Auction judgment and upset bid: securing the takeover of a property asset

Buying a property at the courtroom auction attracts more and more investors, property dealers (marchands de biens) and property companies looking for discounts that the private-treaty market no longer offers. But a court auction is not a sale like any other: no loan condition precedent, no cooling-off period, an immediate transfer of ownership and a risk, often poorly anticipated, of seeing a third party take over the property within days through an upset bid (surenchère). This guide sets out the exact effects of the auction judgment (jugement d'adjudication) in a property seizure, the mechanics and time limit of the upset bid, and then proposes an operational checklist for securing the takeover of a property asset from start to finish.

The auction: a method of acquisition governed by its own rules

Property seizure is governed by Articles L.311-1 et seq. and R.311-1 et seq. of the French Code of Civil Enforcement Procedures (Code des procédures civiles d'exécution, CPCE). Failing a private sale authorised by the judge, it ends in a forced sale by public auction at the auction hearing, held before the enforcement judge (juge de l'exécution) of the judicial court (tribunal judiciaire) for the place where the property is located.

Bids cannot be made freely. Article R.322-40 of the CPCE requires representation by a lawyer (avocat) registered with the bar of the court concerned: the investor instructs a lawyer, gives instructions and a bidding ceiling, and it is the lawyer who makes the bids in the investor's name. Before the hearing, Article R.322-41 requires that the lawyer be given a guarantee, an irrevocable bank guarantee or a bank draft, representing 10% of the starting price (mise à prix), and not less than €3,000. Without this guarantee, the bid is inadmissible.

The last bidder becomes the successful bidder (adjudicataire). The judge then delivers the auction judgment, which records the sale and fixes the price. It is from this decision that the legal effects that matter for the acquirer are triggered.

Why this method of acquisition attracts professionals

The potential discount to market value explains the interest of property companies and property dealers. The counterpart is the complete absence of a contractual safety net: no right of withdrawal, no financing condition precedent, no warranty against hidden defects since this is a court sale. The successful bidder buys as it stands, on the strength of the conditions of sale document (cahier des conditions de vente) and the diagnostic reports annexed to it. The rigour of the preliminary audit therefore determines the profitability of the transaction. The risks and steps specific to acquisition at the courtroom auction are covered, from the bidder's standpoint, in our buyer's guide to judicial property auctions.

The effects of the auction judgment

The auction judgment produces three major effects that an acquirer must master: it transfers ownership, it opens the way to clearing of the registered charges encumbering the property, and it places on the successful bidder payment obligations that are strictly limited in time.

Transfer of ownership

The auction carries transfer of ownership to the successful bidder. This transfer takes effect once the auction has become final, that is, once the period for an upset bid has elapsed without an upset bid having been made. The auction judgment constitutes the title of sale: it takes the place of an authentic deed and will be published at the land registry (service de la publicité foncière) so that the transfer can be relied on against third parties.

Note a distinction that practitioners systematically draw: the successful bidder becomes owner, but may freely dispose of the property (resell it, give it as security) only after paying the price, settling the costs and publishing the title of sale. As long as these formalities have not been completed, a resale planned by a property dealer remains blocked. This constraint bears directly on the marketing timetable and on the cash-flow plan for the transaction.

The auction judgment also constitutes an eviction order against the seized debtor who remains on the premises. By contrast, occupants holding a lease enforceable against third parties cannot be removed: the successful bidder takes the property subject to the leases in force, provided they have a certain date and were not entered into in fraud of the enforcing creditor's rights. An investor targeting a vacant building must therefore check the letting position in the conditions of sale document before bidding. The fate of the tenant and of the commercial lease in force when the building is seized is dealt with separately in another article.

Clearing of registered charges

This is one of the great attractions of acquisition by auction: the property is transferred cleared of the mortgages and privileges that encumbered it. Article L.322-14 of the CPCE provides that payment into escrow or consignment of the price, together with payment of the costs of the sale, clears the property by operation of law of every mortgage and privilege.

In practical terms, registered creditors (the mortgage bank, the Public Treasury, URSSAF) retain no right to follow the property once the price has been paid and consigned. They are paid, according to their rank, out of the sale price under the distribution procedure. The successful bidder may then apply for deregistration of the charges, on presentation of the title of sale and proof of payment. On the place of registered creditors in the procedure, from notification of the payment order to distribution of the price, see our article on that question.

This clearing does not dispense with a rigorous preliminary audit. Certain charges do not necessarily follow the regime of mortgage registrations: easements, split real rights, unpaid co-ownership charges transferred within the statutory limits, or planning disputes attached to the property. The conditions of sale document must be dissected to identify what will weigh on the asset despite the clearing of mortgages.

The successful bidder's payment obligations

The successful bidder must consign the price into an escrow account or with the Caisse des dépôts (French public deposit and consignment fund). Article R.322-56 of the CPCE sets a period of two months from the final auction for payment of the price, on pain of re-auction (réitération des enchères). After that period, the price bears interest at the statutory rate by operation of law until payment.

In addition to this principal price, there are:

• the enforcement costs taxed by the judge, payable by the successful bidder on top of the price;
• registration duties and land registration tax relating to the transfer;
• the fees of the lawyer who made the bids, according to the applicable scale;
• where applicable, the property security contribution (contribution de sécurité immobilière).

The acquirer must therefore reason in terms of full cost price, and not only the auction amount. For a property dealer, this additional cost reduces the resale margin accordingly and must be built in when fixing the bidding ceiling given to the lawyer.

The risk of re-auction

If the successful bidder does not pay within the time limits, the sale may be called into question by a re-auction (réitération des enchères, formerly known as folle enchère). The property is put up for auction again, and the defaulting bidder remains liable for the difference between its price and the price of the new auction if the latter is lower. It also loses the guarantee it paid. For a professional, this risk makes it necessary to secure financing before the hearing, since no loan condition precedent protects the buyer at the courtroom auction.

The upset bid: understanding the mechanism

The upset bid is the main source of insecurity for an acquirer who thinks it has won the property. As long as the period has not elapsed, the auction is not final and a third party, or one of the creditors, may restart the bidding.

Principle and conditions

Article L.322-12 of the CPCE gives anyone the ability to make an upset bid within ten days following the auction, provided that it is at least equal to one tenth of the principal sale price. The upset bid is therefore for at least 10% of the auction price, and not of the initial starting price.

A worked example helps to visualise the mechanism. A building is knocked down at €300,000. A third-party investor, considering that the property is worth more, makes an upset bid: it must be at least €30,000, bringing the new starting price of the second sale to at least €330,000. A new hearing will be held on that basis.

The upset bid is subject to the same formalities as the initial bid. Under Articles R.322-50 et seq. of the CPCE, it is made by a lawyer's deed filed with the registry of the enforcement judge, then notified to the successful bidder, the enforcing creditor and the seized debtor. The upset bidder must also show the financial guarantee required in order to bid.

The time limit for an upset bid in a property seizure

The time limit for an upset bid in a property seizure is ten days and runs from the auction. It is a period of clear days (jours francs), calculated according to the rules for computing procedural time limits. It is this period that explains why a successful bidder is never certain of being definitively owner on leaving the hearing: the sale remains suspended until this period expires without an upset bid.

For the investor, this ten-day period is a zone of uncertainty to be built into its timetable. No resale step, and no signing of a preliminary sale agreement with a sub-buyer, should be undertaken before the period has expired. A property dealer who had pre-marketed the property is exposed to having to go back on its commitment to its own buyer if an upset bidder ultimately takes the asset.

The new sale hearing

When an upset bid is properly made, a new sale hearing is held. The bidding restarts on the basis of the price of the first auction increased by the upset bid. Three outcomes are possible.

If nobody bids higher, the upset bidder is declared successful bidder at the amount of its upset bid. If a third party, or the initial successful bidder, makes a higher bid, the property is knocked down to the highest bidder. Finally, the successful bidder at the first sale may perfectly well attend the second hearing to try to retake the property: it is not ousted by the upset bid, it simply has to bid again in turn.

A key point: the second auction is final and does not open a new period for an upset bid. Only one upset bid is possible per procedure. Once the second sale has been pronounced, the acquirer can at last secure its transaction without fearing a further reversal.

The acquirer's checklist: securing the transaction from start to finish

The success of an asset takeover at the courtroom auction is determined as much before the hearing as after it. Here are the key checks and actions, ordered by phase of the transaction.

Before the hearing: auditing the property and the file

This phase conditions everything else. The acquirer cannot withdraw afterwards: due diligence must be exhaustive.

• Study the conditions of sale document filed at the court registry, which contains the description, the starting price, the diagnostic reports and the special conditions.
• Analyse the letting and occupation position: leases enforceable against third parties, occupants without title, seized debtor still present, impact on the availability of the property.
• Check the mortgage statement and the charges that survive the clearing: easements, arrears of co-ownership charges, planning disputes.
• Visit the property where organised viewings are scheduled, and otherwise assess the risk of buying on paper.
• Close the financing beforehand, since the absence of a loan condition precedent rules out any turning back.
• Fix with the lawyer a bidding ceiling that includes the full cost price: price, enforcement costs, duties, fees, estimated works.
• Put in place the financial guarantee required by Article R.322-41 of the CPCE, amounting to 10% of the starting price and at least €3,000.

During and just after the hearing

On the day of the sale, the lawyer makes the bids within the limits of the mandate. Once it is successful bidder, the acquirer enters the sensitive period.

• Monitor the ten-day period for an upset bid and refrain from any resale commitment before it expires.
• Anticipate a possible upset bid by assessing, from the auction onwards, whether to reposition at the second hearing if a third party restarts the bidding.
• Prepare the consignment of the price to comply with the two-month period in Article R.322-56 of the CPCE and avoid interest, or even a re-auction.

After the final auction

Once the upset bid period has expired and the auction has become final, the acquirer secures ownership and operation of the asset.

• Pay the price, the taxed costs and the duties, then have the title of sale published at the land registry.
• Apply for deregistration of the cleared charges in order to obtain a clean mortgage statement, essential for a resale or for granting security.
• Where necessary, bring eviction proceedings against the seized debtor who remains on the premises, on the basis of the auction judgment which constitutes an eviction order.
• Take over management of the leases in force and regularise the position of legitimate occupants.

Conclusion

Acquisition by auction gives investors, property dealers and property companies a route to discounted assets cleared of their mortgages, but it reverses the usual logic of a property sale: here, legal certainty is built beforehand, because no condition precedent or right of withdrawal will correct an error of judgment. The auction judgment in a property seizure transfers ownership and opens the clearing of registered charges, but it becomes final only on expiry of the ten-day upset bid period, a window during which a third party can call everything into question.

The position is clear: the profitability of an asset takeover at the courtroom auction does not depend on bidding skill, but on the quality of the preliminary audit and the discipline of the timetable. Before making any bid, have the conditions of sale document, the mortgage statement and the occupation position audited by a lawyer, and take no resale step until the upset bid period has expired.

Frequently asked questions

What is the time limit for an upset bid after an auction judgment?

The time limit for an upset bid in a property seizure is ten days from the auction, under Article L.322-12 of the French Code of Civil Enforcement Procedures. During this period, the auction is not final. The upset bid must be at least equal to one tenth of the principal sale price and be made by a lawyer's deed filed with the registry of the enforcement judge.

Does the successful bidder become owner immediately?

The auction judgment transfers ownership, but it becomes final only after the ten-day upset bid period has expired without an upset bid. Moreover, the successful bidder may dispose of the property, resell it or give it as security, only after paying the price, settling the costs and publishing the title of sale at the land registry. A resale should therefore never be started before the auction is final.

Does the auction really clear all the charges on the property?

Article L.322-14 of the CPCE provides that consignment of the price and payment of the costs clear the property by operation of law of registered mortgages and privileges. However, this clearing does not extend to easements, certain arrears of co-ownership charges or planning disputes attached to the property. An audit of the conditions of sale document and of the mortgage statement remains essential before bidding.

Can you back out of a property bought at auction?

No. A sale by auction carries neither a right of withdrawal nor a financing condition precedent. A successful bidder who does not pay the price within the two-month period provided for in Article R.322-56 of the CPCE is exposed to re-auction, loss of its guarantee and payment of the difference if the property is resold at a lower price. Financing must therefore be secured before the hearing.

What happens if a third party makes an upset bid on my auction?

A new sale hearing is held on the basis of the auction price increased by the upset bid, that is, at least 10% more. The initial successful bidder is not definitively ousted: it may attend this second hearing and bid again in turn. The second auction is final and opens no new upset bid period, only one upset bid being possible per procedure.

Is a lawyer compulsory in order to bid?

Yes. Article R.322-40 of the CPCE requires representation by a lawyer registered with the bar of the competent judicial court in order to make bids. The investor instructs its lawyer, gives it a bidding ceiling and the required financial guarantee, and the lawyer bids in its name. This representation also applies to making an upset bid.

What budget should be allowed beyond the auction price?

The auction price is only part of the cost price. To it are added the enforcement costs taxed by the judge, registration duties and land registration tax, the lawyer's fees and, where applicable, works. The acquirer must also put in place, before the hearing, a guarantee of 10% of the starting price, with a minimum of €3,000 under Article R.322-41 of the CPCE. This full cost must be built in when fixing the bidding ceiling.