Foreclosure on Mortgaged Property

Foreclosure on mortgaged property is one of the key institutions for securing obligations in civil transactions. In a market economy, a pledge — and particularly a mortgage — serves as a fundamental guarantee for the repayment of loans and other obligations. The Law of the Republic of Uzbekistan “On Mortgage” (No. ZRU-58 of October 4, 2006) establishes detailed rules and procedures for the implementation of this mechanism.

Foreclosure may be initiated when a debtor violates their obligations under the secured agreement (loan, credit, or another contract). According to the law, a mortgage remains in force until the full performance of the principal obligation, and in case of non-performance, the creditor (mortgagee) is entitled to satisfy their claims at the expense of the mortgaged property.

Key Grounds:

• Delay in the performance of an obligation;
• Improper fulfillment of contractual terms;
• Other cases expressly provided by law (e.g., damage to the mortgaged property, lack of insurance).

Forms and Procedure for Foreclosure

The law provides several forms of foreclosure:

Judicial procedure – the most common method, where the creditor files a lawsuit to foreclose on the mortgaged property. The court issues a decision ordering the sale of the property through public auction.

Extrajudicial procedure – allowed when explicitly provided for in the mortgage agreement and notarized. This method enables faster realization of the mortgaged property.

Enforcement proceedings – foreclosure may occur as part of enforcing a court judgment or acts of other competent authorities. In this case, the state enforcement officer must notify the mortgagee within three days.

Sale of the Mortgaged Property

The sale of the property is generally conducted through auction. The mortgagee has a preferential right to be satisfied from the proceeds of the sale before other creditors. Exceptions apply in cases expressly provided by law (e.g., alimony obligations).

If the property is not sold at auction, the creditor may:

• Retain the property in lieu of debt repayment; or
• Agree with the debtor on another form of settlement.

Consequences and Legal Guarantees

Preservation of the mortgage – transfer of ownership to another person does not terminate the mortgage; the new owner becomes the debtor’s successor and assumes the encumbrance.

Invalidity of transactions – any transactions involving the disposal of the mortgaged property without the consent of the mortgagee may be declared void.

Liability of the acquirer – a person who acquires property in violation of the rules may be held jointly liable with the debtor.

Debtor protection – the law prohibits foreclosure on property that cannot be alienated or is withdrawn from circulation (e.g., cultural heritage sites, property subject to mandatory privatization).

In foreign practice, particularly in continental Europe, extrajudicial realization (foreclosure) is widely used. In Uzbekistan, this institution also exists but judicial foreclosure remains the primary method, primarily to ensure the protection of debtor rights.

The foreclosure mechanism plays a fundamental role in maintaining the stability of credit relations. The Law of the Republic of Uzbekistan “On Mortgage” establishes a balance between the interests of the creditor and the debtor: on the one hand, ensuring the repayment of obligations; on the other, protecting the property rights of individuals and legal entities. The effectiveness of this mechanism depends on strict compliance with procedural norms and the good faith of the parties.

Methods of Foreclosure on Mortgaged Property and Their Consequences

Method of Foreclosure	Legal Basis	Implementation Procedure	Key Features	Legal Consequences
Judicial procedure	Law “On Mortgage”, Civil Procedure Code of Uzbekistan	The creditor files a claim; the court issues a decision; property sold through public auction	Provides the greatest protection of debtor’s rights; mandatory property valuation; participation of all parties	Proceeds distributed: first – to the mortgagee; remaining balance returned to debtor
Extrajudicial procedure	Notarized mortgage agreement	The parties pre-agree on extrajudicial realization; the agreement is notarized	Faster and less expensive; excludes litigation; requires clear clause in the contract	Sale through auction or direct transfer of ownership to creditor; debt repaid from property value
Enforcement proceedings (court decision or other authority)	Law “On Enforcement Proceedings”	State enforcement officer seizes property, notifies mortgagee within 3 days, and arranges sale	Ensures state participation; mortgagee may demand early performance	If unsold, mortgagee may accept property as ownership or refuse it
Voluntary transfer of property to creditor	Mutual agreement (under Mortgage Law)	Debtor transfers property to creditor in lieu of debt	Based on mutual consent; avoids auction	Debt considered fully or partially repaid (as agreed)
Foreclosure upon unauthorized alienation of property to third parties	Law “On Mortgage”	Mortgagee may challenge the transaction in court and foreclose on property	Purchaser aware of mortgage may become jointly liable	Property returned to circulation with mortgage preserved; creditor satisfies claims

 

Procedure for Realization of Mortgaged Property

Stage	Action	Participants	Legal Basis / Key Points
1. Emergence of grounds	Non-performance or improper performance of obligation secured by mortgage	Debtor, creditor (mortgagee)	Law “On Mortgage” (No. ZRU-58), Civil Code of Uzbekistan
2. Notification of debtor	Creditor sends written demand for performance or foreclosure	Mortgagee → Debtor	Voluntary settlement preferred
3. Choice of realization method	(1) Judicial procedure; (2) Extrajudicial procedure (if stipulated in contract)	Creditor, debtor, court/notary	Possible direct agreement on extrajudicial realization
4. Initiation of enforcement proceedings	Court issues judgment (judicial) or notary certifies agreement (extrajudicial)	Court, state enforcement officer / notary	Debtor officially notified
5. Inventory and seizure of property	Determination and recording of property subject to realization	Enforcement officer, debtor, creditor	Creditor notified within 3 days
6. Property valuation	Market value assessed by independent expert or by agreement	Expert, debtor, creditor	Mandatory before sale
7. Organization of public auction	Announcement and conduct of open sale	Enforcement officer, specialized organization	Closed sales prohibited; information made public
8. Conduct of auction	Sale of property through competitive bidding	Auction participants	Buyer pays purchase price
9. Transfer of property	Ownership transferred to buyer; transfer act drawn up	Enforcement officer, buyer	Buyer registers ownership in state registry
10. Distribution of proceeds	(1) Payment of execution and auction costs; (2) Satisfaction of mortgagee’s claims; (3) Return of balance to debtor	Enforcement officer, creditor, debtor	Mortgagee has priority over other creditors
11. Special cases	If auction fails – creditor may keep property at appraised value	Creditor	Exception: property restricted from circulation
12. Social guarantees	In sale of residential property – court supervision, protection of minors	Court, guardianship authorities	Court ensures legality of eviction