Real estate in the estate: a way out: partition auction?
Property in an estate: Is a partition auction the answer? If a property forms part of an estate, you do not always become the owner of an unencumbered property that is also vacant, over which you can make decisions and dispose of it entirely on your own without any problems. Often, you find yourself facing debts or suddenly become a landlord. In many cases, only a share in a property forms part of the estate. This means that you are not the sole owner; the property is also owned by third parties. In most cases, you do not even know these third parties personally at the outset. You may be connected to these third parties, for example, as a fractional owner, as a partner in a civil-law partnership, or as part of a community of heirs. You are a fractional owner if you hold only a share in the property, regardless of the legal basis. If you acquire ownership of a property together with at least one other person as a result of inheritance, you form a community of heirs with this co-heir or these co-heirs.
Over time, it often becomes clear that this (compulsory) co-ownership does not work due to conflicting interests. In such situations, attempts to sell the property on the open market or for another co-owner to acquire a share often fail for a wide variety of reasons. Attempts to reach an agreement or conduct negotiations are blocked. Before getting bogged down in years of wrangling, it makes sense to consider the last resort: a partition auction. This refers to the compulsory auction of the property for the purpose of dissolving the community of fractional owners or heirs.
The aim of the partition auction is the dissolution of the community of property and the „conversion“ of the property into cash. However, the court does not rule on the subsequent distribution of the cash or proceeds amongst the parties involved.
The decision to proceed with a partition auction should be carefully considered. In most cases, the proceeds will be lower than would be possible through a sale on the open market. However, it is certainly possible for the property to be sold at or above the valuer’s estimate. Nevertheless, reaching an agreement with the other co-owners regarding the winding up of the co-ownership through a notarised contract is generally preferable, even whilst proceedings are ongoing.
To give you a rough idea of what to expect, we have set out below a brief and easy-to-understand overview of how a partition auction works:
Each co-owner is entitled to apply to the relevant local civil court for a partition sale. This is the local civil court within whose jurisdiction the land forming part of the property in dispute is situated. In this context, ownership must be evidenced either by the land register or, in the case of succession, by a copy of the certificate of inheritance or a notarised disposition of property upon death (will or inheritance contract), together with the minutes of the opening of the will.
Once the application has been lodged, the court will then order the auction by way of a ruling, and a corresponding entry will be made in the land register. All owners listed in the land register will be informed of the order. From the date of service of the order, the respondent has two weeks in which to lodge an Application for dismissal pursuant to Section 180(2) or (3) of the ZVG to provide.
An application for suspension under section 180(2) of the ZVG is justified only if, having weighed up the conflicting interests of all parties involved, the compulsory auction does not appear appropriate at that time. Suspension may be granted for a period of up to six months; a one-off extension is also possible.
It is unlikely that the Option to appoint under section 180(3) of the ZVG. This is intended to safeguard the child’s welfare where necessary and may be ordered on multiple occasions.
It should be noted that, under section 180(2) and (3) of the ZVG, the suspension of proceedings may not last for more than five years in total, and that it is not intended to prevent the auction from taking place, but merely to grant a postponement. It is therefore restricted to exceptional cases.
The application is not „final“: should an out-of-court settlement (e.g. through a sale) appear likely after the application has been lodged, the applicant may suspend the proceedings for a maximum of six months. The applicant may also withdraw the application at any time.
If the property is to be sold at auction, the court must first determine its market value – that is, the value that could currently be realised on the open market. This is carried out by an expert appointed by the court to value the property, the costs of which are to be borne by the applicant. If a recent valuation report is already available, this report may also be used, provided that the parties do not object to its use.
As soon as the court has received a valuation report, a hearing is held with the parties involved. If no (relevant) objections are raised, the market value of the property is determined by order on the basis of this report (known as a ‘market value determination order’).
The next step is to set the date of the auction, which usually takes place no earlier than one year after the order is made. Notice of the date must be served on the parties four weeks before the auction to ensure they are informed in good time, and is also published in the Official Gazette, on the court notice board and on the internet at www.versteigerungspool.de published.
The auction date The auction itself is divided into the announcement stage, the bidding session and the award of the contract.
In the notice section, the judicial officer sets out key facts relating to the property and the proceedings, such as the land register status, market value, creditors, claims, applications, minimum bid, security, tenants/leaseholders, etc.
The bidding session begins with a call for bids. The minimum bid has been calculated in advance by the judicial officer and published in the notice section. The bidding session continues until no further bids are submitted, but for at least 30 minutes. Finally, the highest bid is determined.
This is followed by the proceedings regarding the award of the lot. As a rule, the highest bidder is entitled to have the lot awarded to them, Section 81 of the ZVG, unless the highest bid falls short of half the market value, Section 85a of the ZVG. However, this so-called 5/10 threshold applies only at the first auction and not at a repeat auction. It must be taken into account ex officio. At a repeat auction, on the other hand, there is no lower value threshold.
Is the highest bid within the range set for the first deadline? above the 5/10 threshold, but below the 7/10 threshold (= 70% of the market value), in which case any person whose rights would be affected by the award may apply for the award to be refused at the partition auction (Section 74a of the ZVG). It should be noted here that this does not take place automatically, but only upon application by the entitled party, and is only permitted at the first hearing, not at a subsequent hearing.
The following additional There are certain special points to bear in mind regarding the partition auction:
- All encumbrances entered in the land register remain in force and must be assumed by the purchaser. The purchaser therefore does not receive a land register free of encumbrances, but pays a correspondingly lower purchase price (cash offer). The cash offer therefore corresponds to the remaining purchase price that the seller would receive in a private sale. To compensate for the lower purchase price, the buyer must subsequently redeem or service the existing encumbrances themselves. If, for example, there is a land charge, the buyer must still pay this after the partition auction has been concluded so that it can be discharged. The higher the encumbrances, therefore, the lower the chances of a successful auction are, as a rule.
- The purchaser shall assume the existing tenancy and lease agreements.
- A co-owner is not required to provide security for their own bid if they hold a mortgage which would entitle them to an allocation based on the cash bid.
- If a co-owner is awarded the lot, they must nevertheless pay the full amount of the highest bid. It is not for the court to decide what proportion of that amount would be due to them. However, when calculating the costs associated with the award, the share to which they were already entitled is taken into account.
In the subsequent distribution of proceeds, the court costs, the parties’ advance payments towards court costs and, where applicable, any outstanding public charges on the property (such as property tax) are first deducted at the distribution hearing. This is followed by the satisfaction of creditors in accordance with the Section 10 of the ZVG. Any proceeds remaining after this are due to the previous owners. In order for the remaining proceeds to be paid out, unanimous declarations from all previous owners are required; these must be submitted in writing before the distribution date or, at the latest, on the distribution date itself for inclusion in the court’s minutes.
In the event that no agreement has been reached between the previous owners by the distribution date, the remaining proceeds will be deposited with the Local Court’s depositary on behalf of all previous owners jointly, until unanimous declarations are provided or a court judgement is submitted to replace them.
It should be clear that the respondents will use every means at their disposal to block or delay such a partition auction procedure. In this respect, this course of action should only be pursued if one is fully aware of the duration of the process and the financial loss on sale that typically occurs. One should also always bear in mind the applicant’s obligation to pay an advance, although any advances paid will be refunded once the property has been awarded.
Do you have any questions on the subject of Community of heirs, Dispute over the distribution of an estate or Partition auction Or have you been served with such an application for a partition auction, or would you like to submit one? We’d be happy to advise you!