Is purchasing property in a bailiff’s auction worth the trouble?

Real estate auctioned off in execution proceedings may be tempting because of below-market prices. But a low price also has its price.

There is a common belief that during a bailiff’s auction of real estate in the course of execution proceedings, a buyer can acquire property for a price much lower than the market value. This is partly because the starting price during the first auction is set at three-fourths of the estimate, and if the property does not sell at that price and a second auction is held, the starting price is reduced to only two-thirds of the estimate. Moreover, in practice the estimates issued by appraisers hired by bailiffs tend to come in somewhat below market prices.

But buying real property at a bailiff’s auction carries with it certain dangers which potential buyers need to be aware of.

When taking part in an auction, it is important to pay particular attention to the date on which the execution proceeding was commenced. If it was commenced prior to 3 May 2012, it will not be covered by the amended regulations governing execution proceedings introduced by the amending act of 16 September 2011. This is a key cut-off date because a number of changes were introduced to correct certain defects in the previous rules.

We now turn to a calculation of the price to be paid for the opportunity of purchasing property at auction for below the market price.

Cash up front—credit, not so much

When deciding to acquire property through execution, the potential buyer should have a source of financing in place sufficient to pay the full price for the property in short order.

When the court order confirming that the prospective buyer has made the highest bid—which is issued quickly, typically on the same day as the auction—becomes legally final, the court will summon the buyer to pay the full purchase price (less the bidding deposit already paid) within two weeks. This period may be extended, but only up to one month at the most. Therefore the time allowed to come up with the purchase price may be very short (although it may also be prolonged if a complaint against the bailiff’s actions or an appeal against the court order confirming the highest bid is filed).

For these reasons, it is safest to enter the auction with cash on hand sufficient to cover the full price. In theory the purchase could be financed through a bank, but it may be difficult or impossible to obtain a bank loan that quickly, and not entirely under the buyer’s control. A bank loan would also require submission of security other than a mortgage on the property to be acquired—e.g. a mortgage on other real estate.

In any case, when choosing to participate in a bailiff’s auction, the bidders must pay a deposit of one-tenth of the estimate. In proceedings commenced prior to 3 May 2012, the deposit must be paid by the latest by the time the bidder joins the auction, i.e. by the start of the auction, but in proceedings commenced after that, the deposit must be paid earlier—by the day before the auction at the latest.

The deposit is a form of security in case the bidder does not fulfil the terms for payment of the price, and is forfeited in its entirety if the full price for the property is not paid—for example if the successful bidder does not obtain an expected bank loan. The unsuccessful bidders should be repaid their deposits promptly.

Order awarding ownership

If the buyer pays the full price for the auctioned property by the deadline, the court will issue an order awarding ownership of the property to the buyer. When the order becomes legally final, it entitles the buyer to record ownership in the land and mortgage register and to delete mortgages on the property from the register.

But if the property acquired at auction is occupied, it is often necessary to evict the occupier from the property.

The order awarding ownership of the property entitles the owner to conduct eviction from the property. In the case of execution proceedings commenced prior to 3 May 2012, it is also necessary for the court to issue an enforcement clause for the order before eviction may be carried out. In the case of execution proceedings commenced on or after 3 May 2012, the order awarding ownership does not require issuance of an enforcement clause as a condition to conduct eviction.

If eviction is necessary, this postpones the buyer’s taking possession of the property, and in extreme cases may result in destruction of the property by the occupier. The inability to take possession of the property immediately upon acquisition by winning the auction prevents the buyer not only from making immediate use of the property but also from reaping other benefits from the property, such as the payment of rent. The buyer may seek payment from the occupier for non-contractual use of the property, as well as any related damages, but this also requires the owner to incur court costs and take measures to enforce such obligations.

Lease and tenancy

Property acquired at auction may also be encumbered by rights arising out of a lease or tenancy agreement. When the order awarding ownership becomes legally final, the new owner enters into the rights and obligations of the prior owner under existing lease and tenancy agreements, under the regulations governing such relationships in the event of sale of the leased or tenanted property.

But in this case it is particularly vital to determine the date when the execution proceeding was commenced.

If the execution proceeding was commenced prior to 3 May 2012, the buyer, now the owner of the property, is entitled to terminate an existing lease or tenancy agreement in accordance with the provisions of the agreement and the law. However, the new owner cannot effectively terminate a lease or tenancy agreement concluded for a definite period if the agreement was made in writing with a certified date and the property was already delivered to the lessee or tenant. In that case, even lease or tenancy agreements concluded after the commencement of the execution proceeding are binding on the buyer.

Leases for a definite period sometimes include an acknowledgement that the lessee has paid the rent in advance, directly to the prior owner (the debtor in the execution proceeding), for the entire term of the agreement. In such case, the acquirer of the property is not even entitled to benefit from the property in the form of rent.

The buyer of the real estate is bound by such an agreement until it ends because the period for which it was concluded expires, unless there is some other basis for terminating the agreement under the law—for example, if the lessee uses the property in a manner contrary to the agreement or the designated use of the property, and does not stop using the property in such manner despite a demand from the owner, or neglects the property to the extent that it is threatened by loss or damage.

As is apparent, the situation of a buyer of property during the course of a bailiff’s auction in enforcement proceedings commenced before 3 May 2012 is not favourable if the property is encumbered by a lease or tenancy agreement.

The buyer’s situation in proceedings commenced on or after 3 May 2012 is much more favourable. Such a buyer can terminate a lease or tenancy agreement even it was concluded for a definite period (longer than two years), in writing and with a certified date. However, it is crucial to comply with the deadline for submitting the notice of termination of such an agreement. Notice must be given within one month after the order awarding ownership of the property becomes legally final, with a termination notice period of one year unless the agreement provides for a shorter notice period.

As against a buyer of property at auction in proceedings commenced on or after 3 May 2012, delivery of the property in usufruct, finance leasing, lease or tenancy is also ineffective.

Entry of commencement of execution in the land and mortgage register

The conduct of execution against real estate is reflected in the land and mortgage register, which should include an entry on commencement of execution.

Apart from entering ownership of the property and deleting mortgages against the property, it is also important for the buyer to delete the entry on the pending execution against the property. This enables further transactions involving the property to be conducted effectively.

The issue of deletion from the land and mortgage register of the entry on commencement of execution is not specifically regulated in the law. The practice in this respect also differs among the land and mortgage register courts. Some courts will delete the entry on the basis of a legally final order awarding ownership, others also require a legally final plan for allocation of the proceeds of execution, and some wait until the execution proceeding is completed.

Currently, with respect to execution proceedings commenced on or after 3 May 2012, the bailiff is required to file an application to delete the entry on commencement of execution if the proceeding is discontinued. Expressly providing for such an obligation on the part of the bailiff in the Civil Procedure Code is beneficial, and was a necessary change, but it did not entirely solve the problems of buyers of property at auction. This is because an execution proceeding may continue for several years before it is finally closed or discontinued.

The need for the bailiff to file an application to delete the entry on commencement of execution after the auction has been held and the property has been sold was not addressed in the recent amendments. Therefore, now as before, the bailiff may take no initiative in this respect, even though the property has since changed owners and the bailiff can no longer conduct any enforcement measures involving the property in the pending proceeding.

It appears that when the order awarding ownership becomes legally final, enabling entry of the new owner in the land and mortgage register, this is the moment when the bailiff should be required to support the buyer of the property in the procedure of deleting from the register the entry on commencement of execution.

Cooperation by bailiffs with buyers of auctioned real estate in this respect would increase the appeal of auctioning off property in execution proceedings, because it would be a signal for potential buyers that it is possible to clean up outdated entries from the land and mortgage register more quickly.

Complaint against execution measures

When acquiring property in execution proceedings, it should also be borne in mind that the debtor and other participants in the proceedings are entitled to file complaints against any and all measures taken by the execution authorities. Until the interlocutory appeal or the complaint against the measures taken by the bailiff is decided, further actions cannot be taken in the execution proceeding. Taking into account the time required to conduct such judicial review, the debtor’s filing of an interlocutory appeal against the order confirming the highest bid, and after that against the order awarding ownership to the buyer, may mean that the new owner will have to wait longer than a year before title is entered in the land and mortgage register.

Time and nerves…

In short, time and nerves are the price to be paid in exchange for paying a below-market price for property in a bailiff’s auction. Purchasing property in an auction should be considered only by investors who do not require an immediate return on their investment and are prepared to wait even several years before they can take move into the premises, redevelop the property, or obtain any other benefit from ownership.

Leszek Zatyka, Reprivatisation Practice, Wardyński & Partners