Purchase OG by mortgagee at auction

To what extent may a mortgagee, when auctioning a property, purchase it himself?

It frequently happens that at auctions of real estate, the mortgagee or an affiliate purchases the property to be auctioned itself. This is allowed, but subject to certain rules. If the mortgagor/owner of the property fails to meet its obligations under the financing and there is a default, the property can be monetized in two ways: by public auction or by private execution (Article 3:268 of the Civil Code). The regulations for this are in the Code of Civil Procedure and a notary accompanies this auction process. The background to this is to realize the highest possible execution proceeds. This is not only in the interest of the creditor/mortgagee, but also of the mortgagor/owner and any other creditors.

The offer made by the mortgagee for the property must be sufficiently realistic. The lender/mortgagee also has a duty of care in the foreclosure sale of a property. The mortgagee may not exercise its powers in such a way as to cause avoidable harm to the mortgagor/owner. If a bid is made that is significantly below the liquidation value, while that bid was made to trigger the auction, under circumstances it may be the case that the mortgagee is not allowed to award his own bid, but must call a new auction (Rb. Midden-Nederland 1 August 2018, ECLI:NL: RBMNE:2018:5581). Another solution would be to deduct the capital gain from the residual debt in a subsequent sale. The preliminary question that must be answered before the auction is called is whether the financing was allowed to be terminated. My office colleague Reinier Pijls and I wrote about that earlier.

In a recently published ruling, the situation occurred where the mortgagee had even offered slightly more on the property than the liquidation value (Rb. Midden-Nederland Oct. 21, 2020, ECLI:NL: RBMNE:2020:4478). Nevertheless, the owner/mortgagor would be left with a significant residual debt. He was of the opinion that the mortgagee abused its right to proceed with the foreclosure when no other offers had been made. The mortgagor indicated that it would not collect the residual debt. The latter was crucial to the preliminary injunction judge in ruling that there was no abuse of right in the foreclosure sale here.

Thus, a mortgagee may make an offer on a property in order to become the owner. In doing so, however, he has a duty of care and there must be no abuse of rights: the interests of the mortgagor and other creditors must be taken into account.