The initially planned major changes to the security interest regime in Lithuania, which would remove notarial certifications of mortgage/pledge, have not materialized. However, certain amendments to Lithuanian laws governing security interests will enter into force from January 1, 2022.
No Separate Register
Currently, mortgages and non-possessory pledges have to be registered in the Mortgage Register. Sometimes, the security interest is additionally registered in the Real Estate Register. Following the amendments, the Mortgage Register will be liquidated. The new mortgages/pledges will be registered in either the Register of Contracts or the Register of Real Estate. The existing security interests will be transferred to the said registers as well.
The following security interests will be registered in the Register of Contracts: (1) movable property (rights) pledge; (2) mortgage over ships and aircraft; (3) enterprise mortgage; and (4) conditional mortgage. And the Real Estate Register will be used to register the following: (1) real estate mortgage (except for those described above); and (2) pledges of rights related to real estate.
More Flexibility in Pledge Perfection
Under current requirements, a security right in movable property (rights) is created by a pledge agreement. If the collateral is transferred to the creditor’s possession (possessory pledge), a simple written form agreement is sufficient. If the collateral is transferred to a third party or remains with the pledgor (non-possessory pledge), the pledge agreement must be notarized and registered in the Mortgage Register. As of January 1, 2022, the following main changes will be introduced:
The possibility to publicly register possessory pledges – currently, this type of pledge is not registrable (collateral transfer serves as a disclosure of security interest). Shortly, it will be possible to additionally disclose such a pledge in the Register of Contracts. It is anticipated that such registration could be achieved in two ways. The parties may submit their request directly to the register, or they may create the possessory pledge and subsequently register it by using IT tools.
The possibility to perfect non-possessory pledges by legal entities without a notary – currently, any non-possessory pledge has to be notarized (the notary confirms the validity of the pledge, e.g. checks collateral, compliance with the law, etc.) and registered in the Mortgage Register. Otherwise, the pledge is invalid. From January 1, 2022, notarial certification will not be mandatory for pledge agreements between legal entities. Such a pledge could be created using IT tools and thereafter registered in the register.
Although said changes will come into effect shortly, it is not yet clear how entering into pledge agreements by using IT tools will work in practice. The explanatory notes to the draft law indicate that the parties should be able to use the template pledge agreements available at the self-service portal of the Register of Contracts. However, these templates have not yet been published. It is also not clear whether it will be possible to amend such templates or whether any amendments will result in the need to formalize the non-possessory pledge with a notary.
According to the regulations of the Register of Contracts, this register will not verify the validity of pledges created via IT tools. Accordingly, even though legal persons will be able to create pledges without a notary, they might be willing to proceed with traditional (notarial) certification to have more legal certainty.
Simplified Procedure for Security Interest Release
According to Lithuanian law, the security interest is released once the secured obligation is performed or discharged, or if other grounds provided in the law exist. However, this does not automatically result in the security interest’s removal from the Mortgage Register. To do that, the notary must be provided with a relevant request and supporting documents (e.g., creditor’s confirmation, if the request is submitted by the pledgor or debtor).
As of January 1, 2022, the request to remove a mortgage (in certain cases) or pledge may be submitted by using IT tools (i.e., not through the notary). If the request is submitted by the pledgor or debtor, the creditor’s confirmation will have to be provided via said tools.
To conclude, the above changes should, to a certain extent, simplify perfection and release of the security interest. However, further changes might be anticipated shortly – as discussions are still ongoing on the need to significantly reduce the notary’s role and use well-developed IT tools and e-services to simplify procedures – and relevant new draft legislative proposals are on their way.
By Eva Suduiko, Partner and Co-Head in the Banking and Finance Practice Group, Cobalt
This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.