KPMG: Interpretation and Enforcement of Russian Laws on Pledge

The Decree of the Plenum of the Supreme Commercial (Arbitrazh) Court dated February 17, 2011 No. 10 “On some issues concerning application of legislative provisions regarding pledge” (hereinafter – the “SAC Decree on Pledge”) summarizes the approach of the Russian court practice to various issues in connection to pledge and mortgage - the most common means of securing obligations in Russia.

The SAC Decree on Pledge contains detailed clarifications with regard to out-of-court foreclosure procedures, change of the secured obligations, legal consequences of disposal of the pledged property by the pledgor, mortgage of land plots, foreclosure on leased property etc, as well as some procedural instructions.

The highlights of the SAC Decree on Pledge are the following.

Out-of-Court Foreclosure

According to the general rule a pledge (mortgage) holder may levy execution on pledged property by applying to court with a respective claim. However, per changes introduced into legislation on pledge in 2009, parties of a pledge agreement may agree on an out-of-court foreclosure procedure. Civil Code RF sets forth exceptions when foreclosure is allowed in a judicial procedure only.

Based on these exceptions the SAC Decree on Pledge pointed out specific cases when the parties cannot agree on an out-of-court foreclosure procedure (item 2). Such cases include:

  • pledge of shares owned by an individual (including individual entrepreneurs) in a share capital of a limited liability company in favor of a non-participant (due to the necessity to obtain a prior approval for transfer of shares from the general meeting of participants of the company);
  • pledge of lease rights under land plot lease agreements with regard to undeveloped land plots (due to the necessity to obtain a prior approval from the lessor for transfer of rights under the land lease agreement); this restriction does not apply to lease rights under long-term lease agreements with regard to publically owned land, as transfer of lease rights thereto does not require the owner’s prior approval (Clause 9 Art. 22 Land Code RF).

The SAC Decree on Pledge contains a list of possible forms of out-of-court foreclosure procedures (items 28 and 29).

The specific form of out-of-court foreclosure on immovable property is a material condition of a mortgage agreement. The parties must choose between:

  • a public / closed auction, or
  • acquisition of the pledged property by the pledge holder in its own favor or in favor of a third party with set-off of the purchase price against the value of secured obligations.

Failure to define the form of out-of-court foreclosure on immovable property in the mortgage agreement leads to invalidity of the provisions on out-of-court foreclosure and, consequentially, to eventual necessity to apply for a judicial procedure of security enforcement (the mortgage agreement itself remains in force).

At the same time, no restrictions are provided with regard to pledge of movable property. If the pledge agreement refers to out-of-court foreclosure without specifying particular procedure, the pledged property by default will be subject to sale on a public auction; pledged securities will be subject to sale by a professional securities trade organizer.

If the pledge agreement on movable property refers to alternative options of out-of-court foreclosure procedures, the exact procedure shall be elected by the pledgor, unless otherwise stipulated in the agreement.

Change or Termination of the Secured Obligations

Pledge agreements generally have an accessory (secondary) nature, meaning that the conditions of pledge depend largely on the terms and conditions of the secured obligations.

The SAC Decree on Pledge provides for guidelines with regard to certain freestanding limits of validity of the pledge agreement in case of amendment or termination of the secured obligation (items 13, 26).

In case of change of the overall amount due under the secured obligations (e. g. change of interest rate under a credit agreement) the pledge agreement continues by default to secure the obligations in the amount that existed prior to introduction of such changes.

In case of change of timeframe for performance of secured obligations, the limitation period for putting forward claims regarding foreclosure on pledged property starts by default in accordance with timeframes for performance of secured obligations that existed prior to introduction of changes.

In order to prevent discrepancies, the parties should agree to reflect changes introduced into the main terms and conditions of secured obligations in the pledge agreement. At the same time, failure to do so will not automatically lead to invalidity of the pledge agreement. The latter will be preserved as a security instrument with regard to original terms of secured obligation.

Upon early termination of the secured obligation the pledge continues to secure related outstanding obligations (e. g. in case of early termination of a lease agreement the outstanding rent payments may be secured with pledge).

Moreover, the parties may agree that, apart from main contractual obligations, the pledge will secure claims in connection with eventual invalidity of the main secured obligation (e. g. compensation of unjustified enrichment).

Legal Consequences of Disposal of the Pledged Property by the Pledgor

Disposal of pledged property without prior consent of the pledge holder is deemed a violation of the pledge holder’s rights under the pledge agreement. The SAC Decree on Pledge focuses on the scope of remedies available to the pledge holder in this situation (item 23).

The pledge holder is entitled to require early performance of the secured obligation and subsequent foreclosure of the pledged property. However, per general rule, specified in SAC Decree, the pledge holder is not entitled to challenge the transaction on the basis of which the pledged property was transferred to a third party. Exceptions are provided with regard to subsequent mortgage agreements which were concluded in violation of a direct prohibition contained in the initial mortgage agreement. Such agreements may be invalidated by court on the initiative of the initial mortgage holder in case the latter proves that the subsequent mortgage conflicts with his own rights and interests.

The SAC Decree on Pledge also limits the possibility of foreclosure of pledged property alienated to a good-faith acquirer (item 25). Practically, it introduced a legal analogy to the rules of vindication by the legal owner from a good-faith acquirer (Art. 302 Civil Code RF). The object of pledge may not be foreclosed upon if it is currently held by a good-faith acquirer, who was not informed (was not reasonably supposed to be informed) about the existence of the pledge and acquired the object on a commercial (i.e. non-gratuitous) basis. On the other hand, if the object of pledge used to be in possession of the pledge holder and was taken away against its will (e. g. stolen), it may be foreclosed regardless whether its current possessor is a good-faith acquirer.

The above provisions of the SAC Decree on Pledge actually override the pledge “succession” rule per which the pledge encumbers the asset regardless of transfer of ownership right to it.


According to the general rule buildings and constructions must be mortgaged together with underlying land plots (lease rights thereto) on the basis of the unity principle (clause 3 Art. 340 Civil Code RF).

At the same time, Russian legislation contains some restrictions on land mortgage / pledge of land lease rights (e. g. Art. 63 of the Law on Mortgage). Such restrictions are provided mainly with regard to publically owned land.

The SAC Decree on Pledge points out (item 12) that inability to mortgage a land plot due to legislative restrictions applicable to its mortgage does not entail invalidity of mortgage agreements regarding real estate objects located on the land plot concerned, provided that such objects are not affected by the restrictions applicable to the land plot. In practice it means that, for example, an owner of a building located on a municipal land plot leased for less than 5 years (mortgage of short-term lease rights to a land plot is prohibited without consent of a public owner, unless the lease agreement stipulates otherwise), may actually mortgage such building without mortgaging the lease right to the land plot. Should the mortgaged object be transferred to the mortgage holder or a third party as result of foreclosure, the acquirer shall be entitled to use the land plot on the same basis as the previous owner of the mortgaged object.

In addition, the SAC Decree on Pledge clarifies that mortgage of a separate premise in a building does not require simultaneous mortgage of rights to the underlying land plot (item 11). According to the recently developed legal concept of common property in non-residential buildings, the joint ownership (lease) rights to land are considered an integral part of title to separate premises in a building and must be transferred to every following acquirer of the premises automatically.

The SAC Decree on Pledge specifies that mortgage rights (pledge rights to land lease rights) remain valid with regard to all parts of the mortgaged object in case of physical division (separation) thereof (item 10) (e. g. split of a mortgaged land plot into 2 or more land plots registered as separate real estate objects). All respective registration entries are supposed to be made by the registration authority without separate application from the right holder; separate state duty should not be imposed.

Per general rule, foreclosure of mortgaged property leads to termination of any encumbrances to it (lease rights, free of charge use rights, limited use rights (servitudes) to the property), which were established after conclusion of the mortgage agreement and without consent of the pledge holder (clause 2 Art. 40 of the Law on Mortgage). The SAC Decree on Pledge clarifies (item 22) that registration of termination of mentioned rights may be carried out only upon provision of evidence that respective right holders have been duly informed about the fact of out-of-court foreclosure on pledged property. Otherwise, such encumbrances remain in force regardless absence of consent of the pledge holder. If the mortgaged property is foreclosed via court, respective right holders shall be involved in the litigation as third parties.


The abovementioned positions of the Supreme Commercial (Arbitrazh) Court RF with regard to interpretation and enforcement of legislation concerning pledge, as well as other provisions of the SAC Decree on Pledge, shall be regarded in future as official guidance for case examination and decision making by the Russian state Commercial (Arbitrazh) courts.