In the aftermath of the financial crisis, the Dutch financial market saw an increase in financial service providers and creditors transferring outstanding non-performing secured real estate loans to foreign distressed asset investors seeking to acquire the loans and associated security rights at a discount, with a view to possibily enforce on the mortgages and to acquire the secured properties. These investors in most cases being of U.S. origin, aim to acquire the properties through a so called “credit bid” which, under U.S. law, generally entitles a creditor with a secured claim to bid on the properties during an instigated enforcement procedure and, if the holder of such claim becomes the purchaser of the properties, to offset the secured claim against the purchase price due, avoiding further cash funding being required.

Since then, this practice has from time to time reappeared in the Dutch real estate market, as apparent from the various news coverages and case law such procedures often accompany. It is not a surprise that in the current investment climate, these investors are seemingly looking to again capitalize on these investment opportunities. In this short read we address that the procedure for enforcing creditors to bid on the properties differs in material aspect under Dutch law from the procedure as, for example, under U.S. law.

Right to bid
When the debtor is in default with the observance of an obligation for which the mortgage serves as security, pursuant to clause 3:268 paragraph 1 DCC the mortgagee is entitled, without the necessity to obtain approval in advance of the competent court, to instruct a civil law notary to sell the mortgaged property in public by auction and to recover the secured debt from the sales proceeds. Each (other) clause or condition which provides the mortgagee the right to appropriate the mortgaged asset is null and void pursuant to clause 3:235 DCC. Furthermore, as an important principle in Dutch mortgage enforcement procedures, the engaged civil law notary is obliged to ensure that the highest possible proceeds within such procedure can be achieved.

These provisions are included to protect the debtor from a creditor all too easily provoking an event of default in order to be able to acquire the secured properties at a price below market level. This does however not entail that an enforcing creditor is prohibited from bidding on the properties during the enforcement procedure, nor is there an absolut prohibition following from any other provisions of the DCC or case law. It is therefore generally accepted that a creditor bids in the procedure, irrespective of whether this creditor is the only bidder or not.

Right to offset secured claim
Clause 3:270 paragraph 1 DCC provides that the purchaser who has purchased the mortgaged property at a public sale must pay the purchase price to the civil law notary before whom the public sale has taken place. This entails that the enforcing creditor, should he become the purchaser of the properties during the enforcement procedure, is not allowed to offset the secured claim against the purchase price and must fund the purchase price in cash to the civil law notary.

This requirement of cash funding is based on the provisions of clause 3:270 DCC, by which the civil law notary is tasked with the handling of the sales proceeds and the settlement of sales costs and, if and to the extent applicable, the (secured) claims of the other (higher ranking) creditors therefrom. The civil law notary is only able to do so in case the sales proceeds are made available to him in cash, as the (total) sales proceeds are not in all instances to be reimbursed to the enforcing creditor.

As far as these obligations are not complied with by the civil law notary, he and the Dutch Government are jointly and severally liable towards the parties who have suffered damages as a result of this non-performance. Derogation of the provisions of this clause in the relevant sales conditions is therefore not allowed.

Conclusion
In mortgage enforcement procedures in the Netherlands it is generally accepted that the enforcing creditor bids on the secured properties that are subject to the enforcement procedure. The enforcing creditor is however not allowed to offset the secured claim against the purchase price and must fund the purchase price in cash to the civil law notary tasked with the enforcement procedure, who will handle (the distribution of) the sales proceeds in accordance with the provisions of the DCC. (Prospect) creditors should take this into account in their (investment) decisions, as obtaining such funds often comes with its own challenges and some time may pass between the civil law notary receiving the purchase price and reimbursement by the civil law notary of the secured loan pursuant to the provisions applicable to the enforcement procedure.

If you have any questions or would like to receive advice on or assistance with structuring an enforcement procedure, please feel free to contact one of our colleagues.