Can you lease an apartment under mortgage with a bank?

The Federal law “On mortgages (real estate loans),” guarantees the right to lease property under mortage without the consent of the mortgagee but with the caveat that the mortgage agreement may envisage otherwise.

In practice, situations are commonplace in which banks that issued a loan list in the mortgage agreement a provision prohibiting the lease of the apartment used as collateral without the bank's consent. This condition is presumed as unfair since many people lease mortgage real estate and pay for their loans using the income they receive from leasing their apartments.

However, this condition is now officially illegal and an infringement of consumer rights. The Supreme Court of the Russian Federation has issued a ruling in a case in which it confirmed a ban on putting into writing a term prohibiting the leasing of apartments without the bank's consent.

Here’s the history of the dispute.

The Department of the Russian Federal State Agency for Health and Consumer Rights issued a ruling to establish administrative charges for “Bashkir Industrial Bank,” PJSC, under article 14.8 part 2 of the AOC of the Russian Federation: adding a term to an agreement infringing upon consumer rights.

The state agency determined that the bank had written into its agreements with individuals a term prohibiting the lease of mortgaged apartments without the bank's consent, which was a violation of the borrower’s consumer rights.

Within the bounds of arbitrage case #А07-29275/2015, the bank attempted to dispute the ruling by the Department of the Russian Federal State Agency for Health and Consumer Rights.

However, the arbitrage courts of all instances, as well as the Supreme Court of the Russian Federation took the side of the state agency. The courts noted that the term for the mortgaged apartment renting permission procedure violated the borrower’s rights as a consumer as far as current law doesn't envisage the ability to restrict owners’ rights to use collateral property according to its intended purpose.

Thus, if a bank includes a term into a mortgage agreement prohibiting the lease of a collateral apartment, this constitutes an infringement of the borrower’s rights a consumer, and the term itself is thus legally invalid.

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