Foreclosure against hotel units: Creditor Practices

Legal Insight

October 2024

George Psarakis, LL.M. (mult), PgCert

Summary: An article that compiles the range of aggressive actions taken by creditors against the property of hotel units based on current practice. Specifically, it analyzes the challenges faced by Greek hotel units due to their debts to banking institutions and funds.

In Greece, with its relatively well-developed tourism industry, there are hundreds of hotel units that are struggling to survive the various waves of economic crises, the pandemic, or the consequences of inflation. A significant portion of Greek hotel units consists of buildings and facilities that were realized with the help of bank financing. Business owners sometimes received bank loans (in the form of long-term loan contracts, bond loans, etc.), while other times they leased the hotel units using the institution of financial leasing. But what are the risks they face when confronted by credit or financial institutions? And what are the means available to banks, and now Servicers, for the compulsory collection of debts from hotel units?

1. Compulsory Seizure and Auction

Compulsory seizure is the most common means for the compulsory collection of debts. Once the bank has filed for a loan default, it proceeds with the seizure of the company's real estate, which typically includes the hotel facilities. Thus, the property is bound, and within 7-8 months, the auction is scheduled to take place. Given the relatively high values, it is usually not easy to find a bidder in the initial auction, particularly since January 1, 2022, when the automatic reduction of the initial offer price to 80% of the original value takes effect after the failure of the first two auctions. Potential bidders may even wait for the first offer price to drop to 65% of the initial value, which will occur in the fourth consecutive auction if the previous three are unsuccessful. Furthermore, prospective bidders are hesitant to proceed with high offers during an auction, as they aim to acquire ownership of a hotel unit about which they know very little (since the debtor has no reason to be cooperative and provide information). This means they are unaware of any unauthorized constructions, whether the necessary conditions exist for the termination or maintenance of the license, etc. Recently, however, effective from December 1, 2024, a provision has been passed, giving the judicial officer the ability to verify additional information about the property: "In addition to the above information, the judicial officer collects any other information and documents indicative of the value of the seized property, such as building permits, topographical diagrams, and plans, and delivers them to the auction clerk who posts them on the aforementioned website at least thirty (30) days before the auction. All competent public services and notaries are obliged to provide these documents to the judicial officer."

In the context of an auction, the first move of debtors (in addition to other legal remedies available, such as objections against payment orders, seizure reports, etc.) is to file a price correction objection, a legal remedy with which they argue, in simple terms, that the first offer price should be set higher than what has been determined by the judicial officer with the assistance of an appraiser (from the Ministry of Finance’s Registry of Certified Appraisers). Since methods for valuing a property vary, as do the comparative data used, it is relatively easy to argue the application of a different method that will result in a different outcome (or even argue for a somewhat different result within the same method). For example, for hotels that are operational, the "income capitalization" method is often used, based on the income derived from the operation of a hotel, assuming efficient management (see also the "depreciated cost" method, "replacement cost" method, etc.). A notable example is decision No. 84/2021 of the Nafplio Single-Member Court of First Instance, which concerns the correction of the first auction offer price for a hotel unit: "In determining this, it cannot be overlooked that the widely used method for this particular case is that of cash flow analysis, as inferred from the majority of reports, including the aforementioned report, which was prepared upon the instruction of the first applicant, after whose application the depreciated cost method was also applied, as explicitly indicated therein. However, given the deviations in relation to the independent value of the property and its building facilities, which are undeniably quite unique, it is determined that the latter cannot be disregarded in the calculation, and, for this reason, the final value should be estimated by the Court based on a combination of the above results and set at fifteen million euros (€15,000,000)…." See also decision No. 264/2022 of the Trikala Court of First Instance: "... for which the value of the properties was taken into account essentially using the depreciated replacement cost method, typically used in cases where there is insufficient or no market data (comparative) or the nature of the property is such that it is not often traded (e.g., factories, schools, etc.), a case that does not apply here [since comparative market data exists, and the nature of the property allows for trading], and the above method constitutes a last resort for the appraiser and should be used when it is impossible to apply another method [a case that also does not apply here, as in the present case it was possible to use another method, namely the discounted cash flow method, which was applied by both the certified appraiser mentioned in the seizure report and the applicant's appraiser."

Currently, approximately 60 hotel auctions are scheduled throughout Greece, with first offer prices ranging from €150,000 to €13 million (the latter concerning a 5-star hotel in Crete).

2. Application of the Dendias Law (Law 4307/2014)

A few years ago (particularly between 2016-2019), and before the new Bankruptcy Code of 2020 came into effect, extensive use was made of the so-called "Dendias law" (Law 4307/2014) for removing hotel businesses from their shareholders. However, in regional courts, this law did not find much success, likely due to the special treatment of these cases by local judicial authorities. Eventually, the law was repealed by the new Bankruptcy Code, and it is no longer applicable.

Although the process was labeled "special management," it was essentially a process of liquidation of the company’s assets. The business entity lost its assets and was left as an empty "shell," while the business itself passed into the hands of another entity through a public bidding process. In this auction, there was no first offer price (minimum bidding amount), and the manager was not entitled to declare the auction unsuccessful if the offers were deemed unsatisfactory. Therefore, in the interest of expediting the process, the business could be sold below its current value, which, in terms of present value, could benefit the financial institution.

In simple terms, this law allowed financial institutions to take hotel businesses from their shareholders/partners within a few months and sell them to third parties, recovering part or all of the amounts owed. It was indeed a "superweapon" in the hands of creditors.

3. Compulsory Execution and Eviction of Leased Hotel Units under a Leasing Agreement

This case concerns hotel units that do not belong to the entity managing them but have been leased from a leasing company. In the event of payment delays, leasing companies proceed with terminating the lease and, within a few days, move to evict the lessee from the hotel premises using a judicial officer (based on the notarial leasing agreement, which constitutes an enforceable title). The issues that may arise in this case during a legal dispute mainly concern invalidities in the execution process (invalidities of the writ of execution, etc.) and potential invalidities of the lease termination (primarily abusiveness). The business defends itself by filing for interim measures to "freeze" the eviction process, and because these issues take time to be definitively judged by the courts, a temporary suspension of eviction is possible, subject to the payment of a specific amount either as a guarantee or directly to the creditor (e.g., see decision No. 3973/2022 of the Athens Court of First Instance, which ruled: "It was also reasonably established that the applicant would suffer irreparable harm if the compulsory execution process continued, as her eviction from the leased property would lead to her financial ruin, especially given that we are already in the summer tourist season. From the above facts, which are accepted, it is likely that all the conditions for suspending the compulsory execution of the payment order dated 21-3-2022 are met, under the condition that the applicant pays €100,000 to the respondent…").

4. In Lieu of Conclusion

In conclusion, depending on the current legislative provisions in force, the methods for the compulsory collection of debts from hotel units vary. The practices mentioned above are common, but this does not mean that there are no other methods of compulsory collection, which, however, are not preferred in most cases (e.g., compulsory management under Article 1034 of the Civil Procedure Code, aggressive restructuring under Article 34(2) of the new Bankruptcy Code, filing for bankruptcy, etc.). What is worth noting, and emerges from the above, is that due to the particularity of the properties housing hotel units, special handling is required from both the creditor's and the debtor's side.