Concept and Fundamentals of the Bidding Guarantee
Die Bidding Guarantee is a term from the law of credit securities, particularly in connection with the forced auction (foreclosure) of real estate under German law. It refers to a legal obligation assumed by third parties, typically a bank, to submit a certain minimum bid (the so-called “Ausgebot”) on the specified object in the context of a foreclosure auction. The bidding guarantee serves to secure a creditor’s proceeds from realization by reducing the risk of an invalid bid or an unsatisfactory purchase price.
Legal Basis of the Bidding Guarantee
Civil Law Classification and Function
The bidding guarantee is not an independent statutory security, but rather a contractual promise by a third party to the creditor (the guarantee beneficiary). It is a form of guarantee in the sense of Sections 765 et seq. of the German Civil Code (BGB) by analogy. It has practical relevance in the context of real estate enforcement under the Forced Auction Act (ZVG).
The main substantive requirement is the binding promise by the guarantor to submit at least the guaranteed bid in ongoing or future foreclosure proceedings, or if no third party submits this bid, to pay the difference to the creditor.
Statutory Reference Points
Although the bidding guarantee is not explicitly regulated by law, there are legal references in, among others, the following provisions:
- Section 35 ZVG (Auction Conditions),
- Sections 43, 73 ZVG (Minimum Bid, Knockdown),
- Sections 765 et seq. BGB (Suretyship and Guarantee),
- Section 780 BGB (Independent Guarantee Commitment).
Purpose and Application Areas
Securing the Minimum Bid in Foreclosure Auctions
The main function of the bidding guarantee is to ensure the enforcing creditor or other security holders a minimum return. Through the guarantee, the creditor can be certain that the object will be sold at a certain price or that they will receive a corresponding amount, even if no external bidder submits a sufficiently high bid.
Risk Management and Financing
The bidding guarantee is often encountered in banking: when granting loans secured by real estate liens, banks require such guarantees from guarantors, borrowers, or associated lenders to protect themselves against losses in the event of a forced sale of the encumbered property.
For real estate buyers, the bidding guarantee can be used as purchase price financing or security for commercial investors to make transactions more predictable.
Legal Structure and Requirements
Contractual Parties and Content
The guarantee is regularly provided by third parties, such as credit institutions or affiliated companies, in favor of a creditor. The agreement must clearly specify:
- The object to be auctioned,
- the guaranteed amount (but at most up to the claim secured in the land register),
- the obligation to submit the offer at the fixed auction date,
- if a purchase does not take place, the settlement of the difference amount.
Form and Evidence Requirements
Written form or at least text form is often agreed upon. The presentation of a bank-issued guarantee statement is standard market practice to ensure seriousness and enforceability.
The guarantee can be structured as a guarantee payable on first demand or as a pure commitment to submit an offer. In the event of the debtor’s insolvency, it may be asserted as an independent claim against the guarantor.
Legal Effects and Enforceability
Claims of the Beneficiary
If, at the auction date, the guaranteed bid is not made by other interested parties, the guarantor is obliged, as agreed, to
- submit the bid and, if awarded, purchase the property, or
- (alternatively) compensate the difference between the minimum bid and the actual proceeds obtained.
Risk of Surplus Proceeds and Scope of Liability
If the object achieves a higher price at auction than covered by the guarantee, the guarantee becomes irrelevant. The scope of liability is always limited to the amount of the guaranteed sum unless otherwise contractually agreed.
Treatment in Insolvency Proceedings
The bidding guarantee is an independent security promise and, in the event of insolvency of the property owner or main debtor, can still be asserted by the creditor against the guarantor.
Distinction from Other Securities
Distinction from Suretyship
Unlike suretyship, which requires the existence and extent of a primary debt, the bidding guarantee is an independent payment promise for a future event (highest bid achievement or difference settlement). The guarantee is not accessory, but exists independently alongside the secured claim.
Difference from a Bidding Commitment
A pure bidding commitment only obliges a third party to submit a bid without any obligation to balance the shortfall if unsuccessful. The bidding guarantee goes further and also secures compensation if the guaranteed bid is not achieved or not submitted by the guarantor.
Economic Importance and Practical Notes
The bidding guarantee has particular practical relevance for distressed real estate loans as well as in the restructuring and risk management of credit exposures. Lenders thereby increase the likelihood of realization and reduce their risk of loss. For investors and buyers, it enables predictable processes and negotiation security when taking over real estate from foreclosure auctions.
Literature and Web Links
- BGH, Judgment of 17 November 1981 – IX ZR 49/81
- Forced Auction Act (ZVG)
- German Civil Code (BGB), in particular Sections 765 et seq., 780 BGB
Note: This article provides a comprehensive and objective presentation of the bidding guarantee and its legal aspects for a legal encyclopedia. The specific circumstances of individual cases are not taken into account and may influence the legal assessment.
Frequently Asked Questions
What legal requirements must be met to issue a bidding guarantee?
Under German law, the bidding guarantee is regularly relevant in connection with public auctions or the foreclosure of real estate, particularly in the context of Section 68 ZVG (Act on Foreclosure and Receivership). The issuance of a bidding guarantee is subject to certain formal and substantive requirements. Firstly, the guarantee must be issued by a duly authorized and recognized credit institution or insurance company that is authorized under German law to carry out such legal transactions. The guarantor must ensure that the document clearly specifies the guaranteed amount, the event triggering the guarantee, the exact specification of the beneficiary (usually the enforcement court), and the validity period. Furthermore, the guarantee must be in written form and include payment on first demand in order to be recognized as security in the auction procedure. Note that courts strictly examine whether the guarantee meets the statutory requirements and, if applicable, the requirements of the auction court, particularly regarding clarity, specificity, and irrevocability.
Is a bidding guarantee freely revocable at any time or are there legal restrictions?
A bidding guarantee is fundamentally structured as an abstract promise of obligation that cannot be unilaterally revoked or limited afterwards by either the guarantor or the beneficiary, as long as the guaranteed purpose (e.g., participation in the auction date) still exists and no guarantee event has occurred. Reservations for revocation or conditions that would allow the guarantee to be withdrawn are generally not permitted and typically result in the court not accepting the guarantee as security. Legally, it is decisive that the enforcement court can rely on unrestricted payment in case of need. The only exception is upon fulfillment of the security purpose (e.g., award of contract or reimbursement after withdrawal of the bid), which automatically extinguishes the guarantee.
What substantive requirements apply to a bidding guarantee in foreclosure auction proceedings?
Case law and administrative practice impose high requirements on the substantive structure of a bidding guarantee. It is essential that the guarantee is unconditional, absolute, and payable on first demand. It must clearly specify the maximum secured amount, clearly identify the beneficiary third party (court or creditor), and reference the specific foreclosure auction proceedings to ensure a clear link to the specific security purpose. The guarantee must not include clauses that make entitlement to performance subject to further (formal) requirements. In addition, the guarantee text often requires an explicit assurance that defenses arising from the underlying transaction are excluded and that set-off is not possible.
What are the legal consequences if the court enforces the bidding guarantee?
If the bidding guarantee is enforced by the court, this immediately results in the guarantor’s obligation to pay the guaranteed amount—usually within a fixed period (usually a few working days)—to the court account or to the creditor. In this case, the guarantor cannot assert objections arising from the underlying relationship (e.g., alleged invalidity of the bid) or defenses due to alleged abuse of the claim. Payment is irrevocable; repayment is only possible in exceptional cases and by judicial order, for instance if it is subsequently proven that no payment obligation existed.
What is the difference between a bidding guarantee and other securities, such as a suretyship?
Legally, the bidding guarantee—unlike a classic suretyship under Sections 765 et seq. BGB—is characterized by its abstract and independent promise of payment, which is strictly separated from the main relationship (e.g., between bidder and creditor). Suretyship is accessory, i.e., dependent on the existence of the main debt, and the surety can usually assert defenses arising from the underlying relationship. The bidding guarantee, in contrast, is an independent obligation of the guarantor to pay on first demand, without recourse to the underlying relationship, thereby offering greater legal certainty in transactions involving security realization.
Are there specific form requirements to be observed when presenting a bidding guarantee?
Yes, the presentation of a bidding guarantee is subject to strict formal requirements. It must generally be submitted in original, as only an original document is recognized by the court as valid security. Electronic copies or certified copies are not sufficient. Furthermore, the guarantee must be written and signed by one or more authorized representatives of the issuing credit institution or insurance company. In case of doubt, the representative authority should be documented by attaching proof of representation.
Can a bidding guarantee be modified or amended afterwards?
A bidding guarantee that has already been issued and submitted to the court can, as a rule, no longer be unilaterally modified or amended. Changes or amendments, such as increasing the guaranteed sum or extending the duration, generally require the issuance of a new guarantee document. Any subsequent modification risks that the security will no longer be recognized or the purpose of the guarantee be frustrated. It is therefore advisable to clarify all relevant guarantee details with the court in advance.
