Distressed real estate and enforcement procedure in the Netherlands

This is an overview provided by CMS setting out the enforcement of a mortgage granted over (commercial) real estate in the Netherlands.

The current economic situation may lead to issues around (re)financing and access to affordable debt. Hiking interest rates have not only made borrowing more expensive but also required commercial mortgage lenders to increase their risk premiums and lending margins to reflect the higher uncertainty and default risk in the market. As a consequence, refinancing has become more difficult for commercial real estate investors, especially those with higher leverage, lower credit quality, or less diversified portfolios. Furthermore, decreasing valuation of properties may affect existing financing arrangements. Increased loan-to-value ratios and the risk of negative equity may result that lenders face losses if the sale proceeds are lower than the outstanding debt.

Position of lenders in the commercial mortgage market
Position of lenders in the commercial mortgage market varies depending on their type, size, strategy, and exposure. Some lenders, such as banks, insurance companies, and pension funds, have more diversified and long-term portfolios, lower leverage, and stronger capital buffers, and may be more willing and able to restructure, continue, or extend loans to distressed borrowers. Other lenders, such as non-bank financial institutions, private equity funds, and securitization vehicles, may have more concentrated and short-term portfolios, higher leverage, and weaker liquidity positions, and may be more inclined or forced to foreclose or sell loans to recover their funds.

Foreclosure of mortgages over real estate
Foreclosure of mortgages over real estate in the Netherlands can occur when borrowers default on their loan obligations and lenders exercise their legal right to foreclose the property to recover their debt. When an event of default occurs, as defined in the financing documentation, the mortgagee may exercise its right to accelerate the right of mortgage and as such initiate a forced sale procedure of the property via a public auction.

The public auction procedures vary considerably in EU member states. Not only the legislation varies, but also the effectiveness and efficiency of the procedure. For instance, the Dutch procedure is particularly favourable as regards to flexibility, duration (an auction can take place within 90 days) and costs (these are average). Most enforcement sales occur at the request of the mortgagee. However, while being less common, an attachor can also request an enforcement sale of an attached property. In this article, we will further discuss the procedure in case of a public auction at the request of the mortgagee in the Netherlands.

Steps and formalities

Below is a schematic representation of the steps to be taken in a public auction:

Default situation and termination

In the event of a payment default of the mortgagor the mortgagee may initiate the enforcement the loan and the foreclosure of the property. The mortgagee may apply the net enforcement proceeds towards repayment of the outstanding debt (in accordance with the ranking of its security right). After termination of the loan agreement with the mortgagor, the mortgagor will be given a reasonable period of time (in practice 14 days) to repay the full debt to the mortgagee.

Instruction civil-law notary

If the mortgagor does not comply with this request, the mortgagee can instruct a civil-law notary in the Netherlands to prepare a forced sale via a public auction. In the Netherlands, the civil-law notary has a special (coordination) role to play in a public auction procedure. The civil-law notary will first conduct certain checks: research, consisting of among other things, the property information (checks with the Dutch Land Registry regarding ownership and possible other rights in rem and the acceleration notice of the loan. The mortgagee and the civil-law notary shall set the date, time and the (online) location for the public auction. Most of the public auctions of real estate will take place online. The civil-law notary shall inform the mortgagor about the public auction procedure, the date, time and the (online) platform used.

The mortgagee will also engage a broker to deal with the commercial aspects and to market the property. The broker can conduct on-site research, arrange viewings (if possible), and prepare an (online) auction brochure. The broker shall inform the civil-law notary and the mortgagee about any observations / specifics pertaining to the property. Sometimes it is necessary to include the obtained information of the broker in the special auction conditions. This will be discussed between the mortgagee, broker and civil-law notary.

Serving notice

The formal notice of the public auction is served by means of a bailiff's writ to the mortgagor(s), with a copy to parties with an attachment to the property, any other parties whose rights will expire and tenants.

The civil-law notary shall instruct the bailiff. The bailiff's writ will include (at least) the following information: the total outstanding amount of the secured debt, auction costs already incurred by the mortgagee, the date, time and the platform of the public auction and the name of civil-law notary involved.

The mortgagor has the possibility to request the court in summary proceedings to stop the public auction if it is of the opinion that the public auction is not justified. If successful, these summary proceedings will terminate or postpone the public auction by the mortgagee. Enforceability may also be restricted by general principles of Dutch Law, such as the principle of reasonableness and fairness (redelijkheid en billijkheid) as provided for in the Dutch Civil Code, and may be subject to rescission in cases of vitiated consent (wilsgebreken) or which are the result of undue influence (misbruik van omstandigheden), fraud (bedrog), error (dwaling) or threat (bedreiging).

Special auction conditions

The civil-law notary will draw up the special auction conditions. The special auction conditions will include among other things the following important information of the property: the applicable general auction conditions additions / deviations in relation to the general auction conditions, platform, date, time, location, costs for the purchaser, premium, use of the property, information about the lease, special charges and restrictions related to the property (e.g. easements, perpetual clauses, qualitative obligations, leasehold, right of superficies etcetera), "as is where is" clause and a limitation of liability clause.

The general auction conditions which are most frequently used are the General Auction conditions 2017 (Algemene Voorwaarden voor Executieverkopen 2017) and the General Auction with Internet Bidding 2015 (Algemene veilingvoorwaarden met internetbieden 2015).

• If a property is leased, it is preferable to share the rental information as insightfully as possible. With this information, potential bidders can make a assess the value of the property. The special auction conditions contain mostly factual information in relation to the property.
• If the property is leased out without the bank's consent and this will affect the proceeds of the public auction in a negative way, the mortgagor has the authority to invoke the letting clause. For a commercial property, this will be done through the issuance of a bailiff's writ. Vacation of the tenant is usually left to the auction purchaser.

No later than 30 days prior to the public auction date, the civil-law notary will publish the special auction conditions on the auction platform. Also, the owner of the property and the other interested parties (such as other mortgagees / parties with an attachment to the property) will receive a true copy of the special auction conditions.

Private bid(s)

Ultimately 14 days prior to the public auction date interested parties can submit private bid(s) to the civil-law notary. The civil-law notary will provide the mortgagee with the private bids and will inform the mortgagor about the amounts of the private bids. It is up to the mortgagee whether or not to accept any of the bids. An underlying valuation report will have to show that the offer (to be) accepted by the mortgagee is reasonable.

If the mortgagee decides to accept a private bid, a (written) purchase agreement between the mortgagee and the (potential) purchaser will be concluded and will be confirmed in writing by the auction notary, subject to the condition precedent that judicial approval for the agreement is obtained unconditionally.

Requests for judicial approval can be submitted up to eight days before the auction date. Once the application is filled the public auction date will be cancelled. If the purchase agreement is not approved, the court will determine a new date for the public auction.

Please note that the mortgagor is also authorized to submit a purchase agreement for approval at the court.

Preliminary relief proceedings

The hearing before the preliminary relief judge is public and all interested parties (e.g. other mortgagees, attaching parties, the owner of the property) are invited. If the preliminary relief judge allows it, an interested party can make a higher bid. After the public hearing, there are two options:

• the preliminary relief judge accepts the request of the mortgagee, payment of the purchase price and transfer of the property will take place within a period of four weeks; or
• preliminary relief judge rejects the request of the mortgagee, and a new auction date can be set within fourteen days.

If a request for judicial approval is submitted the auction will be suspended. Subsequently, if approval is obtained the auction will be cancelled; if approval is denied, the judge will set a new auction date.

Public auction

Very often the public auction itself will take place online. In order to participate, interested parties have to register prior to the auction, by (i) creating an account on the auction website, (ii) completing the auction house registration form and (iii) fulfilling any additional registration requirements included in the auction conditions.

An important part of the registration process will be the identification of the interested parties (which may also include indirect shareholders and ultimate beneficial owners of legal entities or partnerships), notarisation of the signatures of the authorised representatives and confirmation of the notarisation by apostille.

If no private bids are made, the mortgagee rejects all of the private bids or if the court does not approve the bid; the public auction will take place. The auction times will be published on the auction website. The website also provides information about the procedure of the various stages of the auction. The public auction will take place by two phases, starting with the ascending (opbod) phase and followed by the descending (afslag) phase. In the ascending phase the bids go up and in the descending phase the bids go down towards the amount of the ascending phase. If there is no descending bid, the ascending bid is considered as the highest bid. Each bid during the public auction is unconditional, irrevocable and without any reservation.

After the public auction, the civil-law notary will inform the mortgagee and the mortgagor about the outcome of the public auction and the consultation period will start, during which the mortgagee will decide whether or not a bid will be approved and - if so - will determine the winning bid. As long as a winning bid has not been approved, the mortgagee may at all times cancel the auction. Approval may also be subject to one or more conditions subsequent.

It is up to the mortgagee whether or not to accept the highest bid in the auction or accept one of the bids at all. The civil-law notary will draw up the relevant deed (a record of the auction proceedings). If the mortgagee accepts the highest bid the civil-law notary will draw up an award deed and shall inform the purchaser. The purchaser will pay the purchase price to the civil-law notary on the third-party account (including additional costs) of the civil-law notary. The special auction conditions will include the period between acceptance by the mortgagee and the payment of the purchase price and transfer of the property. Normally this is between 4 and 6 weeks.

The civil-law notary will pay the proceeds (minus the auction costs) to the mortgagee. If the purchase price (i.e. the accepted bid at the auction) exceeds the debt with the mortgagee, a distribution proposal will be made for the surplus with the relevant parties, such as the tax authorities, the attachor and the mortgagor.

Alternative - Repayment right mortgagor

In the event that the market value of the property exceeds the outstanding debt under the loan agreement, the mortgagor, being threatened by the initiated auction procedure, may discover the options to sell the foreclosed property. The sale proceeds will then be used to repay the mortgagee, with the mortgagee being forced to cancel the auction. This sale does not require the consent of the mortgagee or the preliminary relief judge. However, it should be noted that this repayment can ultimately be done at the moment of (i) approval by the court of the private bid received by the mortgagee or (ii) granting by the mortgagee of the property to a bidder pursuant to the public auction.

With the largest commercial real estate team in Europe and specialized inhouse notaries, CMS is well positioned to help investors, borrowers and lenders to navigate all aspects of distressed real estate. CMS has experience with working with clients on foreclosure procedures. We are more than happy to assist you with any questions about distressed real estate and the Dutch auction procedure of (commercial) real estate.