International Debt Collection in the Real Estate Sector

Payment issues in the international real estate sector can derive from disputes, financial issues, socio-economic and political issues.

How can international debt recovery be described in the real estate sector?

We will look at real estate investment, sales, banks and lenders, rentals, and property management. 

Payment issues on real estate investments

One scenario is that the builder of a real estate development, collects from its investors under investment agreements. An investor does not meet the obligations under its investment agreement, resulting in payment default. The builder in this case is the creditor, and the investor is the debtor.

Another scenario is when a real estate project in development collapses. An investor that invested in the construction of the project, reclaims repayment of the amount invested. However, the builder does not (or cannot) meet its obligations under the financing agreement. In this scenario, the investor is the creditor, and the builder the debtor.

Debt collection in connection with sales of real estate

An alternative situation is when a builder or real estate agent sells a single property to a buyer, and eventually, the sale falls through because the transfer of title cannot be completed. The buyer is committed to the purchase of the property under a purchase agreement. The payment obligation may consist of a single payment or several installments. The buyer may have already (partially) paid the purchase price of the property and is looking to receive back its payment(s). In this situation, the buyer is the creditor, and the seller the debtor. 

On the other hand, it may be that under the purchase agreement, the seller is complying with its obligations (including maybe even transfer of title), but that the buyer is not paying the agreed purchase price of the property. The seller will want to enforce payment of the purchase price by the buyer, whereby the seller is the creditor, and the buyer the debtor.

Debt collection for banks and real estate lenders

Another debt collection case may be a bank or lender, that has provided a mortgage or a loan to a buyer to purchase real estate. If the buyer defaults under the mortgage or the loan agreement, the bank or the lender usually seizes the property under foreclose. If, however, the amount of the mortgage or the loan supersede the value of the property sale, the bank or lender will have a claim on the buyer for the remainder. 

The situation may become more complicated, if a loan is provided by a private lender whereby the lender does not have a lien on the property. If the property buyer does not meet the obligations under the loan agreement, then the lender is the creditor, and the buyer is the debtor.

Payment default in case of property rentals

Properties can be rented out as long term or vacation rentals. Sometimes, a property owner rents out directly, but more often, the rentals are handled by a third party, like a real estate agent. It can happen that a tenant fails to pay the rent. In this case, the landlord is the creditor, and the tenant is the debtor. 

Debt collection for property management

Property management, especially for condo buildings, is typically carried out by a property administrator. The property manager collects maintenance fees and additional costs on behalf of the owners’ association. It regularly happens that a property owner or a tenant does not the pay maintenance fees or additional costs. In this case, the association or the property manager is the creditor. The debtor is the defaulting property owner or the tenant. 

As a final note, I would like to mention the potential burdens for successful international debt collection in real estate. Such burdens may include the lack of leverage, multiple jurisdictions to deal with, unsolid contracts and other underlying documents, absence of the use of escrow in international real estate transfers, and the absence of cross-border legal support during the beginning of the process and later on.

Payment issues in international real estate can be related to disputes, financial issues, socio-economic and political issues. Debt collection can apply for real estate investments, property sales, mortgages and other loans, property rentals and property management. Who is defined as creditor and who as debtor, differs according to the particular default situation. Burdens for success in international debt collection in the real estate sector can be related to lack of leverage, multiple jurisdictions, unsolid contracts, the absence of an escrow, and insufficient legal support.

If you want to know more about debt collection in international real estate, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

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David Zannoni