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Joinder ruling [Beitrittsbeschluß]

The forced sale process is initiated upon application by the petitioning creditor. If a further creditor would also like a forced sale of the property by auction, he does not need to apply for a new auction process, rather enters the process which is currently underway; this will be confirmed by the Court by way of a joinder ruling.

Highest bidder

The person who has made the highest bid by the end of the auction.

Non-acceptance of the bid

Acceptance of the bid can be refused for a variety of reasons, e.g. where the petitioning creditor approves a provisional suspension of the auction if the 5/10 or 7/10 limits are not reached during the first auction or the application for judicial sale is withdrawn before the bid has been accepted.

Acceptance of the bid

With regard to the property, acceptance of the bid means the end of the forced auction. Upon acceptance of the bid, ownership is transferred to the purchaser. If the purchaser wishes to make use of his break option against tenant(s), he must do this immediately upon receipt of acceptance of the bid, even if the Court order conferring title to the real property purchaser is still contestable.

Assignment of the highest bid

Der Meistbietende erhält nicht immer den Zuschlag. Tritt der Meistbietende seine Rechte aus dem Meistgebot an einen anderen ab, so erhält dieser den Zuschlag.

Auction

The auction is comprised of three phases: notice, the bidding period and the discussion concerning acceptance of the bid. Dates must be published at least six (6) weeks before the auction in the gazette for court notices; it will generally also be published well ahead in all regular daily newspapers.

Auction proceeds

The payment to be made by the purchaser is made to the Court and will then become the auction proceeds. Often the highest bidder leaves the security deposit he has provided until the date of distribution of the proceeds of the auction and then pays the court only the difference plus interest due until the distribution hearing. The court then determines the bankrupt’s estate from the auction proceeds which, in most cases, is the same as the payment by purchaser (highest cash bid plus interest due on the cash bid).

Bankrupt’s estate

The bankrupt’s estate is the assets which, at the distribution hearing (which generally takes place several weeks after the auction), are ascertained and later distributed. The bankrupt’s estate includes, in particular, the highest cash bid and in addition interest on the cash bid. The bankrupt’s estate is the auction proceeds available to the court. This ensures that the costs of the proceedings are covered and the creditor(s) satisfied, insofar as the bankrupt’s estate holds sufficient funds.

Bidding guarantee

In a contract, the potential bidder (guarantor) agrees with the petitioning creditor (holder of the guarantee) to make a bid at the auction at a minimum agreed amount. The contract must be witnessed by a notary. Often the holder of the guarantee, in return, offers special conditions for the financing of the highest bid or to waive his requirement for a security deposit or not to prevent the acceptance of the bid in favour of the guarantor.

Bidding period

The bidding period is the second phase of the auction. This is the period between the invitation to bid and the declaration that the auction is over. The bidding period does not end with the acceptance of the bid; this is decided only after the bidding period, if there is a highest bid. The bidding period must last at least thirty (30) minutes.

Break option

According to § 57a ZVG [law governing forced auctions], the purchaser has a break option. He may terminate all lease contracts (subject to service of the statutory notice period) at the first permissible date; however, this break option is limited in many cases to commercial leases or is completely excluded. In the case of a residential lease contract, the statutory tenant protection stipulations must be observed (e.g. BGB [Civil Code] § 564b). General building cost contributions and advance rental payments may also hinder termination (§ 57c Para. 1 ZVG).

Cash bid

At the auction the potential bidder makes only a cash bid. This comprises only the proportion payable in cash by the purchaser. Any continuing rights must be added "in spirit" in order to assess the economic value of the bid. If the bid is accepted, the cash bid (then the highest cash bid) must be paid by the date of distribution of the proceeds of the auction plus 4% interest.

Clearance certificate

According to the Stamp Duty Act [Grunderwerbsteuergesetz], the purchaser may only be registered in the land register as the new owner if he has presented evidence to the enforcement court or the land registry office that he has paid stamp duty. This certificate is called the clearance certificate. The tax office must issue this certificate when the stamp duty is paid by the purchaser. Irrespective of registration in the land register, the purchaser has already become owner after the bid is accepted.

Continuing rights

These are rights which are considered in determining the lowest bid and do not form part of the proportion payable in cash. Continuing rights can take the form of servitudes, land charges or mortgages and are to be taken over by the highest bidder who obtains the title to the real property in addition to the cash bid. All rights which rank in priority to the right held by the creditor who has petitioned for the forced sale will continue; all other rights are extinguished.

Costs of the proceedings

The costs of the proceedings are part of the proportion of the minimum bid payable in cash and are to be deducted first from the auction proceeds. In contrast to the costs of acceptance of the bid, they are not payable by the purchaser as they are already included in every highest bid made and do not have to be paid in addition. The costs of the proceedings include, for example, the fees of the proceedings, of holding the auction, the notice costs and the costs for the providing a valuation report by a valuation surveyor to determine the market value.

Decision to suspend proceedings

The forced sale process can be provisionally suspended for a variety of reasons. It will be adjourned and then recommenced at a later point in time. For example, the debtor can apply for a suspension if he has justifiable reasons to believe that an open market sale can take place shortly. However, the petitioning creditor can also approve the provisional suspension of the proceedings before acceptance of the bid without giving reasons, e.g. in order to avoid acceptance of the bid being awarded to the highest bidder or because it may not be possible to achieve a higher auction price until a later point in time. This must be distinguished from the withdrawal of the application for debt enforcement, which permanently ends the process. A third suspension of the process will also terminate proceedings, because it has the same effect as a withdrawal.

Discussion over acceptance of the bid

After the bidding period the acceptance of the bid is discussed. This discussion is the third and final phase of the auction. Those participants in the proceedings who are present must be heard at the end of the auction on the question of whether there are objections to the proposed acceptance of the bid. Acceptance of the bid can then be issued immediately; it can also be refused or its issue postponed until a later notification hearing. Acceptance of the bid can, for instance, be refused if the highest bid does not exceed the 5/10 limit on the first auction or if the petitioning creditor approves the suspension of the process before notification of acceptance.

Dissolution ruling

The creditor petitioning for enforcement of the debt can terminate the forced sale contract at any time and without statement of reason. The Court will then formally end the forced sale process by way of a ruling. This also occurs when the petitioning creditor approves the suspension of the auction for a third time, as this is considered as a withdrawal of the application for auction.

Distribution auction

A distribution auction takes place when a property must be auctioned for the purpose of dissolving an owners’ cooperative. This is often how civil law partnerships, communities of heirs or co-ownership arrangements (e.g. married couples) are dissolved on the application of one of the co-owners. Its purpose is not to enforce a debt but rather to prepare for dissolution because the property instead becomes auction proceeds to be distributed. In contrast to the purchaser in the case of a forced auction, a purchaser in the distribution auction has no break option which may be enforced against tenants.

Distribution scheme

The Court prepares a distribution scheme at the distribution hearing, which includes claims on the bankrupt’s estate, continuing rights, indebtedness and allocation of the bankrupt’s estate. The distribution scheme therefore forms the basis of the distribution of the auction proceeds.

Entry of the order for auction in the land register

On the court’s order for forced sale, the land registry office must register a notice of the order for forced sale in Section II of the land register for the respective property. The entry will read as follows:

"A forced auction has been initiated by the Court with enforcement jurisdiction, registered on ................".

The notice of the order for auction in the land register has the effect of a relative restriction of the right of disposal against the owner, but not a bar to registration. In this way the owner can still dispose of the property e.g. by way of sale or encumbrance. But such dispositions have no effect against the petitioning creditor and require his agreement. If the owner wishes to sell the property, for instance after registration of the notice of the order for auction in the land register, then he can conclude an effective sale and purchase agreement with the purchaser, but can implement it only with the consent of the petitioning creditor.

Extinguished rights

All rights which will not continue according to the terms of the auction will be extinguished upon acceptance of the bid. If absolutely no rights continue, the highest bidder who obtains the title of the real property will acquire the property free of encumbrance. Before an invitation to bid is made the court with jurisdiction over the auction will explain which rights will continue. Continuing rights are taken into account in the minimum bid.

First auction

The term First auction is often misunderstood. In the so-called first auction both the 5/10 and the 7/10 limits apply. These limits can also apply at the second and third auctions; this is announced by the Court before the invitation to bid is made. Both limits apply until acceptance of the bid has been refused because either the 5/10 or 7/10 limit has not been reached. Thereafter, neither limit applies at the next auction. If, for instance, no bids are made at the first auction, the limits will continue to apply without limitation in the second auction. If a bid is not accepted at the first auction because of the highest bid has not reached half of the market value (5/10 limit), then the limit no longer applies in the second auction.

Five/tenths limit

The 5/10 limit serves to protect the debtor from a sale of the property at rock bottom prices. The limit means that a bid cannot be accept at the first auction if the highest bid, including continuing rights, lies below 5/10 of the market value determined by the Court. If acceptance of the bid is refused once because of failure to reach the limit, the limit no longer applies in later auctions. However, the 5/10 limit does not apply to the beneficiary within the meaning of § 85a III ZVG [law governing forced auctions] (mostly the petitioning creditor) because if the bid is accepted, he has to place the debtor in the same position as if at least half of the market value had been achieved at auction.

Fixtures and fittings

The forced sale of the property includes the fixtures and fittings, even if these are owned by a third party and so do not belong to the debtor. Fixtures and fittings include all moveable items, which serve the economic purpose of the property but are not essential components of the building, such as fitted kitchens.

Forced sale

The forced sale is a form of debt enforcement for land. It is applied for by a creditor if the debtor can no longer meet his payment obligations and disposing of the debtor’s property assets is usually the only form of (partially) satisfying the creditor. A precondition for commencing a forced sale is that the creditor is in possession of a warrant of execution [Vollstreckungstitel] with an executory clause [Vollstreckungsklausel] and that this warrant was served on the debtor before the initiation of the application for debt enforcement. The owner often consents to immediate execution in a deed witnessed by a notary relating to a creditor’s claim under a mortgage or land charge, so that the preconditions for debt enforcement are usually fulfilled if the debtor has not paid.

Higher bid

A higher bid is a bid which lies above and therefore overrides the previous bid or the minimum cash bid, provided that it is admitted. The court with jurisdiction over the auction decides immediately whether to admit such a bid. If, for example, a bid is made but the bidder cannot provide a security deposit, then the bid will be rejected; it is then ineffective. The increase in the bid is not pre-determined in the auction - this can also be a minimal amount; nevertheless, the creditor can apply for different auction conditions, e.g. such that higher bids are only permissible when the previous bid has been exceeded by a minimum amount.

Institutional sequestrator

If any of the process participants are specified institutions (public bodies, state-controlled institutions, mortgage banks or housing associations), these may propose the appointment of a person employed by them as a sequestrator.

Leave in place agreement

A right which is be extinguished according to the auction terms continues if a "leave in place" is agreed between the beneficiary of the right and the purchaser. The agreement can relate to rights in Sections II or III of the land register, which are not included as ‘continuing’ in the lowest bid. The usual reason for such an agreement is that the purchaser leaves a land charge in favour of the petitioning creditor (often banks) in place because he is undertaking financing with them.

Lodging of rights and claims

If, at the time of the registration of the entry of the order of judicial sale in the land register, rights are not apparent from the land register, for example because they will be registered at a later point in time or are not registerable at all, they must be lodged. If they are not lodged, they will not be considered in the distribution of the proceeds of the auction.

Minimum bid

The minimum bid is an absolute minimum bid that must always be achieved. Lower bids are ineffective and not capable of acceptance. It comprises a proportion payable in cash (cash bid) and any continuing rights, which take precedence over the highest ranking petitioning creditor. Often the proportion payable in cash comprises only the costs of the proceedings and any outstanding land taxes.

Notification hearing

Generally the discussion over acceptance of the bid follows the bidding period. This is the moment when acceptance of the bid is usually issued. Sometimes, if objections have been raised against acceptance of the bid (which must first be checked by the court), a notification hearing will be set by the court, which will be one to two weeks later. At this notification hearing the court will then announce its decision whether acceptance of the bid will be issued or not. Until this decision, the forced sale process can be suspended by the petitioning creditor at any time without giving a reason; acceptance of the bid will then not be issued.

Notification of the highest bid

The bidding period ends when the last bid has been called by the Court for a third time. The Court asks whether a higher bid will be made. The bidding period ends when no higher bid has been made after the third call by the Court. The Court then declares the highest bid and continues the auction with a discussion over acceptance of the bid. Thus the highest bidder will not automatically become the purchaser.

Notification of the highest bid

Participants in the proceedings

The participants in forced auction and sequestration proceedings are essentially all persons with an interest in the process.

Petitioning creditor

The creditor who has submitted the application for debt enforcement is referred to as the petitioning creditor. Anyone who is later joined as a creditor into the forced sale proceedings is also referred to in this way. The strongest position is held by the highest priority petitioning creditor, because he is holder of the right with the highest priority. The minimum bid is set with reference to him. If, after the bidding period, i.e. when the highest bidder has become known, he declares that the process is to be provisionally suspended, then the bid cannot be accepted.

Provision of acceptance

Acceptance of the bid can be issued immediately at the auction or at a later notification hearing. In principle it must be issued to the highest bidder unless he has assigned his rights arising from the highest bid to another person or declares, before the notification of acceptance of the bid, that he has bid on another’s behalf. In both cases, the highest bidder is jointly liable with the purchaser for the payment of the bid and double stamp duty will be levied. Acceptance of the bid will not be issued if there are reasons for rejection (e.g. not reaching the 5/10 limit at the first auction, provisional suspension with the approval of the highest ranking petitioning creditor).

Purchaser

Term used for the highest bidder whose bid for the property is accepted; however, the highest bidder’s bid will not always be accepted. This is the case when the highest bid is assigned or there is a concealed principal; in such instances, the highest bidder and the purchaser are not identical.

Refusal of acceptance of the bid

Acceptance of the bid can be refused for a variety of reasons, e.g. if the petitioning creditor approves provisional suspension or if the 5/10 or 7/10 limits are not reached at the first auction or if the application for debt enforcement is withdrawn before acceptance of the bid is issued.

Replacement value

Rights over the subject of the forced sale, which will be extinguished by acceptance of the bid, continue over the auction proceeds as a "claim for compensation for value [Anspruch auf Ersatz des Wertes]" if there are sufficient funds. Thus the claim to settlement from the auction proceeds replaces the right. If there are insufficient funds available e.g. due to the low level of priority of the extinguished rights, then the rights are extinguished without recompense.

Security deposit [Sicherheitsleistung]

Every bidder must be prepared to provide a security deposit of 10% of the market value determined by the Court at the auction after submission of his bid and at the request of a participant. Authorised security deposits are:

Confirmed Federal or State Central Bank cheques [Bundes- or Landeszentralbankschecks];
Crossed cheque, payable in Germany and issued by a bank which is on the list of credit institutes authorised by the European Commission;
Guarantee from a bank which could also issue crossed cheques; or
Bank transfer or payment into an account held by the court cashier. The amount must be credited before commencement of the auction.

Bonds of any form are no longer authorised.

Sequestration

The property will be sequestered by the court in favour of the petitioning creditor after submission of the application for a forced sale. The sequestration effects a restriction on alienation i.e. a disposal of the property by the debtor is ineffective unless the creditor has agreed to the sale.

Sequestrator

In addition to forced sale, sequestration is a form of debt enforcement for land. The purpose of sequestration, from the creditor’s point of view, is satisfying the claims from the regular income (rents etc.) form the property. Sequestration does not lead to a disposal of the property, but only to administration of the same in the interest of the creditor. In the case of sequestration, the debtor will be denied the management and use of the property, although he has a right of residence so that his may use all rooms essential for his household if he occupied the property at the time of the seizure. Sequestration will be undertaken by the sequestrator appointed by the court. The activities of the sequestrator are subject to supervision by the court with enforcement jurisdiction.

Seven/tenths minimum bid

The 7/10 limit primarily provides protection to the petitioning creditor and should help prevent too great a loss to certain creditors. It means that at the first auction the highest bid, including continuing rights, which lies over 5/10 and under 7/10 of the market value determined by the Court, will not be accepted upon the application of a disadvantaged creditor (usually the petitioning creditor). The only authorised applicants are creditors who would receive more than the actual highest bid received if the bid amounted to 7/10 including continuing rights. A 7/10 application can be filed only once. If acceptance of the bid is refused because the 5/10 or 7/10 limits have not been reached, neither of the limits will apply to later auctions.

Statutory terms of forced sale

These regulate the scope of the property being auctioned and the rights and obligations of the purchaser. The auction terms are agreed at the auction.

Transfer of ownership through acceptance of the bid

The purchaser becomes owner upon acceptance of the bid and not from the moment when he is registered in the Section I of the land register. This registration has only declaratory significance.

Undisclosed principal

The highest bidder during the bidding period is not necessarily the person who receives acceptance of the bid. If the highest bidder (who initially bid under his own name) declares during the acceptance discussions that he has bid on another’s behalf and that he can provide evidence of this in the form of a publicly witnessed deed, then acceptance of the bid does not go to the highest bidder but to the concealed principal. In contrast to open representation, the purchaser initially remains in the background. The insertion of a nominee is expressly permitted, but incurs double stamp duty, in a similar way to the assignment of the highest bid, and the highest bidder is jointly liable with the purchaser for the bid made.

Auctioning

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