Mortgage Agreement
Purpose- A Mortgage may be attached by agreement between the parties for such intention and by registration of the mortgage on the title to the property (Article 186 of the Civil Act).
· Parties to a mortgage agreement shall be the mortgagee who secures his or her interest against mortgagor’s property, and the mortgagor who owns a property to be secured.
√ In principle, the mortgagee is the creditor in an Agreement for Consumer Cash Loan.
√ A third party to the Agreement for Consumer Cash Loan may become a mortgagee of the relevant mortgage agreement.
√ Under the Civil Act, a mortgage may be attached to the title of immovable property (Article 356 of the Civil Act) or Superficies/Chonsegwon (right of registered lease on deposit basis) (Article 371(1) of the Civil Act).
Scope of Security- A mortgage shall secure the principal, interest, liquidated damages, damages arising from non-performance of a debt obligation, and the costs for enforcing the mortgage. However, as to the damages for delayed repayment, the mortgage may be exercised only as to the amount incurred for 1 year as from the original repayment due date (Article 360 of the Civil Act).
Effect of Mortgage- If the debtor fails to repay the debt by the due date, the mortgagee may proceed to a mortgage sale and receive from the sales proceeds, taking precedence over other creditors (Article 356 of the Civil Act).
· A mortgagee shall take precedence over other creditors subject to the following exceptions:
√ A lessee of a residential property or a commercial building who qualifies certain requirements stipulated in the House Lease Protection Act or the Commercial Building Lease Protection Act (e.g. Counter-Defense, Registration of Fixed Date, or Requirements for Counter-Defense prior to mortgagee’s application for mortgage sale by auction) shall take precedence over the mortgagee (Articles 3 and 8 of the House Lease Protection Act; Articles 3 and 14 of the Commercial Building Lease Protection Act).
√ National taxes and additional dues imposed on a mortgaged property shall always take precedence over a mortgage even if the mortgage had been registered before the date of posting of notification of such taxes or dues (Item (a) of Subparagraph 3 of Article 35(1) of the Framework Act on National Taxes).
√ Any claim for retirement benefits regarding the final three years of service shall take priority over claims secured by pledges or mortgages, and over taxes, public charges, and other claims on the whole property of an employer (Article 12(2) of the Guarantee of Workers' Retirement Benefits Act).
√ Any claim for the wages of the last three months and for an accident compensation shall take priority over claims secured by pledges, mortgages, and over taxes, public charges, and other claims on the whole property of the employer (Article 38(2) of the Labor Standards Act).
· If there are competing interests that are secured against the same immovable, priority shall be determined in chronological order of registration of such interests.
Enforcement of Mortgage Security- Enforcement of Mortgage Security arises when the mortgagee exercises his or her statutory power of sale after a relevant default by the mortgagor, by which the mortgage is entitled to the sale proceeds in lieu of the debt.
- Such enforcement shall be governed under Part III, "Auction for Exercise, etc. of Security Right" of the Civil Execution Act.
- In general, an auction procedure shall be as follows: Application for Auction → Ruling on Commencing Auction & Service of Notification → Survey on Current Status (e.g. Survey Valuation) → Disposition by Sale → Approval of Sale → Distribution of Sale Proceeds.
※ For detailed information on procedure of auction, please refer to the Supreme Court's website: www.courtauction.go.kr.
Agreement for Consumer Cash Loan incorporating clauses regarding Mortgage Security- You may refer to a template for an Agreement for Consumer Cash Loan incorporating clauses regarding Mortgage Security at: < Seoul Central District Court’s website-legal proceedings and templates-agreement>.
※ Establishing Pledge
- In order to secure the loan, the creditor may establish a pledge against movables owned by the debtor or any other third party.
· A pledge means a right to hold possession of the movables which the creditor has received from the debtor or a third person as security for the loan and to obtain satisfaction of his or her claim out of the movables in preference to other creditors (Article 329 of the Civil Act).
· For example, if a debtor borrows KRW 1 million from the creditor and if the debtor delivers his or her luxury watch being worth KRW 1.5 million as a security to the creditor, a pledge shall become effective thereupon (Article 330 of the Civil Act).
· A pledge shall secure the principal, interest, liquidated damages, expense for enforcement of the pledge, expense for preservation of the pledged article, and the damages arising out of the non-fulfilment of the obligation or from latent defects in the pledged article (Article 334 of the Civil Act).
- A pledgee of movables shall be entitled to hold possession of the pledged article which he or she has received from the debtor or a third person as security for the debt, and to obtain satisfaction of his or her claim out of the movables in preference to other creditors (Articles 335 and 329 of the Civil Act).