General Background
In contrast to a disposal by private contract, an auction is a process for the purchase and sale of property (or any other goods and services) by offering it up to numerous parties simultaneously, by the taking of bids and then selling the property to the highest bidder (or buying from the lowest bidder). In the sale of property at auction, at the fall of the hammer exchange of contracts occurs and the contract becomes binding upon the parties.
The most common form of auction is the “ascending price auction” in which the auctioneer confirms the current sale price with bidders submitting a bid either verbally or electronically. The highest bid is successful, on the proviso that the reserve price has been achieved.
Another form of auction known as a “Dutch auction” is the opposite to the ascending price auction. In this procedure the auctioneer will start with a higher price and will then decrease the bids until a buyer accepts the price offered or, alternatively, until the price offered reaches the predetermined reserve price.
Historically in the UK sales of property at auction has usually the preserve of probate sales or repossessed/distressed properties; this is possibly because of the limited knowledge of the subject property of the seller. In these cases, the sellers tend to be acting as an administrator or liquidator on behalf of the owner. However, we have seen an increase in the number of private sellers (both of commercial or residential property) seeking to dispose of properties at auction due to the speedy nature of the process.
Finally, it is usual for high value or “prestigious” properties to be sold subject to sealed bids. In this situation, a selling agent will direct prospective buyers as to how to submit a bid. The form and timescales should be fully and properly adhered to as a failure to do so may invalidate a bid.
Considerations for a Seller
A legal pack will need to be prepared for the buyer in accordance with the auctioneer’s requirements. 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 an auction rather than through a private sale) these should be resolved as fully as possible in the pack, despite the principle of ‘buyer beware’ or caveat emptor. This will improve the marketability of the property, which will hopefully result in a higher sale price and separately it will also assist a prospective buyer in securing third party funding so as not to delay or indeed prevent completion. If a buyer did fail to complete, the seller will have remedies against the buyer, but it may be in the seller’s interest to complete rather than rescind the contract and re-market.
The Seller or its legal representative must also consider the recent ruling in SPS Groundworks and Building Ltd v Mahill [2022] EWHC 371 (QB).
The case essentially considers whether a seller failed in an auction sale to comply with its common law duty to disclose an overage obligation affecting a property.
The salient facts are that the seller and its legal advisors prepared a legal pack for the sale of a plot of land which included a copy of a deed of covenant. The deed of covenant contained an overage obligation, and this deed was expressly referred to in a restriction in the proprietorship register of the title to the property being sold. The title documents were included in the legal pack but no specific reference was made either in the legal pack or orally by the auctioneer, to the overage obligation. Once the buyer became aware of the overage obligation they refused to complete.
The High Court held that the seller had not complied with its duty of disclosure. References in the auction brochure and by the auctioneer to the need to read the legal pack were insufficient, even though the title, containing the restriction, had been disclosed. The ruling confirmed that a full and frank disclosure of the overage clause to be specifically highlighted for a potential buyer’s attention was required either by a description in the particulars, specific oral reference by the auctioneer or an addendum. It was accordingly held that the buyer had not been put on satisfactory express notice of any unusual feature of the auction lot and they could not have been put on notice by inspection of the property either.
Therefore a seller can no longer rely on the concept of caveat emptor. The ruling in the case imposes a greater obligation upon the seller i.e., a need not just to simply disclose but also to expressly highlight the encumbrance.
Whilst this decision is undoubtedly a very difficult decision to understand, in practice a seller, selling at auction where a potential buyer has bid, (very possibly before a lawyer has carried out due diligence on their behalf) should undertake sensible and thorough precautions to ensure that any significant encumbrances or title defects are expressly and clearly highlighted in the legal pack or orally by the auctioneer.
Considerations for a Buyer
It is extremely important for a Buyer to obtain a full legal review of the legal pack, providing as much time as possible for the legal adviser to review and report upon the pack. The legal adviser may raise enquiries on the contents of the pack although there is no obligation upon the seller to provide a substantive response. Indeed, it is common for a seller to simply respond that the property is ‘sold as seen’.
If a prospective purchaser is acquiring the interest at auction with the benefit of third party funding, the buyer should, at worst, have confirmation that the loan offer is agreed in principle, although it is far more preferable to have express confirmation that completion funds will be available. This will require a full review of the legal pack by the lender’s solicitor, incurring significant legal costs, before the auction has taken place and before the buyer has confirmation that they have been successful with their bid.
It is an 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 reasonable and foreseeable damages for breach of contract.
Both buyers and sellers can benefit from legal advice before an auction to maximise their respective positions.
Key Points
- Consider the format of auction most suitable for the disposal of the type and value (including salient market conditions) of the subject property.
- The seller should resolve as many foreseeable title problems or encumbrances as possible which could be disclosed in the legal pack or revealed by an inspection. This will improve the marketability of the property and accordingly, in all probability, realise a higher sale price. Separately, it will also assist a prospective buyer in securing third party funding so as not to delay completion.
- The seller must ensure that a full disclosure has been made in accordance with the provisions of the ruling in SPS Groundworks and Building Ltd v Mahill [2022] EWHC 371 (QB).
- The buyer must ensure that funding is available not only to complete the acquisition but also in relation toall further associated and professionals’ costs (included but not limited to the payment of SDLT), if successful at auction.
Whether buying or selling a property at auction, a buyer and seller should obtain legal advice giving the appointed legal advisor as much time as possible to either prepare or alternatively review the legal pack.