Buying a new property is always an exciting and challenging topic. The classic acquisition scheme is well known. Alone or with others, directly or via a company, the buyer, often assisted by a real estate agent, signs a compromis, and then reiterates the sale before a notary. The price, the related fees and taxes are paid, and the transfer of property is published to be opposable to third parties. On the whole, there are very few reforms that disrupt this well-established pattern. Yet, it is not the only way to buy real estate. There is indeed a second, lesser-known, way: the acquisition by auction. The procedure whereby real estate is acquired by way of auction in court, is called adjudication.
Technically, the adjudication designates the formal declaration whereby a judge, who supervises the auction of an immovable property, attributes it to the person who makes the highest bid at his hearing and, by extension, all the subsequent formalities allowing the transfer of ownership to produce its full effects and be opposable to third parties.
Typically, the sale of real estate by auction occurs when a creditor (usually a bank) has seized a property (e.g. by activating a mortgage security). This creditor, who has no interest in keeping the property, will seek to liquidate it. To do so, he must organise an auction himself (specialist lawyers do so on his behalf) before the competent court.
Such auctions can present a real opportunity to acquire properties below their market value. However, this acquisition process is entirely different from amicable sales.
The purpose of this article is to present the main specificities of the adjudiciation process (1°), and explain what is required of those who wish to participate (2°). It will also help you to anticipate the costs of the auction (3°).
1. The specificities of the adjucation process
The process of acquiring a property at auction is not very well known. Yet, every day, many properties are sold in court below their market value. In our current inflationary environment, there are some real bargains to be had. The adjudication is thus really worth considering, for those willing to move to France. In order to take advantage of these opportunities, it is essential to be aware of certain characteristic rules.
1.1. The auction is exclusive of all recourse
One thing that is absolutely essential to understand is that the auction does not give the buyer any right of subsequent recourse regarding the property. The sale is a strictly judicial process. No Notary or real estate agent is involved. One of the key objectives of the process is to facilitate the recovery of the debts.
This is why all the information relating to the property put up for auction is contained in a document called cahier des conditions de vente, prepared by the pursuing creditor (i.e. the bank’s Counsel). Further useful information can be found in the descriptive report of the Bailiff who carried out the seizure. Generally speaking, the information available is therefore less accurate than that provided by an estate agent or a Notary.
Notwithstanding, the property is acquired en l’état, without any recourse on the part of the successful bidder against the pursuing creditor, the latter’s Counsel, nor any third party, including the previous owner(s). The successful bidder may not, therefore, raise any claim in respect of any error, omission, or inaccuracy in the description of the property, nor its actual state on the day of taking possession.
We always draw our clients’ attention to this absence of recourse. We carefully review the stipulations of the cahier with them. We also encourage them to visit the property, if necessary accompanied by a knowledgeable person.
1.2. The auction entails the immediate transfer of ownership and risks
As soon as he is declared adjudicataire, the last bidder becomes the owner of the property. As of this transfer of ownership, which takes place immediately as a result of the auction, he becomes entirely liable. All risks associated with the property (e.g. fire, damage to third partes…) become his.
This is why we always advise our clients to subscribe an insurance policy (with a condition precedent clause) against all the risks of the property, even before the auction hearing takes place.
Although he immediately becomes the owner, the adjudicataire is legally prohibited from carrying out any act of disposal on the property (with the exception of a mortgage security to finance the acquisition) before the deposit of the full sale price and related costs. As the entry into full and final possession is conditional upon this payment, he is also not authorised to make any notable changes until then (demolition, cutting of wood, deterioration of the property, substantial renovations, etc.).
1.3. The adjudication is a contingent process
Obvious, isn’t it? By essence, only the last bidder is declared adjudicataire and becomes the owner of the property. For 10 days after the auction hearing, any person can make a higher bid of at least one tenth of the price of the sale. When this occurs, a new auction hearing takes place.
Beyond this condition, which is related to the conduct of the hearing and the price that each participant is willing to pay, the final acquisition of the property will naturally depend on the payment of the price. Once declared last bidder and once the 10-day over-bidding period has elapsed, it is essential to pay the price within the legal deadline of two months. Any delay in payment may lead to the application of interest and penalties, or even the complete re-run of the auction. In the event of a re-run, all sums sequestered for the auction are irrevocably lost by the defaulting adjudicataire!
It goes without saying that participation in adjudication is a serious decision, which must be inspired by a well thought-out plan to acquire a specific property.
2°) What is required to participate to the auction
We have just seen the main characteristics of the adjudication process. Let us now look at the legal requirements for bidding.
2.1. The ordinary legal guarantees
The purchase of a property at auction is obviously an important act.
Anyone wishing to participate in the auction must therefore be able to demonstrate that he/she:
- Is of legal age (18 yo min.);
- Is of sound mind and full civil capacity (e.g. no guardianship or curatorship);
- Is not in a state of over-indebtedness;
- Has not been convicted of criminal offences relating to the letting of unsanitary premises, nor prohibited from acquiring property; and
- Is sufficiently independant from the previous owner and/or the creditor for the transaction to be on an arm’s length basis (e.g. not be the guardian or tutor of the previous owner, the agent whose mission was to sell the property, the fiduciaire who managed the property etc.).
We naturally carry out such due diligence with our clients and consider the implications of their family status, when considering their participation. We prepare and make them sign all the relevant declarations that need to be produced in court.
2.2. The legal representation in court
It is strictly impossible to participate in an auction hearing in person. You must be represented by an Avocat. This lawyer must be chosen among those registered at the Bar corresponding to the tribunal before which the auction is held. Given the guarantees that the bidder must provide at the hearing, and the technical nature of all the subsequent formalities, this compulsory assistance is invaluable.
Your lawyer will have you sign a special power of attorney to push the bidding up to a certain threshold. You may of course attend the hearing, but your lawyer will not exceed the amount indicated on the power of attorney. Each Avocat has his/her own technique for dealing with this difficulty. At Citizen Avocats, we attach great importance to dialogue with our clients. We determine a double threshold with them:
- A first, unofficial, threshold, set where the bidders would idealy like to stop, according to their budget;
- A second, official threshold, indicated on the power of attorney.
Auction hearings can be quite captivating. When bids approach the first threshold, we inform our clients with caution. If they wish to exceed it, we take the time to remind them of the consequences of their decision and ask for their informed confirmation. We never exceed the second threshold, indicated on the power of attorney: it is the strict extent of our mission.
2.3. The financial guarantees
Before the Tribunal Judiciaire de Bordeaux, you will be asked to produce a bank cheque, or a bank guarantee, representing 10% of the first bidding price (with a minimum of 3.000 €). If you fail to do so, no bids will be accepted and you will not be recognised as the last bidder under any circumstances. This verification is carried out directly by the judge at the end of the auction.
All monies related to the sale will be handled by your lawyer and the Bar to which he belongs, securely in designated escrow accounts. We will of course check with you on the sufficiency and origin of the funds and keep you informed of all your obligations, as well as the payment deadlines.
3°) The costs of buying a property at auction
While auctions can be a way of acquiring properties for less than their market value, it is important to be aware of the costs associated with the sale, which can be substantial. Although no Notary is involved in the transaction, certain costs, emoluments, fees and taxes must be anticipated, in order to determine one’s bidding budget.
3.1. Procedural costs and fixed fees of the creditor’s Counsel
At the end of the hearing, the costs of the proceedings are determined by the judge. They include the costs of the seizure and auction proceedings and the fixed emoluments due to the creditor’s lawyer for the work he/she has done. These costs are to be paid by the successful bidder. They are generally paid by cheque made out to the escrow account or by bank transfer. The creditor’s lawyer then redistribute them between his client (in respect of the advanced costs) and him/herself (in respect of the fixed emoluments). The legal deadline for depositing these costs and fees is two months. Some cahiers des conditions de vente provide for shorter periods.
These costs and fees vary systematically, depending notably on the extent of the work of the creditor’s Counsel. Generally speaking, they vary between €6,000 and €10,000.
3.2. Transfer duties paid to the Treasury
The adjudication judgment is automatically forwarded by the Clerk of the Tribunal Judiciaire to the tax authorities. The latter is quick to send the adjudicataire’s lawyer a call for transfer duties.
In principle, the duties are calculated as follows:
- Droit départemental : 4,50% of the final price;
- Taxe communale: 1,20% of the final prince; and
- Frais d’assiette: 2,37% of the Droit départemental amount.
These fees must be paid within a maximum of one month of the appeal, as particularly punitive interest on arrears may apply.
3.3. Land registration costs
Just like any real estate transaction, the adjudication must be published by the land registry to be opposable to third parties. This step is essential for the adjudicataire‘s ownership to be fully effective. Once the final deed of onwership is delivered to his Avocat, the latter transmits it to the Service de la publicité foncière, who carries out the pubilicity measures and amends the registry to purge the securities affecting the property.
This process costs 0,10% of the final price, to which should be added some minor sums for the purging of securities and the return of the file.
3.4. Proportional fees for the seller’s and buyer’s lawyers
As we have seen, Avocats play a major role in the auction process. This justifies that part of their remuneration is distributed, at the end of the sale, in proportion to the final price. This is called the proportional emolument and it is calculated as follows:
- Final sale price under €6,500: 7,397% exc. VAT;
- Final sale price between €6,500 and €17,000: 3,051% exc. VAT;
- Final sale price between €17,000 and €60,000: 2,034% exc. VAT; or
- Final sale price above €60,000: 1,526% exc. VAT.
The proportional emolument is allocated 3/4 to the lawyer of the pursuing creditor, and 1/4 to the lawyer of the adjudicataire.
You wish to buy a French property at auction?
As you will have realised, the auction process can be a great opportunity to buy a property for less than its market value. The judicial nature of this procedure, the customs that may vary from one court to another, and the strict conditions to be fulfilled in order to be declared last bidder, however, make the intervention of a lawyer imperative.
Citizen Avocats being registered at the Bar of Bordeaux, we can represent you for any auction held before the Tribunal Judiciaire of our city. Should you need further information, please contact us and well provide answers to your questions.