Pledge vs Mortgage: Key Differences in Security Interests

Understanding the Pledge as Security

A pledge involves handing over the secured item to a creditor or third party. This arrangement facilitates the sale of the item if the underlying obligation is not met. Therefore, a pledge necessitates a transfer of possession.

In specific cases allowed by law, this physical transfer (displacement) can be substituted by registration. Examples include:

• Pending fruits and expected crops
• Individual fruits
• Animals
• Machinery and equipment on holdings (as per Art. 54 of the Law of Mortgages and Pledges without Displacement of Possession, December 16, 1954).

Upon receiving possession of the item, the creditor has the right to retain it, or it can be held by a third party designated by mutual agreement (Art. 1866.1 CC). If the pledged item generates income (e.g., interest), the creditor is entitled to apply this income towards the amount owed. Any excess beyond what is legally due must be applied to the principal debt (Art. 1868 CC).

If the debtor defaults on the obligation, the creditor has the right to be paid from the proceeds of the pledged item. The sale can occur through a notary (requiring notification to the debtor and a public auction) or via judicial authorization. Conversely, if the debtor fulfills the obligation, the creditor must return the pledged item in the same condition it was received.

Mortgage: Securing Debt with Property

A mortgage is a charge placed on real property or inalienable rights associated with such property (e.g., the right of usufruct can be mortgaged). It's possible to place subsequent mortgages (e.g., a second mortgage) on already mortgaged property. However, the first mortgage always retains priority (degree of preference).

The Act of December 16, 1954, also covers chattel mortgages (sometimes referred to as 'mortgage interest' in this context), which can be placed on specific movable assets listed in Art. 12, including:

• Commercial establishments
• Automobiles and other motor vehicles
• Aircraft
• Industrial machinery
• Intellectual property

However, in practice, both chattel mortgages and pledges without dispossession have seen limited use.

For a mortgage to be validly established, the corresponding document must be registered in the Land Registry (Art. 1875 CC). A mortgage directly subjects the property to the fulfillment of the secured obligation, irrespective of who currently owns the property.

Consequently, the owner can sell the mortgaged property, but the buyer acquires it subject to the existing mortgage. Because registration is required for validity, any third-party purchaser acquires the property with this encumbrance ('load'). The owner cannot perform acts that jeopardize the value or security of the mortgaged property.

Unless otherwise agreed, the mortgage secures the payment of interest generated by the guaranteed obligation, even in the event of bankruptcy. However, unless specifically agreed upon, the mortgage typically does not cover legal costs or the expenses associated with the foreclosure procedure.