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The position of real estate purchasers in enforcement proceedings

VP Law Firm • okt 31, 2020

The position of real estate purchasers in enforcement proceedings

In enforcement proceedings, real estate is sold by either public auction or direct agreement. Where an auction is advertised, third parties have an opportunity to buy the real estate, regardless of the relationship between parties to enforcement proceedings, and acquire title pursuant to a conclusion on handover that is issued by the enforcement officer.

The relationship between the enforcement creditor and the enforcement debtor with regard to auctions is mainly clear and governed by the Enforcement and Security Law (ESL). By contrast, the position of a purchaser in such an auction is not specifically regulated and merits particular attention.

In enforcement proceedings, title to real estate is acquired on the basis of a decision made by the enforcement officer, who holds devolved public powers. This constitutes original acquisition, as it is not derived from the property of any legal predecessor. Once the auction is complete and after the purchase price has been paid within the required period of time, the enforcement officer sua sponte issues a conclusion on handover that contains instructions to the real estate cadastre to register title and delete all burdens on the real estate in question (with some exceptions).

Does this mean that the buyer can now quietly enjoy the property? If not, why?

First off, the buyer must take possession of the real estate. According to the ESL, the enforcement debtor is ordered to vacate the property within eight days and permit the purchaser to receive possession. If the debtor fails to comply, the enforcement officer enlists the help of specialised professionals and the assistance of the police to evict the debtor and permit the purchaser to take possession.

The ESL stipulates that the buyer must pay the costs of eviction in advance, and, even though they are allowed to claw back this sum from the enforcement debtor, they are by no means certain to be successful in doing so. This arrangement is difficult to justify from the purchaser perspective. The buyer cannot know with any certainty whether they will face additional costs of eviction and what these costs may be. This presents the purchaser with a fait accompli, as they have already paid the purchase price and can no longer withdraw from the transaction, leaving them with no alternative but to pay extra.

The next step to quiet enjoyment is to register the new owner with local utility companies, but this too hides a multitude of challenges. Given the way the purchaser acquires title, it would be only logical to expect the utilities to update their registers as of the day the handover conclusion is adopted, at which point the new buyer is responsible for paying utility bills.

However, the utilities seek to exploit their monopoly by attempting to shift any debts left from the old owner to the new buyer. Particularly contentious issues arise in cases where a utility has ceased to provide a service to the property due to unpaid bills, and the purchaser has no recourse to any instance but the utility itself. The utility company will often refuse to resume the service until the outstanding bills are paid, and yet the bills are not in the buyer’s name, nor did the buyer occupy the property at the time they were incurred. Liability for a previous owner’s bills can be contested in court, but this is hardly an ideal solution.

Electricity supply merits special attention, as the national power company seems to have moved beyond mere abuse of monopoly. The Government Order on Conditions for Provision and Supply of Electricity requires any new owner of a property wishing to enter into a supply contract to submit proof of payment of any outstanding electricity bills attached to the property. This piece of secondary legislation, therefore, implicitly mandates that the new buyer must pay someone else’s bills, as the previous owner clearly has no interest in doing so. The new owner’s recourse to the previous one usually means little, as this requires going to court, and at any rate the previous owner is unlikely to have the funds to comply with a judgment.

Having taken possession of a property and having had it connected to utility infrastructure, the purchaser is finally able to enjoy the property and its tangible and intangible benefits. All the purchaser lacks to enjoy fee simple absolute is the right to dispose of the property.

According to the Real Estate Transfer Law, the Law on the Elements of Property Relations, the Law on Notaries Public, and the Law on Registration with the Cadastre of Real Estate and Infrastructure, for the buyer to be able to dispose of a property they must be registered as its owner.

Even though title is acquired as of the date of the handover conclusion, which the enforcement officer is required to submit to the cadastre sua sponte, this still does not mean the purchaser will be able to register that tile with the cadastre either definitively or quickly.

The first obstacle may be that there are outstanding applications with the cadastre involving the same property; as the cadastre will not deal with an application before addressing an outstanding one, it is uncertain at what time the buyer will be able to register their title. Real estate sold in enforcement proceedings is often subject to multiple interests, and applications for their registration are frequently not followed up before the auction. This gives rise to the absurd situation in which the owner of a property has to wait for an interest to be registered in that property which will in any case be deleted once their application to register title is taken up.

This issue can be addressed fairly easily by consolidating cases and dealing with them at the same time, but this requires changes to the legal framework if the cadastre is to abandon its principle of priority in registration or make any exceptions without overriding cause or legal justification.

Yet another obstacle may be seeking to register title to a parcel of land if only the building on that parcel was bought. Buildings are often sold independently of land. This is commonly the case where the parcel is subject only to the ‘right to use’ (a carry-over from the socialist system of land ownership where all land was owned publicly and owners of buildings maintained the right to ‘use’ such land, but could not dispose of it), meaning that the mortgage that was the subject of the enforcement action initially applied only to the building.

Even though the Real Estate Transfer Law stipulates that transfer of title to a building also results in transfer of title to the land on which the building stands, as well as land for the ‘regular use’ of the building, this right is not as easy to exercise in practice. The issue is again due to the cadastre’s priority rules, where the land registry will generally not register title to land only by operation of the Law, but will require (1) the previous owner to be registered, and (2) the instrument that transfers title from the previous to the new owner.

However easy it may be to address all of these obstacles that arise when seeking to register title, and however much they may be the product of misalignment between regulations and between cadastral procedures and enforcement officers’ rulings, both sets of challenges can seriously threaten a purchaser’s ability to dispose of the property they have bought.

Even though it may seem disheartening at times, this text in no way seeks to deter readers from buying property at auction. A market already exists for real estate bought at public auctions, and amendments to the ESL that introduced e-auctions seek to enhance its efficiency. There are many reasons why improvements are needed: greater demand leads to higher prices, and these can have a knock-on effect on greater recovery rates for creditors, an outcome that is certainly in the interest of all parties.

Enhancements to auction regulations must go not one but several steps further to seriously re-examine the position of purchasers in public auctions and allow them to acquire title as quickly and as painlessly as possible, since without purchasers there can be no sales at auctions.

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