Eviction from Bank-Mortgaged Properties and the Legal Status of the Tenant

In a real case, a debtor leases a property that is mortgaged to a bank to a third party. The bank acquires the property through the Registration Execution process (an out-of-court foreclosure mechanism in Iran for registered mortgages), and after obtaining the executive transfer deed, files an eviction lawsuit (Khal-e-Yad, a specific action in Iranian law to dispossess an unlawful occupant) solely against the mortgagor (the borrower) and obtains a judgment. At the execution stage, the execution officer encounters the tenant. The tenant files a third-party objection petition (a legal mechanism allowing a party not involved in the original lawsuit to challenge a judgment that harms their rights); the key point here is that at the time the eviction judgment was issued, the lease term was still valid, but by the time the third-party objection was registered, the term had expired.

The first viewpoint is that the eviction lawsuit should have been filed against the actual occupant; because an eviction lawsuit is directed against a usurper or someone deemed a usurper. Since the tenant was a lawful occupant at the time the judgment was issued, and the bank is the successor in interest to the previous owner, the judgment was issued incorrectly and must be annulled.

However, this viewpoint faces two challenges: First, the issue of the ownership of the usufruct (the right to enjoy the benefits/profits of the property) and the bank's succession. The bank's subordinate right in rem (collateral right) was created prior to the lease by virtue of the mortgage contract, and under the mortgage and loan agreements, the right to transfer the usufruct is usually stripped from the mortgagor. Even beyond this contractual condition, leasing a mortgaged property without the mortgagee's (the bank's) permission is unauthorized and unenforceable (Fozouli, a concept in Islamic/Iranian law where a transaction made on behalf of an owner without their consent is pending their approval or rejection); because it deprives the mortgaged property of its immediate utility, reduces its value and desirability, and consequently causes detriment to the mortgagee.

The bank cannot be considered the successor to the unauthorized lessor; because the acquisition of the property and the filing of the eviction lawsuit by the bank constitute a practical rejection of the lease, and that so-called tenant has no ownership of the usufruct against the bank.

The second challenge is the conflict between a procedural objection and substantive reality. Even though the court of first instance would have dismissed the lawsuit at the time of the eviction hearing had it known about the occupation of the property by a third party (i.e., the tenant), does this procedural error warrant overturning the judgment in a third-party objection?

According to Article 417 of the Civil Procedure Code, the objecting third party must prove that they possess a legitimate right at the moment the claim is filed. When no transfer of usufruct has occurred due to the unenforceability and subsequent invalidity of the lease, and the contract period has also expired prior to the third-party objection, continued occupation is considered usurpation. Overturning the judgment in favor of an occupant with no substantive right would mean imposing a repetitive trial with a foregone conclusion.

Of course, what occurs to me is that in one specific scenario, a right can be recognized for the tenant even after the lease expires: if the lease was concluded prior to the mortgage or with the bank's permission. In this case, the lease would be enforceable against the bank, and the bank becomes the lessor's successor; therefore, according to Article 4 of the Landlord and Tenant Relations Act of 1997, the tenant has a right of retention (a lien allowing them to withhold the property) until their security deposit is refunded, and executing the eviction would violate this right. Consequently, the court, in the capacity of handling a third-party objection, should annul the eviction judgment in the part where it was issued absolutely and without the condition of paying the deposit amount, due to the third party's rightful claim and the establishment of harm to them.

Written by Reza Bastani Namaghi