Condominium owner privileged in foreclosure proceedings

With effect from 01.07.2007, the Federal Government has considerably strengthened the rights of the condominium owners' association, in particular by amending the Compulsory Auction Act (Zwangsversteigerungsgesetz), by introducing the new ranking class 2 of § 10 ZVG. The provision has the following wording:

"A right to satisfaction from the property shall be granted according to the following order of priority with equal rank according to the ratio of their contributions: .... on enforcement of a condominium the claims due therefrom for payment of the contributions to the burdens and costs of the common property or of the separate property owed in accordance with sections 16(2), 28(2) and (5) of the WEG, including the advances and provisions as well as the recourse claims of individual condominium owners. The preferential right covers the current and the arrears from the year of seizure and the last two years. The preferential right, including all ancillary benefits, is limited to amounts not exceeding five per cent of the value determined in accordance with section 74a(5). The application shall be made by the community of condominium owners. Recourse claims of individual condominium owners shall be registered by them;"

According to the previous legal situation, it was hardly possible to enforce housing benefit claims in arrears against flat owners who had no assets or were unwilling to pay by way of compulsory auction, because such claims were assigned to the low ranking class 5 of § 10 ZVG, i.e. they ranked in particular behind the public property encumbrances and the claims in rem of the land charge and mortgage creditors. This meant in a large number of cases: Arrears of the condominium owners' association had to be titled at great expense and subsequently registered in the land register by means of a security mortgage, usually behind the real estate liens of the real creditors, which in the case of a compulsory auction almost regularly led to the condominium owners' association having to conduct a costly compulsory auction in an effort to get rid of the defaulting member, only to end up empty-handed because the proceeds of the auction served to satisfy the public coffers and the creditors secured in rem. This highly unsatisfactory legal situation for the condominium owners' association has now been considerably improved in its favour. With the restrictions mentioned in the new ranking class 2 of § 10 ZVG, it should be possible in the future to realise the claims in the majority of cases. In proceedings conducted by the WEG, the purchaser no longer has to take over standing mortgages and, above all, the WEG can hope that its claims will be met even if the auction proceeds are low. However, this is to the detriment of the public coffers and the creditors secured in rem, whose claims are assigned to ranking classes 3 and 4 of § 10 ZVG. Mortgagees must fear that in such cases their rights may be lost without settlement. As a rule, they can only prevent this loss by redeeming the preferential claim of the WEG. Even then, however, the COA is entitled to its rights.

As a result of the new legal regulation, the number of compulsory auctions of residential property is likely to increase significantly in the future.

Goldberg Attorneys at Law, Wuppertal-Solingen 2008
Attorney Walther Goldberg
info@goldberg.de

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