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    Irrevocable Power-of-Attorney for private sale: 's-Hertogenbosch Court

  • On 26 June 214 the Court of Appeal of 's-Hertogenbosch advised banks to include an unambiguous minimum price in irrevocable powers-of-attorney for private sales.

    This decision is in line with the judgment of 20 July 2008 of the preliminary relief judge of the Court of Almelo. That Court held that a bank was not allowed to exercise an irrevocable power-of-attorney because the price was not competitive. Even in times when  banks are trying to find alternatives to public sales under execution, such as a private sale under an irrevocable power-of-attorney, banks should not disregard their duty of care. Below we will set out the objections as well as the concessions with regard to the use of the irrevocable power-of- attorney.

    When and Why Irrevocable Power-of-attorney?

    In case of payment arrears banks may prefer not to proceed with a sale under execution, given market conditions and the favourable prospects of private sales. As an alternative to public sales, it is possible to draw up a power-of-attorney by which the debtor authorises the bank irrevocably to sell and transfer the mortgaged registered property (Collateral).

    Irrevocable Power-of-Attorney

    The debtor does not grant the bank an ordinary power-of-attorney but an irrevocable one. An irrevocable power-of-attorney can exclude the grounds for termination that apply to an ordinary power-of-attorney such as death, guardianship orders and revocation (but not bankruptcy and debt management). If one of those grounds arises, the bank can still exercise the power-of-attorney. The law allows the granting of irrevocable powers-of-attorney provided that they are in the interest of the authorised party (the bank, in this case) or a third party. In case of an irrevocable power-of-attorney as an alternative to a sale under execution that interest lies in realising the highest possible proceeds, which is in the interest of both the bank and the debtor. The higher the proceeds, the smaller the debtor’s residual debt, after all.

    Objections

    The literature raises several objections to the use of an irrevocable power-of-attorney as an alternative to a sale under execution:

    • The irrevocable power-of-attorney is occasionally regarded as the proverbial ‘Sword of Damocles’. As the possible revocation by the grantor/debtor of the power-of-attorney has no effect, the power-of-attorney will remain in effect even when a grantor/debtor has meanwhile complied with his obligations;
    • The right to levy execution could be eroded. A sale by exercise of an irrevocable power-of-attorney, after all, lacks the safeguards granted by law to the debtor in the sale under execution. Examples are the court approval required for the private sale under execution;
    • It is considered doubtful whether sale by an irrevocable power-of-attorney will yield the highest possible proceeds as the interest of the bank does not go beyond payment of the outstanding debt. If at a certain purchase price the deb to the bank  is satisfied, the bank might be less inclined to negotiate a higher price;
    • By law the attachments and mortgages on the Collateral listed in the public registers can be cancelled upon completion of the sale under execution. This 'release' is not possible in the event of sale by means of an irrevocable power of attorney.

    Concessions

    If a bank would like to exercise an irrevocable power-of-attorney it will have to try to meet the above objections where possible, for instance as follows:

    • To prevent an irrevocable power-of-attorney from becoming permanent, even if the debtor has meanwhile complied with his obligations, the power-of-attorney may set a deadline. This would cancel out the possibility of using the irrevocable power-of-attorney after expiry of a certain period;
    • Good communications and information for the debtor. The bank, as well as the civil-law notary drafting the deed containing the irrevocable power-of-attorney, should act with due care towards the debtor. The civil-law notary and the selling realtor should preferably meet with the debtor;
    • The selling realtor must offer the Collateral on the market in the usual manner, and not offer the Collateral just to a select group of commercial traders. This would eliminate any semblance that the bank does not aim for the highest possible price;
    • As mentioned earlier, private sale further to an irrevocable power-of-attorney does not cause release. If, therefore, the Collateral is still subject to attachments that upon acceptance of a bid cannot be paid, the debtor fails in his obligation to transfer free from attachments and mortgages. In its ruling the Court of Almelo decided that the irrevocable power-of-attorney does not relate to transactions that foreseeably will result in attributable breach. The bank, therefore, will have to make arrangements with the attachors and mortgage holders.

    's-Hertogenbosch Court of Appeal: State Minimum Price

    In addition to the above concessions the 2008 decision of the preliminary relief judge of the Almelo Court and the recent ruling of the 's-Hertogenbosch Court of Appeal clearly show that the irrevocable power-of-attorney must state a minimum price. The preliminary relief judge directed that the bank could not use the irrevocable power-of-attorney granted to it because the selling price was not competitive. In the case heard by the 's-Hertogenbosch Court of Appeal  the bank had been granted an irrevocable power-of-attorney authorising the bank to sell the Collateral at an asking and selling price determined (i) based on the valuation report of 19 April 2013 and (ii) the recommendation of the selling realtor engaged by the bank. After the bank had made a contract of sale under the irrevocable power-of-attorney the debtor asked that the power-of-attorney be declared void because it did not state a minimum price. The Court of Appeal, however, held that the inclusion of a minimum selling price is not based on a rule of law, let alone on a rule of law sanctioned by avoidance. However, the Court of Appeal did hold that: 'a careful mortgage holder who wishes to avoid sale under execution and for that reason constructs the irrevocable power-of-attorney for private sale would do well to include an unambiguous minimum selling price in the power-of-attorney'.

    In Practice

    As shown, besides the concessions set out above the selling price plays a vital part. Although the absence of a minimum price in the notarial power-of-attorney has no legal implications for the validity of the power-of-attorney inclusion is a major concession.  Inclusion of a minimum selling price is the best possible safeguard for the debtor that his property will not be undersold. The emotional value of a Collateral for the debtor will often exceed the price realized in the market. It is therefore important both for the debtor and the bank to make clear, unambiguous agreements about the (minimum) selling price. That price could be based, for instance, on the forced-sale value shown by a recent valuation report by an independent surveyor. The explicit inclusion of that forced-sale value as minimum selling price makes it plain for both bank and debtor what the implications are of the irrevocable power-of-attorney, which will reduce the risk of proceedings on this sensitive subject.

    For more information, please contact Eline Broekhof or Ingrid Juffermans.