Compulsory realisation of an attached property, in particular of a co-ownership share
The principle of the sufficient bid decisively governs the outcome of a compulsory auction. It is subject to a notable exception where the attached co-ownership share relates to a property encumbered as a whole.
In general
At a creditor’s request, the debt enforcement office may realise — that is, sell — the assets it has attached (art. 116 DEBA). The Federal Act on Debt Enforcement and Bankruptcy (DEBA), together with several federal ordinances, governs the realisation of attached assets, whether movables and claims (art. 122 et seq. DEBA) or, more specifically, immovable property (art. 133 DEBA).
When a property is put up for auction, it is sold together with the charges encumbering it, including for example mortgages. The auction conditions must mention such charges (art. 135 et seq. DEBA), stating for example that a house worth CHF 1,000,000 and encumbered with a mortgage debt of CHF 700,000 is being auctioned.
The general principles of the auction
The auction of a property is governed by several major principles, in particular that of the sufficient bid (art. 126 in conjunction with art. 142a DEBA). The following considerations concern realisation following attachment only, and not realisation in bankruptcy, which is governed by its own rules.
In practice, a creditor requests the sale of the attached property owned by its debtor. That creditor may be the mortgagee — the bank in whose favour the mortgage was created to secure a loan — or an entirely different creditor, for example a contractor whose invoice the owner has not paid.
For the property to be sold, the principle of the sufficient bid requires a bidder to offer at least the total of the secured claims ranking ahead of the enforcing creditor. In the example above, if a creditor other than the bank requests the sale, the highest bid must be at least CHF 700,001 in order first to cover the bank’s preferential security. If the bank itself requested the sale, as first-ranking mortgagee it would have no one to satisfy ahead of it, and the property could be knocked down from CHF 1.
What about co-ownership?
The realisation of immovable property is governed in particular by the Federal Supreme Court Ordinance on the Compulsory Realisation of Immovable Property (ORFI), which sets out how to sell a share in a co-owned property.
The property may be co-owned by two people — a brother and sister, or spouses. Each owns a one-half share, which itself constitutes immovable property (art. 655 para. 2 no. 4 CC).
That co-ownership share may itself be attached, in particular where only the brother, and not the sister, is subject to enforcement, or vice versa. Either each co-ownership share may be mortgaged, or the property as a whole.
In the latter case, art. 73f et seq. ORFI govern the auction conditions for a share in a property encumbered as a whole, namely:
- if the mortgage rights encumbering the entire property and, where applicable, the joint and several debt cannot be apportioned, and the co-ownership relationship cannot be dissolved either, only the attached share may be sold (art. 73f para. 1 ORFI);
- the successful bidder wholly succeeds the debtor in respect of the mortgage rights which, according to the schedule of charges, encumber the entire property, together with the claims thus secured, without those charges being set off against the sale price (art. 73g para. 2 ORFI);
- when calculating whether the principle of the sufficient bid has been complied with, claims secured by mortgage over the entire property are not taken into account (art. 73h ORFI).
Consequently, the successful bidder becomes jointly and severally liable for the debt. The principle of the sufficient bid therefore does not truly apply in this situation, since the charges are not set off against the sale price.
Conclusion
The principle of the sufficient bid is fundamental to the compulsory auction of an attached property: it substantially governs the outcome of the auction in order to protect priority claims. Where the enforcing creditor holds no mortgage security, the sale must cover the value of the mortgage in order to protect the mortgagee. Where the creditor is itself the mortgagee, the essential point is to allow repayment of its claim even at a lower bid, since it already enjoys priority protection. This principle is subject to an exception, however, in the case of the attachment of a share in co-ownership of a property that is itself encumbered by a mortgage.