Selling an indebted flat

The most common types of debt

Before we turn to the sale procedure itself, it is worth distinguishing what kind of debt we are dealing with, because that determines who has to be contacted and how.

Arrears to a housing cooperative or homeowners’ association. Unpaid service charges, arrears in the renovation fund or other running costs are one of the most common and most underestimated types of debt. As a rule such a debt burdens only the person who owned the premises when it arose; the new owner is not automatically liable for it, because what passes to the acquirer are the benefits and burdens attached to the thing itself (Article 548 § 1 of the Civil Code), not the previous owner’s personal debt. The exceptions are where the arrears have been secured by a mortgage on the premises — in which case they burden the property itself and pass with it to the acquirer — and where the acquirer themselves agrees, in a separate agreement, to take the debt over. Even though the arrears do not pass to the new owner automatically, a certificate of no arrears in payments is in practice one of the documents without which no transaction takes place, because no sensible buyer wants to step into a dispute between the seller and the association, or risk the arrears being secured by a mortgage in the meantime.

A mortgage loan not being repaid on time. When an owner stops paying the loan instalments regularly, the bank first demands payment and, if the repayments continue to be missed, may terminate the loan agreement, after which the whole outstanding loan amount becomes immediately due. The mortgage securing the loan remains entered in the land and mortgage register and must be taken into account in the settlement of any sale transaction.

Bank debts sold to third parties, such as debt funds. Banks regularly sell portfolios of non-performing loans to specialist securitisation funds. Such a fund then steps into the creditor’s rights, including those arising from the mortgage, which requires the change of mortgage creditor to be disclosed in the land and mortgage register. In practice dealing with a fund tends to be harder and slower than with a bank, and it also happens that the same debt has already passed through the hands of several different funds over a few years, which makes it even harder to establish who the current creditor is.

Unpaid private loans secured by a mortgage. Increasingly often there are situations in which a property owner has taken out a loan outside the banking system — from a lending company or a private individual, say — securing it with a mortgage on their property. Such loans tend to be more expensive than bank credit, and in the event of repayment problems a private creditor does not always act according to the same predictable procedures as a bank, which makes it harder to agree repayment terms and obtain consent to delete the security.

Tax arrears and other enforcement entries. It is also worth remembering the less obvious sources of debt: unpaid property tax can result in a compulsory mortgage being established in favour of the municipality or the State Treasury, and a property can also be attached by an enforcement officer in the course of enforcement pursued on an entirely different basis, unconnected with the property itself. Such entries, visible in sections III and IV of the land and mortgage register, have to be clarified just as carefully before a sale.

What the sale process looks like step by step

Establishing the full picture of the debt. The first step is to check the land and mortgage register carefully, specifically section III (other encumbrances, such as enforcement attachments) and section IV (mortgages), in order to identify every creditor whose consent will be needed to carry out the transaction. It has to be borne in mind that not every debt is visible in the land and mortgage register — arrears to an association or cooperative, for instance.

Contacting each creditor separately. Every mortgage creditor has to be asked for a current certificate of the amount owed, precisely stating the sum remaining to be repaid together with interest. Such a certificate is valid only for a limited period, usually a few weeks, so the whole procedure has to be well planned in time.

Obtaining an undertaking to delete the security. The next step is to obtain from the creditor an undertaking, that is a formal declaration that on receipt of the stated amount into a specific account they will consent to the mortgage being deleted from the land and mortgage register. In the case of banks such a document is based on banking law and has a period of validity specified there, after which a new one has to be obtained.

A certificate from the cooperative or association. Where the debt concerns running costs, a separate certificate is needed confirming that there are no arrears or, if there are, stating their exact amount so that they can be taken into account in the settlement of the price.

Settling the sale price. The sale price is usually split into parts: the amount corresponding to the debt goes directly into the creditor’s technical account or into a notarial escrow, from which the notary transfers it to the creditor after the deed is signed, and only the remaining difference goes to the seller’s account.

The release letter and deletion of the mortgage. Once payment is received the creditor issues what is known as a release letter, a document confirming repayment of the debt and consent to the security being deleted. On that basis an application is filed to delete the mortgage from the land and mortgage register, which formally completes the whole procedure.

Why it is such a laborious process

None of these steps is particularly complicated in itself, but bringing them all together — and doing so in such a way that every document is current at the same moment, on the day the notarial deed is signed — can be genuinely difficult. Banks and debt funds respond to requests at different speeds, sometimes a few days, sometimes a few weeks, and certificates and undertakings have a limited period of validity, so it is easy to end up in a situation where one document has already expired before the rest can be assembled. Add to that the fees for issuing individual certificates, the need for repeated contact, often by telephone and email, with different departments of the same institution and, with debt funds, the additional task of establishing whether the debt has not been sold on to yet another entity in the meantime.

Time matters

Debt burdening a property does not usually stand still. Interest accrues, debt collection costs are added and, if the matter reaches an enforcement officer, the costs of enforcement proceedings too. The value of the property itself does not grow at the same pace, and may stay at a similar level for years. This means that the longer the decision to sell is put off, the closer the debt balance comes to the value of the property, and in extreme cases it may even exceed it. At that point a sale stops genuinely solving the problem, because the price obtained is not enough to repay all the creditors, and the property, despite its formal value, becomes practically unsellable on the open market. It is most often precisely this moment that precedes the bank terminating the loan and referring the matter to enforcement, which we wrote about in connection with the dissolution of co-ownership.

That is why it is crucial to deal with selling an indebted property before the debt balance catches up with its value, rather than only once the problem has become insoluble.

How we can help

At Remedy we deal with exactly these matters day in, day out. Acting under a power of attorney, we can contact every creditor on your behalf, request certificates of the amount owed and undertakings to delete securities, coordinate their validity periods and see the whole transaction through to the end, so that you do not have to wrestle with one institution after another yourself. We buy indebted properties throughout Poland. If you are worried that your debt is starting to approach the value of the property, the sooner you come to us, the more can realistically still be salvaged from the situation.

This article is for general information and does not constitute legal advice. In an individual case, particularly when negotiating with creditors and establishing the current debt balance, it is worth consulting a lawyer.