The automatic reduction of the first bid price in real estate auctions: the provisions of the bill and the need to protect the debtor

Legal Insight

September 2021

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

(republished from Euro2day.gr)

Summary: A few days ago the new bill with the proposed changes to the Civil Procedure Code was put to public consultation (opengov.gr). One of them concerns the way of determining the first bid price in real estate auctions. This article comments on the arguments for and against this change, and proposes a safety valve for the debtor.

A few days ago the new bill with the proposed changes to the Civil Procedure Code was put to public consultation (opengov.gr). One of them concerns the way of determining the first bid price in real estate auctions. In particular, it is proposed that the first bid price be automatically reduced after two unsuccessful attempts to 80% of the initial price (the initial price is identified by law with the market value of the property) and then, after the 3rd unsuccessful attempt, to 65% of this. A property i.e. a property valued at 100,000 euros and offered at this price in the 1st auction, after two unsuccessful attempts will be offered at an initial price of 65,000 euros. Currently, under the current legal framework, the first offer price can only be reduced after two unsuccessful attempts following a court decision and not automatically. 

The reason for this legislative proposal is obvious: with a large volume of properties ready to be auctioned within the next few months, the delays caused by the involvement of the judiciary in the process are already causing problems. In fact, it is not only the delay but also the ambiguity of the court's judgment that sometimes may not satisfy the lender.

This important change, however, raises some concerns:

a) Under the current legal framework, the court before which the issue of the reduction of the first bid price will be raised will decide whether the inability to award the contract (i.e. to find a successful bidder) is ultimately due to the high first bid price or to other reasons. Indeed, in recent years there have been dozens of court decisions rejecting applications for a reduction of the first bid price on the grounds that the inability to find bidders is not linked to the high first bid price but to the lack of liquidity in the market or the general economic crisis. Indeed, sometimes the lack of interest is also explained by the rather high market value of the property, or its particular characteristics, which results in a limited audience. For example, a house with a commercial value of more than EUR 3 million is likely to be addressed to a fairly limited public; or, in another example, for a hotel unit, for example, the judgment of the Trikala Single Court of First Instance No 73/2020 held that: "Given that the high price of the first bid of the property corresponds to its market value as determined by a previous judgment of this Court, based on its specific characteristics, however, due to the pervasive economic hardship it is considered that it is not possible to proceed with the auction procedure with the appearance of interested bidders, even with the appointment of an auction at a later date, in view of the fact that as a hotel unit it is addressed to a special buying public". Indeed, sometimes the courts have even gone so far as to criticise the credit institutions for trying to reduce the first bid price; see, for example, the decision of the Halkidiki Court of First Instance No 333/2013: "Therefore, the cancellation of the auctions is not due to the high prices of the first offer (since many of the seized properties remain unsold, even if the first offer is set at a price that is humiliating in relation to the loans taken out and the mortgages registered, in order to buy them), but to the lack of liquidity that generally affects the market, as well as to the high taxation and other charges on privately owned properties, which also deters would-be buyers. However, the economic crisis cannot be passed on to borrowers - debtors alone, while the banks remain unscathed and are able, on the one hand, to sell off the seized properties at prices far below their real value, on the other hand, they could continue to demand from the borrowers the full amount of the capital which they had granted to them in order for the latter to buy the seized properties, together with interest and costs, often confiscating other elements of their property'.

b) The explanatory memorandum supports the proposed change to the automatic reduction on the following grounds: "Provision is then made for a gradual reduction of the first offer price if two cancellations of the auction precede it. [...] The lack of bidders suggests that the first offer price is not in line with the existing market and demand conditions and therefore, in order to ensure that the auction is finally conducted and that there is significant bidding interest, a further (automatic) reduction of the first offer price in two stages is introduced in market conditions and healthy competition. [...] This arrangement does not affect the rights of the defendant in execution, nor does it prejudge the price at which the object will ultimately be auctioned, since through the bidding procedure, in accordance with Article 965 of the CCP, and healthy competition, which takes place under conditions of transparency, the highest bidder will emerge as the successful bidder. It is doubtful, however, whether the market can ultimately function rationally at any time and in conditions of healthy competition. In any case, the first bid price has also been intended to protect the debtor over time, otherwise there would be no reason to provide for it and the auctions would be conducted on a free bid basis (as, for example, under the new insolvency code when the assets of the company are sold as a whole). 

c) An interested bidder is likely, after being informed about the non-participation of any other bidders, to wait for the first two auctions to be declared inefficient in order to bid in the third auction, where the price will automatically be significantly reduced. In this way, the debtor will eventually lose his asset at a lower price, with the risk of continuing to owe his lender - usually a credit institution - if the auction has not covered the amount of the debt. 

However, the following should also be noted:

a) The first bid price at an auction would logically be linked to the foreclosure value of a property and not to the free sale price. In other words, the property is not being sold under free market conditions, with the responsibilities that a seller may have and the safeguards that a buyer may negotiate. Nor does a purchaser of a property at auction face the same risks as a purchaser of a property on the open market; in addition to the risks of judicial reversal of the auction by means of an appeal by the debtor, there are also the unknown costs of settling any unauthorised constructions etc. as well as various other hidden burdens (which we have highlighted in another article). It is reasonable that the first offer price should reflect this differentiation. The law, however, stipulates that the first offer price is equal to the market value of the property without taking into account the above parameters. The proposed change appears to compensate for this imbalance by automatically reducing the price. 

b) Courts hearing first offer price reduction cases obviously rely primarily on appraisal reports. The latter, however, as is well known, may vary; for the same property one valuer may have obtained certain comparative data which reinforce the desired result, while the opposing party's valuer may have obtained some other comparative data leading to a quite different result. The only objective and indisputable evidence is that the auction could not lead to a fruitful result twice in a row; this in itself provides a presumption of a high first offer price. However, since this is a presumption, it would probably be appropriate to clarify in the law that the debtor can bring a so-called 'correction action' to challenge the automatic reduction of the first bid price in court. In this way, the automatic reduction of the price will be achieved in principle, but the debtor will also be given the opportunity to protect himself in court if it is ultimately found that the reason for the lack of interest is not the high first offer price in relation to the market value, but, for example, the special characteristics of the property which make it attractive to a limited number of buyers.