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06 November 2018

Bulgaria: Case Law Developments Around Real Estate Financing

The Supreme Court of Bulgaria has clarified important aspects of enforcement over real estate assets that form part of an enterprise pledge.

Enterprise pledges embracing the whole pool of a pledger’s assets are a favorite security interest for banks in Bulgaria. They resemble English floating charges, since prior to an enforcement event, pledgers are free to deal with the pledged property. However certain assets within the enterprise may be fixed charged, and thus dealings in them would be restricted. Normally, this applies to valuable properties, and therefore real estate assets within the enterprise are typically fixed charged.

The enterprise pledge with fixed charged real estate has certain advantages over the classic real estate mortgage. First, whereas mortgage registration fees are calculated as a proportion of the secured obligation’s amount, the registration costs of real estate with fixed charge assets are primarily symbolic. Thus, in large financings a mortgage may result in costs of thousands of euros, while the registration of an enterprise pledge with a fixed charged real estate in the land registry would typically cost less than EUR 100. Furthermore, enforcement over real estate within an enterprise pledge may take place in an out-of-court procedure which is less costly and less cumbersome than bailiff enforcement, which is the only option in the case of a mortgage.

There was, however, lots of contradictory case law as to whether buyers in such out-of-court enforcement sales acquire the real estate assets free of other security interests. To unify the practice, the Supreme Court of Bulgaria issued an interpretative judgement (mandatory for all other courts) on July 11, 2018, holding that out-of-court enforcement sales do not affect mortgages and attachments over the same real estate assets even if those mortgages and attachments had been established after the date of the enterprise pledge. Thus, if a creditor has an enterprise pledge with a fixed charge over real estate registered on January 1, and subsequently a mortgage is established over the same real estate on February 1 (e.g. to secure a EUR 100,000 loan), an out of court sale by the enterprise pledge creditor (e.g., for EUR 90,000) would not affect the second ranking mortgage. So, the buyer could purchase the asset encumbered with a mortgage for an amount exceeding the purchase price paid by him.

As a result of the Supreme Court’s judgment, and some other recent statutory amendments, real estate sales in out-of-court enforcements would be quite uncertain, as buyers in such sales could find the real property encumbered with security interests which could render their investment a hazardous endeavor.

Therefore, it is to be expected that following the Court’s judgement creditors will be more inclined to take recourse to the general bailiff enforcement sale. Although that procedure is more cumbersome and costly, it results in extinguishing all encumbrances over the real estate.

This would in turn affect the drafting of enterprise pledge agreements, as certain arrangements around the bailiff procedure should be reflected in the parties’ arrangements.

A version of this article was first published on CEE Legal Matters, 06.11.2018.
authors: Tsvetan Krumov and Milena Gabrovska