7 essential tips for you to save your property from the extrajudicial auction

In BRAZIL, many people lose property financed in an extrajudicial auction, and the main reason is the lack of information.

Many end up not reacting to the charges and disregard the possibility of losing the property with the default of the financing instalments.

The problem is that the creditor is in a hurry. An extrajudicial asset repossession system is faster than a lawsuit, in general. As soon as the acquirer defaults, the company or bank that granted the credit will do everything to speed up the property repossession procedure.

And that means that the property will be put up for auction to satisfy the creditor who lent real estate credit to the purchaser, giving the property itself as collateral.

We must point out that failing to pay the contract instalments is not recommendable.?

In this article, however, I bring seven precious tips (and a bonus) that can save your property from going to extrajudicial auction, as provided in articles 26 and 27 and Law n. 9.514/97.

(1) The creditor has to renegotiate the contract:

The Brazilian Civil Code contains an article of great importance for contractual relations, including real estate financing contracts.

This is the General Clause of Good Faith, provided in article 422 of the Civil Code, which implicitly imposes on contracting parties the duty of loyalty, transparency and collaboration.

In this sense, the General Clause of Good Faith determines that the parties must act in favour of preserving the legal transactions, especially when there are supervenient facts that have modified the original circumstances at the time of contracting.

And a great example was the Covid-19 pandemic, which caused substantial changes in the economy and the financial status of a significant part of the population.??

Many people financed property in long-term instalments and were suddenly surprised by the drastic reduction in their finances due to the health and economic crisis.

Given this, several ended up falling into default, and the consequence was the loss of the property in an extrajudicial auction, provided for in Law n. 9,514/97.

This means unpredictable and unexpected factors can modify the balance of the terms of the contract. Financing agents (banks, developers and other companies) must renegotiate the contract instalments to rebalance that situation.

At that time, an excellent solution to call the creditor to negotiate and not let the debt accumulate is to send an extrajudicial notification.

Through this notification, the debtor may express in writing his willingness to continue with the contract, but he will need to renegotiate the conditions initially agreed upon.

In this way, depending on the company's policy or the bank's consensus, it will be possible to reach a common point between the parties. For example, it can be a dilution of overdue instalments, the deduction of late payment charges, or the exchange of the monetary correction index for another.?

Even so, if the creditor company proves to be rigid for any negotiation, the debtor will have constituted evidence for a possible Judicial Claim. Although there are strict requirements and nuances here, it can be claimed before a judge, seeking an advance measure, and precariously, to correct the instalments values until the desideratum of the judicial process occurs.?

This circumstance can open room for a possible negotiation between parties at the court hearing.

However, it is worth noting that there will not be any situation that generates the duty to renegotiate on the creditor's part. The debtor will have to fully demonstrate that the performance of the contract becomes unexpectedly costly, with extreme advantage for the lender, due to extraordinary and unforeseeable events.?

(2) The debtor may negotiate the goodwill/premium with a third party:

An attractive alternative for all those in default with a real estate financing contract is the assignment of rights or transfer of the agreement.

If the debtor realizes he will no longer be able to pay the financing instalments, he can sell the right to acquire the asset to a third party, the famous premium.

In this operation, a third party interested in buying the property may pay the former buyer a certain amount - which will depend significantly on the amount that has already been paid and on the increased value of the property over time -, assuming with the creditor, the other instalments of the financing.

However, it is essential to note that in this case, the creditor must agree to the assignment or transfer of the contract. Indeed, the third party must demonstrate to the creditor that it has the financial conditions to continue with the payment of the financing instalments.?

(3) The debtor is guaranteed a minimum term to pay the overdue instalments:

Nowadays, most real estate financing is done through a Fiduciary lien, regulated by Law 9.514/97.

This means that if the debtor does not pay the instalments within the period stipulated in the contract, the creditor may initiate the extrajudicial debt repossession procedure.

This execution takes place extrajudicially and directly at the property registry office. And as an initial act, the creditor must notify the debtor personally so that, within 15 days, he can pay the debt or prove discharge of the debt (1o, 26, Law 9.514/97).

And, what draws the most attention now is that the notification must be personal. That means it must be carried out in person with the signature of the debtor or someone with the legal capacity to receive it (guardian, curator, legal representative or attorney).

Added to this is that if this notification is adverse/negative, e.g. because it was impossible to locate the debtor at the address indicated in the contract, the creditor must exhaust all means of finding him the debtor.

In this sense, if there is any type of irregularity in the notification of default - such as, for example, receipted by a different person, lacking the spreadsheet of the evolution and details of the debt, or even, as we said, lacking the proof of the exhaustion of the means for locating of the debtor-, it must be considered invalid.

The creditor will need to repeat the formal acts until compliance with all legal requirements. Actively claiming the correction of those conditions can prevent the property from being sold on an extrajudicial auction.

Meanwhile, the debtor may gain time to negotiate with the creditor since the procedure cost will double. It may be more advantageous for the company or creditor bank to resolve the issue through an agreement or renegotiation of the contract.

(4) The debtor must be informed of the date, time and place of the auction:

In addition to the previous item, it is essential to consider the importance of notifying the debtor about the dates, times and places of the auctions to guarantee the debtor's preemptive right to acquire the property.

This issue generated and still generates a lot of discussion in the judiciary since 2017. Law 9.514/97 initially said nothing about the need to notify the debtor at that time, which led to a large part of the contracts being made without the provision of this notification.

It so happens that, for some time now, the jurisprudence of the Superior Court of Justice had been consolidated in the sense of the need for a personal subpoena of the debtor regarding the dates, times and places of the auctions.

It is no wonder that, later, the legislator added two devices to the law (§ 2o-A and 2o-B, of art. 27, of Law 9.514/97), stipulating that the dates, times and places of the auctions must be communicated to the debtor by correspondence addressed to the addresses contained in the contract, including the electronic address.

Thus, if the debtor finds that he has not been informed of the dates, times and places of the auctions, he may apply in court to stop the extrajudicial procedure and consequently annul the acts that followed.

This could also guarantee breathing room for the debtor to negotiate the overdue amounts with the creditor and avoid an immediate extrajudicial auction.

(5) The debtor has a preference in the acquisition of the asset:

As we said above, the law allows the debtor, upon personal notification, to pay the overdue amounts within 15 days.

It happens that once the debtor does not pay these instalments on time, the property will be consolidated in the name of the creditor, and the latter will carry out the auction afterwards.

However, this does not mean that the debtor cannot recover the asset since Law 9.514/97 allows the debtor's preemptive right to acquire the property.

This means that the debtor can buy the property to the detriment of other interested parties.

However, he will only be able to do so up to the date of the second auction upon payment of the stipulated price and the cost of all expenses, including the auctioneer's price, ITBI (tax) and any other property debts, such as a condominium.

(6) The property cannot be sold for a low price:

An essential factor that must be analyzed and that can cause the auction to be suspended is the value of the property announced at the auction.

This is because the property cannot be advertised for a value well below its actual market value.

Generally, a low price is considered when the property is sold for less than 50% of the market value.

Occasionally, in a rush to quickly sell the property at auction, the lender does not correctly value the property and ends up placing it at a value far below what would be found on the market.

Therefore, if it is established that the value of the property is below 50% of the market value, the auction may be judicially annulled.

(7) It is possible, in particular and specific situations, to file a review action on the financing agreement:

As much as the interest charged on real estate financing contracts is generally acceptable, excessive charges may occur in some cases and can excessively burden the debtor.?

As we said above, real estate financing can be granted by banks and real estate companies, whether they are developers, land developers or builders.

It happens that when credit is granted by companies that do not operate in the financial system, that is, in direct financing, there is a prohibition on monthly capitalization of interest.

When a company grants a financial loan, it charges remuneratory interest, which is the consideration paid for the borrowed capital.

In the case of a bank, this interest may be capitalized, that is, interest applied upon interest (compound interest), facts that could significantly increase the value of the amount involved in the contract.

However, there is a great deal of discussion regarding the charging of capitalized interest by companies in the real estate segment, since, as they do not belong to the Financial System, they cannot charge monthly capitalized interest but only annually.

This may not surprise the purchaser since it is very technical; however, in practice, as we said, charging interest capitalized monthly could have a massive impact on the final amount of the financing.

This fact can lead, depending on the particularities of the case, to the suspension of the auction since the undue billing could be considered a significant factor of difficulty in the payment of instalments since they will be greater.

Added to this, there is also the possibility that the debtor requires the exchange of the monetary correction index, which could also significantly impact the instalments' value.

Recently, we have been following the significant increase of the IGP-M, which in the last 12 months, for example, had a rise above 5,90%. In November 2021, the index varied by 0.02% and increased by 17.89% in 12 months.

Spotting abuse in the billing or excessive onerousness may be relevant factors to be taken to the Judge as justifying reasons for a review of the financing agreement to seek discharge of arrears and prohibition or suspension of the extrajudicial auction, a moment in that, once again, may open the door to contracting renegotiation.

Bonus tip – The debtor who lost the property in an extrajudicial auction, in specific situations, will have the right to refund amounts paid:

If the property has already been taken to an extrajudicial auction and no interested parties have appeared, the creditor will award the property. This means the creditor will keep the property for himself, extinguishing the debt.

In this case, if the creditor eventually wants to sell this property, he will do so at its market value and not at the debt value, with a sure enrichment since he would be profiting from the situation.

Given this, it would be sensible to refund the remaining amount to the debtor; that is, the creditor should return the difference between the debt amount and the sale value of the asset.

In this sense, several positions in court rightly understand that the debtor must return this amount ('the value of the difference between prices) under penalty of unjust enrichment.?