Destroyed collateral: current case law on resolving disputes between banks and borrowers over destroyed real estate

With the beginning of a full-scale war, there are more and more cases of destruction and damage to civilian infrastructure facilities that may already be the object of collateral, as well as taken on credit or mortgage. The result has been a sharp increase in disputes throughout Ukraine regarding the destroyed mortgage.

According to the Civil Code of Ukraine, collateral is one of the types of obligations that can be secured. Article 3 of the Law of Ukraine “On Collateral” determines that collateral can be secured by any valid existing claim or claim that may arise in the future that does not contradict the legislation of Ukraine, in particular, one that arises from a loan, credit, purchase and sale agreement, lease, cargo transportation, etc. Collateral is of a derivative nature from the obligation secured by it.

In banking legal relations, collateral is used so that in the event of default by the borrower on a loan, the lender, i.e. the bank, can turn over certain specified property to its benefit, thus satisfying its claims at the expense of the pledged property. Collateral minimizes the risks of the financial institution and guarantees the borrower’s return of the entire amount of funds received from the bank.

A mortgage, in turn, is a type of security for the fulfillment of an obligation with real estate (an indivisible object of unfinished construction, a future real estate object), which remains in the possession and use of the mortgagor, according to which the mortgagee has the right, in the event of default by the debtor of the obligation secured by the mortgage, to satisfy his claims at the expense of the mortgaged object, primarily to other creditors of such debtor in accordance with the procedure established by the Law of Ukraine “On Mortgage”.

Article 17 of the Law of Ukraine “On Mortgage” in particular stipulates that one of the grounds for termination of a mortgage is the destruction/loss of the mortgaged building/structure, if the mortgagor has not restored it. A critically important caveat: if the subject of the mortgage agreement is a land plot and a building is located on it, then in the event of the destruction of the building, the mortgage of the land plot does not terminate. The bank retains the pledge on the land plot even after the complete destruction of the structure.

In addition, the credit obligation is regulated by Articles 525, 526 of the Civil Code of Ukraine, according to which the obligations must be properly performed in accordance with the terms of the agreement. Unilateral refusal to perform the obligation is not allowed, unless otherwise expressly established by law or agreement.

Termination of the mortgage does not automatically mean termination of the credit obligation. According to the position of the Supreme Court, the presence of a court decision on satisfaction of the creditor’s claims, which is not fulfilled by the debtor, does not terminate the legal relationship of the parties to the credit agreement, does not release the latter from liability for non-fulfillment of the monetary obligation and does not deprive the creditor of the right to receive the amounts provided for in Part 2 of Article 625 of the Civil Code. Thus, the destruction of the mortgaged object due to military actions eliminates one instrument of protection for the creditor, but not the claim itself against the borrower (Resolution of the Plenum of the Supreme Court of Ukraine for the Consideration of Civil and Criminal Cases dated March 30, 2012 No. 5 “On the Practice of Applying Legislation by Courts in Resolving Disputes Arising from Credit Legal Relations”).

The consistent position of the Supreme Court is that the pledge (mortgage) and the credit obligation are two independent transactions. The destruction of the collateral terminates the collateral as a means of securing the performance of the obligation, but the credit obligation itself, that is, the borrower’s obligation to repay the loan and pay interest, remains valid, unless otherwise provided for by the contract. This means that a borrower whose apartment or house was destroyed as a result of shelling is not legally released from the debt to the bank solely due to the fact of the destruction of the pledged property. Instead, he loses the status of a pledgor, and the loan is transformed into an unsecured obligation.

Case law, in particular, the decision of the Kherson Court of Appeal
of November 11, 2025, in case No. 650/4541/41, is an example of the fact that the complete destruction of a residential building as a result of Russian shelling is sufficient grounds for terminating the mortgage, even if the credit debt remains outstanding. The court proceeded from the fact that the collateral itself is missing, and therefore it is impossible to maintain the encumbrance. Termination of a mortgage is not the same as termination of a credit debt. The mortgage as a means of security is terminated, but the main monetary obligation may remain in force. The panel of judges of the Kherson Court of Appeal supported the conclusions of the court of first instance, noting that the claim was reasonably satisfied, since the case materials contain appropriate and sufficient evidence of the fact of the destruction of the mortgaged object. Given that the mortgaged property was not restored or replaced with another object, the court concluded that there were grounds for termination of the mortgage provided for by law and the terms of the mortgage agreement.

Since 2022–2023, the courts have begun to actively consider claims of borrowers who request to recognize the mortgage as terminated due to the destruction of the mortgaged object as a result of hostilities. In such cases, the courts apply