Purchase of Property at a Forced Auction: Traps and Risks

Legal Insight

February 2020

PURCHASE OF PROPERTY AT FORCED AUCTION: PITFALLS AND RISKS

Republished from Euro2Day

George Psarakis LL.M. (mult.), PgCert

Summary: This article identifies the risks and pitfalls in the process of purchasing a property sold through a forced auction.

About 8 years ago a similar article was published in a financial newspaper. At that time the issue may not have been so topical as there was little interest in buying property. Although nowadays the first bid price in an auction is identical to the market value of the property, and therefore there is usually no element of 'bargain', the transparency brought by the electronic auction system has contributed to an increase in buyer interest. In fact, credit institutions have built a special website (landea.gr) which contains more data and information on the auctioned properties (searchable and criteria-based) than the public official database (e-auction.gr). We are informed that some servicers intend to do the same in 2020. The problem, of course, that remains is that the first bid price is identified with the commercial value of the property, whereas in many people's opinion it should be more closely linked to the value of the property, which is the value of a forcible sale. 

In any case, both 8 years ago under the auction regime in the magistrates' courts and today under electronic auctions, the risks for the successful bidder in the process remain. No matter how low the auction price is, the new owner is not in a position at that moment to know whether he has finally acquired secure ownership of the property or whether he has simply put his capital at risk. 

The truth is that, as it is often written, with the auctioning of the property and payment of the bidding price by the successful bidder, the mortgages, liens and seizures on the property are written off (Article 1005§3 of the Code of Civil Procedure) and therefore the latter "comes clean" to the successful bidder. For this reason, it is often recommended that bidders should not check the title deeds of the property at the competent land registry or cadastral office in order to avoid unnecessary costs. Indeed, it is often read on the internet that the assistance of a lawyer during the bidding process in an auction is an unnecessary waste of money (see (see relevant passage from a real estate consultancy company website: 'Conclusion NO LEGAL EXPENSES, you don't need a lawyer when buying at auction, of course if you want to GET YOUR MONEY BACK YOU HAVE EVERY RIGHT').  

However, this perception is completely wrong and dangerous. I explain:

1. First of all, in the procedure for the enforcement of real estate, the major issue is not whether the auctioned property is encumbered or not, since it is quite likely that it will be encumbered if it has reached the auction, but whether the enforcement procedure has been carried out lawfully so as to exclude any serious possibility of an opposition to annul enforcement acts. In other words, in the event that the procedure has not taken place as required by law, the final act of sale of the property is at risk of annulment upon opposition by the debtor-owner. Even after the end of the auction and the payment of the auction price, the auction may be annulled, resulting in the loss of ownership of the property and the winning bidder being forced to engage in a multi-year legal battle to recover the capital paid. An illustrative example of the formality of the procedure is a recent decision (Athens Single-Member Court of First Instance 1057/2019) where the court annulled the seizure report, which resulted in the auction becoming null and void, due to the fact that the auction date was set before 7 months from the date of the seizure. The defects that can be involved in an auction are numerous and many pages of legal literature have been written on these issues. 

2. At the same time, the debtor is likely to have already brought legal proceedings against enforcement acts or against the enforcement instrument itself. He or she may have already appealed against the payment order or the final judgment on the basis of which the auction was accelerated without, however, having succeeded in suspending enforcement. In this case, the auction procedure is not hindered by the possible exercise of the above-mentioned legal remedies and it is therefore possible that after the auction, for example, the payment order will be finally annulled and, if appeals have been lodged against the seizure and award report, this annulment will also annul the auction itself. The legislature, of course, in 2015 went ahead and provided that the decision on the objection to any defects in the foreclosure must be published before the auction, so that prospective bidders are assured that the process is not jeopardised. However, in the Athens Court of First Instance this is not usually observed (due to workload), and the decision on the opposition may be issued much later than the auction. 

3. Also, the prospective bidder must bear in mind that the transfer of property by forced auction does not constitute an original but a derivative way of acquiring the property. In other words, even if the auction held is valid, it is not capable of contributing to the transfer of ownership to the successful bidder if the auctioned property was not owned by the debtor, i.e. if the latter lacked the power of disposal. In this case, the beneficial owner may bring an action to claim the property within five years of the transcription of the summary of the auction report of the property, with the possible result that the winning bidder will ultimately lose ownership. In addition, other third-party rights in rem, other than mortgages and liens - e.g. works such as, in particular, the building lease - are not amortised by the auction and therefore continue to encumber the property. For this reason, and finally, a check on the title to the property being auctioned is also necessary.

4. It is also common for the auctioned property to be "encumbered" with certain rights, such as leasehold rights. In this case, before the changes introduced by the legislator in 2015, it was reasonable that the property, due to the conditional commitment of the successful new owner under the already established lease contract, would lose part of its value. This is because the new owner could not operate the property commercially when it was already leased to a third party and that lease also bound him. Now, however, the legislator protects the new owner by giving him the right to terminate the lease of a property on which a business is carried on, whenever and for however long the lease was concluded. This does not apply, however, to leases of property where no business is carried on and the conclusion of which is evidenced by a document of definite date at a time prior to the seizure. In such cases the successful bidder cannot evict the lessee and is forced to wait for the normal expiry of the contract. As can therefore be understood, the risk to the successful bidder, although reduced, is still present.

5. Also significant is the burden that may arise from the so-called "hidden charges" of the auctioned property which follow it and are ultimately borne by the new owner. By way of illustration, I refer to the debts from property transfer tax (pursuant to Article 5 § 3 of the Act). 1587/1950 'for five years from the date of signature of the final contract, the buyer and any person holding the transferred property shall be jointly and severally liable with the buyer and any person holding the transferred property for the transfer tax and surcharges'), which are charges which, without proper control, cannot be easily identified because they are not recorded in the public registers, but are in fact not registered in the public registers, nevertheless, they are 'attached' to the property and are ultimately passed on to the new owners, who are now themselves responsible for their payment. Similar hidden charges are also provided for in other provisions (see, for example, Article 9(9)(a)(ii)). 6 ν. 2744/1999. However, with regard to inheritance tax in particular, it has been held by the Supreme Court (Ap 12/1990) that the owners and holders of inherited property are not jointly and severally liable with their heirs and legatees for the payment of the tax due on the property.

It follows therefore from the above that participation in an auction may bring significant benefits to the new owner, but it is also a source of several risks. Obviously, under the regime summarised above, we cannot expect sound bidding that provides legal certainty. Nor has the electronic auctioning process finally resolved the above issues. While it has introduced transparency to the process, it has also caused some new problems (such as the incorrect entry of an amount in the system, which binds the successful bidder and cannot be easily corrected - see e.g. the decision of the Athens Court of First Instance No. 7017/2018 rejecting the objection of the successful bidder against the auction due to the fact that instead of €309,033 he entered the incorrect €3,090,330).