In a recent decision by the Constitutional Court of Bosnia and Herzegovina, provisions of the Law on Enforcement Proceedings of the Federation of Bosnia and Herzegovina (FBiH) have been declared unconstitutional. The said provisions enable the sale of a co-ownership share of real estate owned by a party who is not the enforcement debtor in enforcement proceedings, without its consent. The decision has not yet been enacted into law by the FBiH legislator – however, amendments are expected in the short-term.
Based on the contested provisions, the court could decide to sell property which was subject to enforcement and which was only co-owned by the enforcement debtor, in its entirety (and not only its co-ownership share) if the value of the encumbered co-ownership share would be significantly higher by selling the entire property. In doing so, the consent of the other co-owners was not required, and if the entire property was sold, other co-owners would have the right to receive compensation for their co-ownership share from the collected purchase price.
In its rationale, the Constitutional Court reasoned that the possibility of the sale of the entire property in the enforcement proceedings, including shares of other co-owners who are not the enforcement debtor, without their consent, does not fulfill the standard of proportionality. Namely, the court found that the public interest to settle the claim can be satisfied even by selling only the co-ownership share of the enforcement debtor, whereas a sale of the entire property places an excessive burden on other co-owners in relation to the enforcement debtor. Thus, a disposal and limitation of the ownership right of the other parties who are not enforcement debtors is not justifiable in the case at hand.
This decision has not yet been enacted into law by the FBiH legislator; however, amendments to the law in accordance with the decision are expected in the short-term. A similar provision is already in place in the Republic of Srpska (the other entity of Bosnia and Herzegovina).
CONSEQUENCES OF THE DECISION IN LIGHT OF EMERGING PRACTICES IN ENFORCEMENT PROCEEDINGS
The effect of the change may result in making the sale of a co-ownership share of real estate more difficult and in a significant decrease in its market value in enforcement proceedings, especially in cases where the economic usability of the co-ownership share by itself is questionable.
Debt collection through the sale of real estate in enforcement proceedings is already impacted by the duration of the enforcement proceedings themselves (the current average duration of proceedings is two years until the first public auction, and 3 – 5 years until the final settlement). In addition, in the last few years there is an increasing practice of filing false bids in the public auction with the aim of decreasing the minimum purchase price for which the real estate may be sold in enforcement proceedings.
As a result, the first two public auctions are often declared unsuccessful, whereas there is still no uniform standing with respect to the minimum price for which the real estate may be sold in the third and final auction. Namely, the law is currently silent on this issue, and practice varies between different courts. Consequently, the creditors are dependent on the sole discretion of the acting judge without any legal certainty which could help them to properly manage their claims.
These circumstances should be taken into account by creditors, especially when assessing the value and adequacy of a certain piece of real estate offered to serve as collateral, given the potential effect on its value, and consequently the ability of successful debt collection.