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Enforcement of a Dutch law mortgage over real property: It is all about valuation

Latifa Ait Youss

A Dutch law mortgage over real property provides the mortgagee with an immediate right to enforce its mortgage upon an event of default with respect to the payment of any of the obligations secured thereby, without first having to obtain a judgement against the mortgagor.

Where Dutch insolvency laws apply, this right can, subject to very limited exceptions, be exercised by a mortgagee regardless of the mortgagor having been declared bankrupt or having become subject to a moratorium. A Dutch law mortgagee that has obtained a first ranking mortgage will have a first priority right to the proceeds of sale of the mortgaged property and will not have to share in any bankruptcy or moratorium costs.

In practice, a mortgagee will not always be inclined to sell the property by means of an enforcement sale, if the loan secured by the mortgage has gone into default. Besides the fact that an enforcement sale will usually not result in the best possible proceeds, lenders are especially reluctant to sell in the current market as this may result in them crystallising a loss on their balance sheet.

A common approach for lenders in the Dutch property finance market (and elsewhere) is therefore to try and refinance or extend the loan against some form of compensation (such as fees or increased margin). Alternatively, a mortgagee could agree to a voluntary sale scenario with the mortgagor; for example, imposing an obligation on the mortgagor to effect a voluntary sale of the relevant property or properties within a period of one year for a certain minimum price, whereby all net proceeds must be applied towards repayment of the loan, in the (usually justified) hope that this will result in higher proceeds.

In certain cases, an enforcement sale will, however, be inevitable. In such a scenario two things are high on a mortgagee's priority list: securing a smooth enforcement process, with minimal or preferably no interference from the mortgagor or other parties with an interest in the property; and generating maximum proceeds, or at least sufficient proceeds to satisfy the debt owed to it.

Under Dutch law, the main rule is that it is left to the discretion of the mortgagee when and in which manner the property is sold. This is, however, subject to a general obligation on the part of the mortgagee to try and maximise the proceeds of the mortgaged property.

Current market circumstances have led to increased discussions and legal proceedings between lenders (mortgagees) and borrowers/mortgagors on the subject of the practical meaning of a mortgagee's obligation to try and maximise proceeds. On the basis of recent case law, the following points are important for a mortgagee to bear in mind on this point.

A Dutch law mortgage can be enforced by way of a public or private sale. The Dutch Civil Code reflects that, in case of an execution sale, the property must in principle be sold in a public sale in the form of an auction supervised and co-ordinated by a Dutch civil-law notary. In such a scenario, it is assumed that the auction process will guarantee that the property is sold for the maximum (enforcement) sale price that is achievable.

In practice however, and especially in the current market, most enforcement sales are carried out by way of a private sale in order to avoid publicity as much as possible, as well as to limit costs and achieve a higher sale price than may have been achievable in an auction sale. Court approval is required for a private sale. An application for such approval must be combined with a binding sale and purchase agreement.

Unlike a public sale, a private sale will leave room for debate as to whether the highest sale price possible is indeed realised. In particular, as the court must inform the mortgagor and other interested parties of the request for a private sale and point out that they have a right to be heard by the court.

This will provide an un-cooperative mortgagor, or third parties with an interest, with an opportunity to challenge the sale and purchase agreement, especially in the case where a mortgagor is of the view that the sale will only benefit the mortgagee and deprive him of his potential future upside.

On this point, it is important to note that recent case law has confirmed in further detail that the obligation of a mortgagee to try and maximise proceeds must be taken to imply an obligation to maximise proceeds under the market circumstances prevailing at the time of enforcement. In this context a Dutch court will generally take the view that if a mortgagor feels that higher proceeds may be possible in the not too distant future, it should make a bid for the property itself or find a third-party investor willing to do so.

From the mortgagee's side, in order to enable a court to deal with a request for consent to a private sale and minimise the chances of any objections against the purchase price offered being successful in preventing or delaying a sale, a thorough, up-to-date and objective valuation of the property, and substantiation of the purchase price offered, should be submitted to the court. This will go a long way toward realising an effective enforcement procedure and is therefore well worth the expense.

Latifa Ait Youss

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