Purchase of real estate at public auction – in bankruptcy proceedings

In these (post) corona times, there is an increased supply of real estate (commercial and residential) that is selling at forced public auctions, either in enforcement or bankruptcy proceedings. Despite the crisis, real estate is still becoming more expensive, which means that many people think buying a property at a forced auction will save a good amount of money. Is this so?

The answer may be affirmative, but the same as with the classic real estate purchase, it is necessary to be careful when buying real estate in bankruptcy proceedings. Also, the new buyer is differently protected when buying real estate in bankruptcy or in enforcement proceedings. In the first part, we will explain the purchase of a real estate in bankruptcy proceedings.

The law stipulates that by paying the purchase price for real estate sold in bankruptcy proceedings, the court, at the proposal of the bankruptcy administrator, issues a decision on handing over the real estate to the buyer, deciding that the conditions for entering ownership in favour of the buyer are met. The purchase price payment thus terminates certain rights of third parties, namely the lien or mortgage and the land debt, regardless of when these rights were established. However, personal easement, real encumbrance, or building right ceases solely if acquired after the commencement of bankruptcy proceedings or after the earliest mortgage or land debt entry in the land register. Thus, for example, the right to the usufruct, use, or easement of an apartment registered before the commencement of bankruptcy proceedings does not cease and remains registered. This means that if the debtor has established a right of usufruct in favour of a third party before the commencement of the bankruptcy proceedings, the new owner will acquire only a bare right of ownership. In contrast, a third party will actually enjoy it.

Special rules also apply to purchasing real estate in personal bankruptcy proceedings if the subject of the sale is a residential or family residential house in which the debtor lives as the owner. In such a case, the court orders the debtor to vacate the property within three months of receiving the decision and hand it over to the buyer – as will be explained in the second part – in such a case, the new buyer is more secure than when buying the property in enforcement proceedings. However, it will still pass some time before the new owner can start using the property.

In case of leases, the law designates that the bankruptcy administrator acquires the right to terminate the lease concluded before the commencement of the bankruptcy proceedings. The length of the notice period shall be one month, notwithstanding the general rules laid down by law or contract. However, if the bankruptcy administrator does not take advantage of this option, the lease also affects the new buyer.

Finally, potential buyers should note that purchasing real estate in the proceedings in the topic does not include guarantee for material defects. It is considered that the buyer is aware of the property’s condition, so it is worth paying particular attention. In any case, it is recommended to talk to an expert before buying, as that can prevent many difficulties.

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Law firm Sibinčič Novak & Partners
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