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Is it safe to buy real property at public auction?

The real estate market in Slovenia has recovered, making the prices increase again. The higher the prices are the more active and innovative the buyers are in searching for the most favourable purchase options. One of the possibilities to save some money is to purchase real property at a compulsory (judicial) public auction, where the selling prices are usually significantly lower than the market prices. We are talking about auctions in enforcement and bankruptcy proceedings. Nevertheless, is it safe to buy real property at such public auction?

In short, yes, generally it is even safer than the “usual” purchase on the market. However, one has to be careful and check precisely the actual and legal state of real property before the purchase, since otherwise the buyer can have significantly greater troubles and costs compared to his savings at purchase.

After the payment of purchase price the buyer who is buying a real property at public auction is expecting to obtain into possession an encumbrance-free real property and to enjoy the ownership right on it without disturbance. However, is this true?

In general, yes, but there are some exceptions to which attention should be paid, as certain encumbrances are not deleted with the sale at public auction. 

In case of purchase in bankruptcy, the following rights of third persons on real property terminate with the payment of purchase price: pledge or mortgage and land debt and right to prohibition on divestiture and encumbrance. These encumbrances terminate “absolutely”, thus irrespective of when they were created. Therefore, after the payment of purchase price the buyer will obtain the real property on which there will not be any mortgages or land debts entered.

Greater attention has to be drawn to personal easements, charges on property or building right. These encumbrances terminate with the payment of purchase price and are deleted from the land register only if they were obtained after the beginning of the bankruptcy procedure or if they were entered into the land register after the entry of the earliest mortgage or debt.

For instance, if the insolvency debtor established a right of usufruct to the benefit of a third person on an unencumbered real property already before the beginning of the bankruptcy procedure, the usufruct will remain entered on the real property also after the completion of public auction and payment of purchase price. The buyer hoping for a “favourable” purchase of real property will obtain only the mere ownership right. If the usufructuary is hale and hearty, it may occur that the benefits of real property will be enjoyed only by buyer’s descendants. Real easements do not terminate with the payment of purchase price. For instance, if right of way was entered before the sale of real property, it will remain entered.

In enforcement procedure, the court lays down in the decision on allocation, which rights and encumbrances entered in land register will be deleted upon the delivery of real property to the buyer, however, the decision on allocation is issued only after the public auction had been completed and the buyer made the most favourable offer, paying a deposit beforehand. He can say goodbye to it if he does not buy the real property after receiving the decision on allocation, because he failed to examine the situation, as it would be appropriate.

Also in case of sale in enforcement procedure, real easements on real property do not extinguish with its sale. Nor do personal easements, charges on property or building rights that are entered in the land register before the rights of land register creditors, pledgees or creditor upon whose proposal the court has allowed enforcement. However, pledges and land debts entered on real property do extinguish irrespective of whether the creditors have been repaid or not.

What if the real property is occupied, for instance if a debtor with his family lives in it or if it has been rented?

In enforcement procedure, the court sets a time limit for the debtor, within which he is obliged to move out of the family residential house or apartment, or empty business premises and leave the real property to the buyer free of persons and things. The decision is an enforceable instrument, which means that the buyer can achieve an eviction of the debtor. However, not in all cases – the debtor who lived in a sold family residential house or sold apartment as owner, has the right to stay in the real property as lessee for a maximum of three years after the sale, for a non-profit rent. The buyer will be informed of this option in advance, since the debtor has to exercise it at the latest before the auction.

In case of sale in a civil bankruptcy procedure the debtor is obliged to empty and deliver the apartment or family residential house, in which he lived as the owner, to the receiver within three months after the decision on sale had been issued. The buyer has greater protection than in enforcement procedure, as the decision on sale is an enforceable instrument for emptying and delivering the real property not only against the debtor, but also against other persons who are using the real property together with the debtor or whom the debtor enabled to use it.

In case of sale in enforcement, also the lease or rent relationship on real property does not terminate. If these are “old” relationships, created before the entry of mortgage on real property, the buyer enters into the position of the previous owner as lessor. Particularly in case of non-profit lease relationships concluded for an indefinite term, this can be very burdensome for the buyer. Nevertheless, if the lease relationship was created after obtaining the pledge of the creditor, the new buyer can terminate the relationship with one month’s notice. The same applies to bankruptcy procedure, where the receiver has previously obtained the right to terminate the lease agreement – if the agreement was not terminated, the lease is effective also towards the buyer.

The law protects the buyer also from possible third party claims. The buyer, who bought a real property in enforcement at compulsory public auction, becomes the owner also if the debtor was not its owner.

The buyers have to inspect very close the real property before making a purchase, since in case of sale at public auction there is no warranty for factual defects of the subject matter of sale. In practice, this means that if one month from the sale the buyer finds out that the roof is leaking, this is exclusively his problem, as he cannot enforce warranty claims. This also means that in case of sale in bankruptcy or enforcement the real property does not acquire building, operating or other permits if it did not have them before. On several occasions, the court law has taken the position that it is possible to sell a real property that is an illegal building at a public auction. When an inspection measure has been imposed due to illegal construction, only transfer as owner’s legal disposal of such real property is prohibited, yet this is not an obstacle to sale in enforcement procedure. A possible legalisation is a problem of the buyer. In one of its decisions, the Higher Court of Ljubljana stated: The one who decides to buy things at a public auction, agrees to buy them according to the “bought as seen” principle.

In case of purchases at public auctions, the buyers thus do not have to worry about mortgages and land debts, as all such encumbrances will definitely be deleted after sale. However, this does not apply to some other encumbrances, which can place a greater burden on the buyer of real property compared to a mortgage – for instance, usufruct. It is also necessary to pay attention to illegal constructions and make sure before the purchase what is actually being sold. Therefore, in order to avoid unpleasant surprises, it is strongly recommended that the potential buyer of real property hire an expert who will examine the real property from a “technical” and legal point of view. The cost of such inspection is negligible compared to the consequences of a reckless purchase by the buyer who is tempted by a low price.