Home Auctions: When you assume more burdens than registered (Risks for Awardees)

Having addressed the risks of registration charges in home auctions to which the successful bidder is subrogated, this third article in our series focuses on a less obvious but equally critical issue: the possibility of assuming higher than expected registration charges. We will analyze how discrepancies between the information provided and its reflection in the records can lead to unanticipated liabilities and costs for buyers. Through examples and relevant court rulings, such as those of the Provincial Courts of Guadalajara and Madrid, we will illustrate the complexities and precautions necessary in the world of real estate auctions.

Auction Value Vs. Registry Charges

In ordinary judicial auctions, properties are offered not for their appraised value, but for their liquidation value, which discounts the registered charges. However, in mortgage proceedings, the situation is different: the auction value is set according to the provisions of the mortgage deed. This detail is crucial, as bidders must decide whether it is in their best interest to bid for the property based on this pre-established value.

The Dilemma of Misinformation

Although it seems that successful bidders will always know the subsisting amount of prior liens, there are situations where the information provided by prior creditors may be erroneous. Case law is inconsistent on this point, and discrepancies can lead to significant complications for the buyer, including the possibility of subrogation to greater than expected encumbrances. To understand this from a practical point of view, we analyze below two similar situations with different results:

1. Judgment of the Provincial Court of Guadalajara (October 7, 2014, Appeal No.: 114/2014, Resolution No.: 222/2014):

• Context: Dismisses an action based on articles 1902 et seq. of the Civil Code.
• Main Focus: The judgment establishes that the information on the encumbrances of a property provided by a creditor only takes precedence if this has been officially registered. In the absence of such registration, the certification of encumbrances from the Land Registry prevails.
• Implications: This decision implies that a third party (such as a buyer at an auction) cannot rely on information provided by previous creditors if it is not reflected in the Land Registry. Liability for erroneous unrecorded information does not lie with the creditors who provided it.

2. Judgment of the Provincial Court of Madrid (October 11, 2018, rec.375/2018, Resolution No.: 339/2018):

• Context: It recognizes the right to compensation to a buyer who acquired a property with a previous mortgage, believing that it was cancelled as erroneously declared by the creditor bank.
• Main Focus: Unlike the Guadalajara case, in this case compensation is awarded even though the cancellation of the mortgage had not been recorded.
• Implications: This decision suggests that a buyer may be entitled to indemnification for relying on erroneous information provided by a creditor, even if it was not recorded in the Land Registry.

Comparative Analysis: These rulings present divergent approaches to the liability and implications of relying on unrecorded information about the encumbrances of a property. While the Guadalajara judgment emphasizes the need for the information to be registered in order to be considered valid, the Madrid judgment recognizes the possibility of indemnity even in the absence of registration, underscoring a lack of uniformity in judicial interpretation in these matters.

The Risk of Open Credits

A particularly complicated scenario arises when the property is subject to an open credit. This means that the debtor may generate additional debts after the auction, in which the successful bidder may be forced to be subrogated. It is essential to consider this risk when participating in auctions, especially when maximum mortgages are involved.

The Importance of Due Diligence

Performing due diligence before participating in an auction is essential. This includes verifying the current status of liens and encumbrances on the property and understanding the possible scenarios that may arise after adjudication. Failure to perform adequate due diligence can lead to unpleasant surprises and unexpected additional costs.

Conclusion

Buying a property at judicial auction is not a decision to be taken lightly. The risks associated with subrogation to registration charges can be significant and significantly alter the return on investment. As a potential successful bidder, it is crucial to be well informed and prepared to navigate this complex and often risky terrain.

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