Issues to consider for the sale or purchase of residential or commercial property at auction

The vast majority of property transactions in relation to acquisitions or disposals will be through a private agreement between the buyer and seller with the proposed terms, either negotiated and agreed through a selling agent, or directly between the parties.

Another option would be by way of an auction sale whereby the property interest is offered to numerous parties simultaneously. The most common and well understood form of auction is known as the “ascending price auction” whereby parties bid, either verbally or electronically and the successful bidder (i.e. the party offering the highest bid) acquire the property, provided that the reserve price has been achieved.

The moment the hammer falls in an ascending price auction is the moment that the transaction becomes binding upon the parties, technically this is referred to as exchange of contracts.

Another form of auction known as the “Dutch Auction” is in effect the opposite to the “ascending price auction”. In this auction the offered price decreases until a prospective party agrees to acquire the property at that price. However if the bidding decreases to value below the reserve price then the property would be withdrawn.

Certain property disposals particularly in relation to the sale of high value, boutique or prestigious properties may be subject to a sealed bids. It is important that any prospective buyer adheres strictly to timings and forms of bid in this process as a failure to adhere to such provisions may invalidate the bid. In relation to a successful sealed bid this may be an “offer” subject to contract (at which point a full legal due diligence, including investigation of title would commence) or alternatively be deemed to be a formal exchange of contracts with the transaction becoming binding upon the parties. Legal advice should be undertaken so a prospective buyer is fully aware of their obligations if their sealed bid is successful.

A lot of property owners wish to dispose of their interest at auction as it can result in a quick disposal and separately if a seller can create a bidding war between numerous parties, this may result in a higher sale price than if the property were sold by private sale to an individual purchaser.

Finally auction sales have historically been the preserve of probate sales or distressed / repossessed properties. This undoubtedly is as a result of the limited knowledge (whether express or implied) of the sellers in such circumstances, who are invariably acting in their capacity as executors of a will, administrators , liquidators or trustees in bankruptcy.

A legal pack will need to be prepared on behalf of the selling party. Auction packs are usually and essentially in the same form but an auctioneers specific requirements must also be considered.

Whilst there may be issues of title or other adverse issues to be disclosed (indeed this may be a reason why the seller sought to dispose of the property through auction as opposed to a private sale) these should be resolved as fully as possible before the auction pack is produced despite the principle of caveat emptor (i.e. buyer beware). This will improve the marketability of the property resulting in the likelihood of a higher price being achieved at disposal and it will also assist the successful buyer to secure third party funding and accordingly prevent a delay in completion.

The facts of the case are as follows, a plot of land was sold at auction in 2019 which was encumbered by an overage obligation which required a payment of 50% of the uplift in the value of land attributable to obtaining planning permission.

The legal pack prepared for the auction sale by the seller included a copy of the deed of covenant containing the overage obligation and the deed was also referred to in a restriction in the proprietorship register of the title to the land (title the the land was also part of the legal pack and so was fully disclosed). However there was no specific reference to the overage obligation in the auction brochure and no express oral reference was made to it by the auctioneer.

Following the auction the buyer became aware of the overage obligation and understood its implications and as a result they refused to complete.  The seller, following the buyer’s default, forfeited the deposit and re-sold the land at auction for a lower price. The seller subsequently then brought an action against the buyer for its losses, i.e. the difference between the original price and the achieved price at the second auction. At first instance, the court held that the overage deed contained the legal pack and was “there to be seen” so that the principle of caveat emptor should apply.

On appeal, however, the High Court, rather surprisingly, took a different view and agreed with the buyer that:

The established rule of equity is that a seller has a duty to disclose defects in title and that the buyer should have full, frank and fair information or a proper opportunity to gain such information about the defect and that without specific reference to a defect, the buyer may assume that the entries on the title would be “the usual sort … which would not significantly affect the value of the property”.

The judge agreed with the buyer that the defect should have been more specifically disclosed by the seller prior to contract.

The ruling in SPS Groundworks and Building Ltd v Mahill [2022] EWHC 371 (QB) is very difficult to understand but the message is clear, a seller, selling at auction should make thorough and complete disclosures in the auction pack (and possibly by auctioneer verbally) and further, highlight any encumbrances or title issues affecting the salient property.

A seller can, following this ruling, can seemingly, no longer rely on the principle of caveat emptor.

As with any potential property acquisition is it is essential for a prospective buyer to instruct a legal adviser to undertake the necessary due diligence and undertake an investigation of title. The more time that a buyer provides to their legal adviser the greater the chance that any issue, encumbrance or defect in title revealed in the legal pack, can be remedied or resolved.

If a prospective purchase will be completing the acquisition of the property with 3^rd party funding then this must be arranged prior to the auction (which may also involve the necessary legal due diligence to be accrued out on behalf of the lender).

It is an extremely important and obvious point but a failure to ensure funds are available to a buyer to complete the purchase of the property will put the deposit at risk. A buyer may also be liable to the seller for any reasonable and foreseeable damages for breach of contract.

At Hanne & Co our property lawyers have extensive knowledge and experience in assisting either prospective buyers or sellers proposing to acquire or dispose of any property or on behalf of lenders providing funding (whether the subject property is residential, commercial or mixed use in nature).

Contact the team today on +44 (0) 207 228 0017 or via the form below.