George Psarakis LL.M. (mult.), PgCert
(republished from capital.gr)
Summary: An article summarizing the palette of aggressive actions taken by lenders against hotel property based on current practice.
In Greece, with its relatively developed tourism industry, there are hundreds of hotels that are trying to survive the various waves of either the recent economic crisis, the pandemic or the effects of inflation. Greek hotels are, to a large extent, made up of constructions and facilities that have been made possible with the help of bank financing. Entrepreneurs sometimes obtained bank loans (in the form of long-term loan agreements, bond loans, etc.) and sometimes leased the hotel unit using the leasing system. But what are the risks they face when they are confronted with credit or financial institutions? and what are the means of the banks, and now the Servicers, to enforce the collection of debts from the hotel units?
1. Enforcement and Auction
Enforcement is the most common means of enforced collection of debts. The bank, after proceeding with the termination of the loan etc., orders the compulsory seizure of the company's real estate, which consists of the hotel premises. Thus, the freezing of the property/property takes place and then within 7-8 months the auction is scheduled to take place. As the values are relatively high, it is usually not easy to find a high bidder in the initial auction, especially from 1/1/2022 when the automatic reduction of the first bid price to 80% of the initial bid price after the first two auctions are barren. Indeed, it is likely that potential bidders will expect the reduction of the first bid price to 65% of the initial bid, which will occur in the 4th auction in a row, if the 3 previous auctions are unsuccessful. Prospective bidders are, moreover, wary of making high bids in an auction, for the reason that they intend to acquire ownership of a hotel unit about which they are not in a position to know much (since the debtor has no reason to be cooperative and provide information). I.e. they do not know about the existence of any unauthorised constructions, the existence of any conditions necessary for the expiry or maintenance of the licence, etc.
Also, in the context of an auction, the first move of debtors (apart from the other remedies they have in their quiver, such as appeals against payment orders, seizure reports, etc.) is to exercise the price correction appeal, i.e. a remedy in which they argue, in simple terms, that the first bid price should be set higher than the price set by the bailiff with the assistance of a valuer (from the Register of Certified Valuers of the Ministry of Finance). And because the methods of valuing a property vary, as do the comparables of which use is made, it is relatively easy to argue on the merits that a different method will produce a different result (as well as to argue a relatively different result within the same method). For example, in operating hotels, the method of 'capitalisation of income' arising from the operation of a hotel is usually used, assuming an efficient and effective management and operation (see also the 'depreciated cost' method, the 'replacement cost' method, etc.). A typical example is the decision of the Nafplion Court of First Instance No 84/2021, which concerns a correction of the first bid price of a hotel unit auction: "In order to do so, it cannot be overlooked that the widely used method, for the case at hand, is that of cash flow, as is inferred from the majority of the reports, including the above mentioned report, which was prepared at the behest of the A opponent, at whose request the depreciated cost method was also applied, as expressly stated therein. However, given the discrepancies in relation to the independent value of the property and its buildings, which are undoubtedly extremely particular, it is considered that the latter cannot be disregarded in the inclusion and, to that end, the final value must be presumed by the Court from a combination of the above results and set at the sum of fifteen million euros 15,000,000 euros...".
Currently, about 50 auctions of hotel units are scheduled to take place throughout Greece, with first offer prices reaching up to 4.5 million euros.
2. Implementation of the Dendias Law (Law 4307/2014)
A few years ago (in particular between 2016-2019), and before the entry into force of the new Bankruptcy Code of 2020, extensive implementation was made of the so-called "Dendias Law" (Law 4307/2014) for the removal of hotel companies from the hands of their shareholders. In regional courts, however, this law had not been so successfully implemented, due to rather special treatment of cases there by local judicial authorities. Eventually the law was repealed by the new Bankruptcy Code and it is no longer possible to use it.
The procedure, although entitled 'special administration', was in fact a procedure for the sale, liquidation, of the assets of the company's property. The operator of the undertaking lost its assets, leaving an empty 'carcass', while the undertaking itself passed into the hands of another operator through a public tender. In the latter there was no first bid price (hence no minimum bid amount) and the administrator was not entitled to declare the tender ineffective if the bids were not considered advantageous. Therefore, for the sake of speed, the company could be sold at a lower than current value, which could be advantageous for the credit institution in present value terms.
In simple terms, the Law in question enabled credit institutions, within a few months, to take hotel companies out of the hands of their shareholders/partners and sell them to third parties, with the latter receiving some or all of the money owed. It was, indeed, a 'super weapon' in the hands of the creditors.
3. Forced Execution and Eviction of a Hotel Leased under a Lease Agreement
This case concerns hotel units that are not owned by the operator but have been leased to the operator by a leasing company. Here, in the event of late payment of instalments, the leasing companies terminate the contract and within a few days go to the hotel's premises with a bailiff to evict the lessee (on the basis of the notarised leasing document, which is an enforceable title). The issues that may be raised in this case in the context of litigation mainly concern the invalidity of the enforcement procedure (invalidity of the cheque for execution etc.) and any invalidity of the termination of the leasing contract (mainly abuse). The company is defending itself by applying for injunctive relief in order to 'freeze' the expulsion procedure and, since these issues are delayed before the courts can give a final ruling, it is possible that an interim prohibition of expulsion may be imposed, subject to the payment of a certain amount of money either as a guarantee or directly to the lender (see, for example, the decision of the Athens Court of First Instance No 3973/2022, which ruled as follows: "It was also presumed that the applicant would suffer irreparable damage if the enforcement proceedings continued, since her eviction from the leased property would result in her financial ruin, given that we are already in the summer tourist season. From the above facts, which are accepted, it is presumed that all the conditions are met to suspend the enforcement of the cheque of 21-3-2022 for payment requested on condition that the defendant pays the applicant EUR 100,000...".
4. Free sale before auction under article 998 par. 6 of the CCP
Under Article 998 par. 6 of the Code of Civil Procedure, it is possible to freely sell the seized property at the request of the debtor to the court, which allows this at a specific price and before the auction takes place. In other words, while the property has already been seized, the bank (or the servicer, etc.) together with the debtor, jointly decide to sell the hotel unit before the auction through the procedure of this provision without conducting a bidding procedure through E-auction.gr. This solution is sometimes preferable for the bank as there is room for the prospective buyer to carry out a legal and technical due diligence of the property (due diligence) before its free sale and, also, there are no obstacles regarding the existence of information (insurance, tax), the absence of unauthorized constructions and the liability of the buyer (under articles 479, 939 CC) that exist in the consensual sale outside of article 998 CCP. This procedure (in combination with the due diligence carried out) is also likely to result in an increase in the price as in the case of an auction, due to the asymmetry in information, the potential bidders make reduced offers due to fear of hidden defects, etc. The court also accepts the application for a free sale under Article 998, if it suspects that the interests of the creditor who carried out the foreclosure and of the other creditors who have been announced up to that moment are not prejudiced.
Of course, there is no shortage of objections to the misguided legislation of this procedure, where there is talk of promoting opacity and collusive sales to avoid the risk of the bidding process. It has been observed that '... this sudden and unforeseeable change in the way in which the property being auctioned is liquidated leads to an unwarranted withdrawal of bidders and, consequently, to a distortion of the economic competition resulting from the bidding process, which is ultimately to the detriment of both the creditors and, equally, the defendant'.
On this issue, interesting is the recent decision of the Athens Court of First Instance (4402/2022), which granted the debtor's application and allowed the free sale of a hotel unit for at least 22 million euros, while the latter had been seized in May 2022 and the auction was to take place in December 2022, with a first bid price of 19,015,000 euros. In the end, the unit was indeed sold at this price of 22 million euros, which would probably have been difficult to achieve without the cooperation of the debtor, who apparently provided all the necessary information to the buyer in order to achieve the best possible result. The judgment in question states the following: "Moreover, it has been observed that auctions with a first bid price as high as in the present case often lead to cancellations due to a lack of bidders, resulting in significant delays in their completion, which in turn entail an increase in the costs of enforcement, a significant delay in the satisfaction of the claim equipped with an enforceable title and ultimately a reduction in the value of the seized property. In the present case, in view of the ongoing economic crisis and the economic conditions that have arisen as a result of the COVID-19 pandemic and the war in Ukraine, as well as the suspension of investment movements, it is likely that the auction scheduled for 30 December 2022 may be cancelled, in particular, that it will be fruitless in the absence of bidders and that it will be held at a later date".
In summary, depending on the legal provisions in force at the time, the methods of enforced collection of hotel debts vary. Above we have mentioned the usual practice, without this meaning that there are no other ways of enforced collection, which, however, are not preferred in most cases (e.g. forced administration of Article 1034 et seq. The most common methods of enforcement which are not usually used in the majority of cases are: administration under Article 1034 (1034) of the CCC, aggressive reorganisation under Article 34 par. 2 of the new Bankruptcy Code, filing for bankruptcy, etc.). What is worth noting, and it follows from the above, is that due to the specific nature of properties housing hotels, special handling is required both from the creditor's and the debtor's side.