forced to investigate and determine the actual legal status of real estate, potential buyers may acquire a registered real estate right in its entirety on the basis of an agreement and acting on the principle of public trust in land registry, notwithstanding any third parties’ non-registered rights. In Croatian court practice however, this seemingly simple legal institute has become an extremely complex topic, to the extent that questions have arisen whether Croatian law supports public trust in the land registry at all.
This topic was analyzed in decision no. U-III-103/2008, dated June 14, 2011 of the Croatian Constitutional Court. The court considered a mortgage of a bank which was contested by the spouse of the person registered as the (entire) owner of the mortgaged real estate, where the (non-registered) spouse claimed that she was the non-registered owner of one half of the ideal part of the real estate parcel and that consequently the mortgage was null and void with respect to that half. In prior similar cases, the Croatian Constitutional Court had emphasized that the principle that no one can transfer more rights to another than he himself has supersedes the principle of public trust in land registry. This resulted in complete legal uncertainty for the banks and other mortgage holders. In the June 14, 2011 decision, however, the court altered its position, stating that in disputes between banks holding mortgages and non-registered spouses, the courts should determine the good faith of all parties. This decision represented a step forward in protecting the legitimate interests of mortgagees and other security holders, but it did not solve all related doubts.
This however does not represent the end of mortgage holders’ struggles with the public trust in the land registry. Specifically, Croatian law provides that public trust in the land registry will not apply to real estate rights acquired before January 1, 2017 with respect to parcels of real estate which represented “social ownership” in the past (i.e. a type of ownership from the socialist period). This proved to be controversial in large real estate projects involving land sold to the investor by a municipality which was later determined to be owned by the state. Such situations resulted in both the investors and the banks losing title to the land and entering into multi-year real estate disputes. However, public trust in the land registry will fully apply to real estate rights acquired after January 1, 2017. This, together with the evolving court practice of the Croatian Constitutional Court, should provide an investment incentive to investors and credit institutions, significantly lowering legal risks with respect to real estate projects in Croatia.
By Vjekoslav Ivancic, Partner, Ostermann & Partners
This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.