As sayings go, “as safe as houses” may not carry quite the weight it used to in these troubled times but taking a mortgage over real estate remains the principal way for a lender to secure the repayment of its loan by a borrower or, indeed, to secure any similar obligation. This is as true in Poland as it is elsewhere but, as readers of this blog will have come to expect – and there was even a mention in The Bank Job – there is a “little local difficulty” which renders this form of security rather less effective than it otherwise might be from the point of view of the mortgagee trying to enforce its security.
Put simply, there is in Poland no concept of the mortgagee in possession. This means that a mortgagee is not able to enforce its security simply by obtaining a possession order and taking over the real estate asset secured by the mortgage as would be the case in England and many other legal jurisdictions. Instead, when ordering the enforcement of the security, the court appoints a bailiff to sell the real estate at a public auction and the sale proceeds less costs are eventually paid to the mortgagee.
The bailiff must obtain a valuation of the real estate from a duly qualified valuer and the minimum price, or reserve, at which the real estate may be sold the first public auction is set at three quarters of the value according to the valuation. If the real estate is not sold at the first auction the bailiff must hold a second auction at which the reserve price is reduced to two-thirds of the valuation. Only if the real estate still remains unsold after the second auction may the mortgagee take possession of the real estate.
Clearly, this approach is not attractive to the mortgagee. It introduces additional delay and cost into the process and the mortgagee looses control of the asset itself. In many cases it will be attractive for the mortgagee to take over the asset either to dispose of it in a controlled manner to maximise proceeds or to take remedial action – for example, finding a new developer to step in to complete a half finished development. Under the Polish system, this will not be possible unless the real estate has failed to sell at two public auctions and, even if sold, the auction may not realise the economic value that the mortgagee would have been able to achieve. The mortgagor also knows that the mortgagee will generally be reluctant to enforce its security unless all else fails which has an impact on its own conduct.
Many real estate investors from outside Poland had been puzzled at the apparent reluctance of Polish banks to dispose of portfolios of distressed real estate assets and this explains that reluctance. Of course, the impact of therefore being no concept of the mortgagee in possession extends far beyond the real estate sector and changing Polish law in this regard is one of the single most effective ways of improving investor confidence and stimulating economic activity since security and its enforcement is a key factor in investment decision making.