Similarities and Differences Between Pledges and Hypothecs

• 12 April 2021
• Local News
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According to Articles 816 and 843 of the Civil Code, a pledge is different from a hypothec. For pledge transactions, the creditor has the right to possess and use the pledged property. However, in the case of hypothec transactions, the creditor has no right to possess the collateral, which means debtors can still can use or benefit from their property as usual.

For example, a mortgage in most cases is a loan in form of the hypothec, in which debtor still has the right to benefit from their property as usual. The creditor/bank only holds the title of that property without having any ownership transfer rights.

The following are some of the similarities and differences between pledges and hypothecs in detail:

Similarities

1. Property must be registered
Immovable property can be used as collateral in a pledge or hypothec transaction only when it is properly registered with the cadastral administration.

2. Transaction must go through cadastral administration
Both pledge and hypothec contracts are required to go through the cadastral administration. The land ownership title must be brought to the cadastral administration for labelling as a pledge or hypothec.

3. Both can go through foreclosure if the debtor fails to pay the debt
In case the debtor defaults on the debt, the creditor must go through a court procedure for foreclosure both for pledge and hypothec contracts. Creditor/s have no right to solely sell the property without a court order.

4. Contract will be terminated when debt is paid off
Once the debtor has paid the full amount to the creditor, the pledge or hypothec contract shall be terminated. The ownership title must also be brought for relabeling at the cadastral administration.

Differences

1) Creditor has different rights on the property

In the case of pledge contracts, the creditor can possess and benefit from the property along with other rights (read more). For a hypothec agreement, the creditor only holds the ownership title of the property solely to ensure the debt repayment, but they do not possess or make benefit out of that property.

2) Different ways to set interest rate

According to Article 351 of the Civil Code, interest is not required in case of a pledged agreement as the creditor could already gain benefit from the possession of the property. However, Article 837 also allows for a special contract to charge interest in the case that the creditor has to pay the maintenance costs on the property instead of getting benefit during the loan agreement. Unlike a pledge, in hypothec agreements, both parties have agreed clearly on the principal, interest and other dividends in the contract in advance.

3) Different transaction duration permitted

By law, the immovable property can be used as collateral in pledge transactions for no more than 5 years and can be re-pledged for another 5 years. On the other hand, hypothec agreements do not have a time limit.

4) Different numbers of creditors

In the case of a pledge contract, there must be only one creditor as the creditor will have full rights to the property possession. However, for hypothec transactions, debtors can use one property to request more than one loan from different creditors.

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