The qualifying function of the property registrar: Is it possible to review the merits of a judicial Authorization permitting the sale of a property in the context of bankruptcy proceedings?

12 June, 2024
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Real Estate
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Amaia Forcada


Comments on the Resolution of the Dirección General de Seguridad Jurídica y Fe Pública (DGSJFP) of February 13, 2023.

The Facts

According to the factual background of the resolution, the deed of sale was authorized on September 2, 2022, in Monzón (Huesca) and involved the transfer of the property number 25,681 registered in the Property Register of Alcañiz (Teruel). The selling party was the bankruptcy administration of a couple declared bankrupt, and the purchasing party was an individual. The property was acquired for €200,000, which was paid via a bank check to Banco Santander S.A.

The property in question was encumbered with three mortgages, two in favor of Banco Santander, S.A. (registrations 13 and 12), and one in favor of Caixabank, S.A. (registration 11), the latter being of the same rank as the mortgage in registration 12 in favor of the first bank. The appraisal values for the property in the aforementioned mortgages were as follows: €325,289 (registration 13) and €381,247.45 (registrations 11 and 12).

The deed was accompanied by an order issued by the Court of First Instance and Instruction No. 1 of Teruel, authorizing the sale of the property under the terms requested by the bankruptcy administration, noting the consent and approval of Caixabank, S.A. for the transaction. Additionally, a resolution was provided indicating that Banco Santander, S.A. had submitted a statement indicating no objection to the sale of the property under the terms authorized by the Court.

The negative qualification and suspension of the registration of the deed of sale by the property registrar

Once the sale was formalized, the Property Register of Alcañiz suspended the registration of the deed of sale in accordance with Article 18 of the Mortgage Law, based on the following reasons:

1. The consent of the bankruptcy administration to the sale is not indicated, thus requiring the presentation of a rectification deed.
2. The finality of the order authorizing the sale and its terms is not stated, as the judicial testimony did not include the documents mentioned in the resolution.
3. No court order for the cancellation of the encumbrances on the property was provided, only an order for the cancellation of the registry entries related to the bankruptcy, derived from the final order concluding it.
4. It is not proven that the sale of the property, encumbered with a special privilege, was conducted at market value according to an updated official appraisal by an accredited entity.

In this commentary, we will focus on the fourth and last reason for suspending the registration, as it is the main subject of the appeal resolved by the Dirección General de Seguridad Jurídica y Fe Pública (DGSJFP).

The appeal against the qualification by the property registrar

The purchasing party appealed against the third and fourth reasons of the property registrar’s qualification. Regarding the third reason, it argues that the provided cancellation order refers to the cancellation of all encumbrances on the property.

Regarding the fourth reason, it asserts that the authorization of sale was granted by the court under Article 210.3 of the Consolidated Text of the Bankruptcy Law (TRLC), meaning the judge has considered the provisions of this article and has granted authorization to preserve the rights of other creditors who can review the legality of the order authorizing the sale through prior legal recourses provided in the Bankruptcy Law.

Additionally, it points out that the authorization for the sale also applied to another property registered in the Property Register of Benicarló (Castellón) – whose sale was executed on the same day and by the same notary – and that this registration was completed without any issues.

After the appeal was filed, the property registrar issued a report maintaining the fourth defect while accepting the correction of the third defect.

Legal framework applicable to the controversy

Article 18 of the Mortgage Law establishes that:

Registrars shall qualify, under their responsibility, the legality of the extrinsic forms of all types of documents on the basis of which registration is requested, as well as the capacity of the grantors and the validity of the dispositive acts contained in public deeds, based on their contents and the entries in the Registry.

(…)

On the other hand, Article 210 of the TRLC, related to the direct realization of encumbered assets, states the following:

1. At any stage of the bankruptcy, the judge may authorize the direct realization of assets and rights encumbered with credits with special privileges.
2. The request for direct realization must be submitted to the judge by the bankruptcy administration or the creditor with a special privilege and will be processed through the procedure established in this law for obtaining judicial authorizations.
3. The judge will grant the requested authorization if the offer is for a price higher than the minimum agreed upon when the guarantee was established, with cash payment. The judge may exceptionally authorize direct realization for a lower price if the bankrupt and the creditor or creditors with special privileges explicitly accept it, provided it is at market value according to an updated official appraisal by an accredited entity for real estate and valuation by a specialized entity for movable property.
4. Once the judicial authorization is granted, the conditions set for the direct realization will be announced with the same publicity as the auction of the encumbered asset or right, and if a higher bidder presents within ten days following the last announcement, the judge will open bidding among all bidders, determining the deposit they must provide to participate.

Therefore, in the context of bankruptcy proceedings, the judge can authorize the sale of a property encumbered with one or more credits with special privileges to a third party, provided it is done: a) for a price higher than the minimum agreed upon when establishing the guarantees with cash payment; or b) for a lower price if the bankrupt and the privileged creditors explicitly accept it, and provided the transaction is at market value according to an updated official appraisal by an accredited entity.

In this specific case, the sale price (€200,000) is lower than the minimum agreed upon when establishing the guarantees (€325,289 and €381,247.45), although the explicit consent of the bankrupt through the bankruptcy administration and the privileged creditors, Caixabank, S.A. and Banco Santander, S.A., is indicated according to the facts of the resolution.

In the eyes of the property registrar, the problem with the deed is that it does not prove the transaction was conducted at market value according to an updated official appraisal by an accredited entity – the only appraisal values available are those indicated in the three mortgages encumbering the property -. Consequently, the property registrar considers that the provisions of Article 210.3 TRLC are not met and decides to suspend the registration of the deed of sale.

The resolution of the appeal by the DGSJFP

The DGSJFP does not address the arguments of the appeal regarding the third reason for the qualification, understanding that the cancellation order was not initially provided and, therefore, cannot be considered, and because the property registrar has accepted the correction of this defect after the appeal was filed.

In this context, it focuses exclusively on the fourth reason for the qualification, discussing if the property registrar can review whether an order authorizing the transfer of a property complies with Article 210 TRLC and, if not, whether the registration of the deed of sale can be suspended for this reason.

The DGSJFP makes it clear, citing its Resolution of October 6, 2015, that to register the sale or encumbrance of assets or rights included in the bankruptcy estate in the Property Registry, it is necessary to prove before the registrar the issuance of the corresponding order authorizing the transfer through the appropriate testimony issued by the Court Clerk certifying its authenticity and content. Additionally, the public document on which the person requesting registration immediately bases his or her right, and which certifies, either by itself or through accredited formalities, the content to be registered, must be provided. Therefore, as a rule, when the order merely authorizes the transfer, the title for registration purposes will be the public deed containing the transfer transaction, supplemented by the formal title certifying the judicial authorization.

Next, it states that, according to the Supreme Court Judgment of October 21, 2013, the registrar must consider the provisions of Article 522.1 of the Civil Procedure Law, under which all persons and authorities, especially those in charge of public registries, must comply with and adhere to the legal status or situation arising from constitutive judgments, unless there are obstacles arising from the registry itself under its specific legislation. It also notes, citing the Supreme Court Judgment of March 21, 2006, that no entry can be made that impairs or questions the effectiveness of existing ones without the consent of the holder or through judicial proceedings in which they have been a party.

More specifically, regarding the qualifying function of the property registrar, it cites the Supreme Court Judgment of November 21, 2017, which states that the registrar cannot review the merits of the judicial decision on which the cancellation order is based, that is, cannot judge its propriety, but can only verify that the judicial order indicates compliance with the legal requirements that protect the rights of the holders of the registered rights whose cancellation is ordered by the court.

Next, regarding Article 210 of the TRLC, the Dirección General reminds that the rules contained in the Bankruptcy Law for the realization of the encumbered asset have an imperative nature and must necessarily be followed in the liquidation plan, rules that also apply if the latter is not approved (see, among others, RDGSJFP of January 10, 2017).

It essentially asserts that the legislator’s intent is clear: in the case of realization outside the agreement of assets encumbered with pledges or mortgages, to make it difficult to realize such assets for a price lower than the appraisal value agreed upon by the parties when establishing the real guarantee, so realization for a lower price requires the consent of the creditor with special privilege.

Given this, and considering that in this case, the order issued by the judge authorizing the sale for the indicated price expressly states that the two entities holding credits with special privileges have given their consent and approval to the sale, the DGSJFP considers that there has been an express judicial pronouncement regarding both the price and the due intervention of the registered holders of the mortgages.

Therefore, it concludes that if the judicial procedure has deemed the requirements established by the Bankruptcy Law for the sale to be met, it is beyond the powers of qualification granted to registrars by Articles 18 of the Mortgage Law and 100 of the Mortgage Regulation to disagree with this assessment and consider these requirements unmet. Consequently, it upholds the appeal and revokes the property registrar’s qualification regarding the contested defect.

In summary, and according to criterion of the Dirección General maintained in this resolution, it is the bankruptcy judge’s responsibility to verify compliance with the requirements established by Article 210 of the TRLC, so once the transfer of a property encumbered with a mortgage in the context of bankruptcy is authorized, the registrar cannot review the merits of the decision but can only address the aspects referred to in Articles 18 of the Mortgage Law and 100 of the Mortgage Regulation.

At MES Advocats, we offer comprehensive advice and support in the process of transferring or acquiring a property in the context of bankruptcy proceedings. If you need more information or are interested in obtaining a quote, you can contact our real estate law department at this link.

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