EWJ Dec 2023 - Journal - Page 71
Auctions: How to Get Over the
Risks of Being Under the Hammer
by Maia Smith, Trainee Solicitor, Wedlake Bell
non-refundable auction fee which can vary from a few
hundred to a few thousand pounds (tending to be
more than an estate agency – and the property may
not even sell on the auction day.) Each unsuccessful
auction is a fee lost. The marketing of the property
may not rival the estate agent offering, generating less
interest. The risk of letting the property go for too little is largely counteracted by setting a ‘reserve’ price.
However, the reserve price must not exceed 10%
above the guide price (CAC 10.2). So, if a guide price
is set on the low side to drum up excitement about the
lot, sellers could be in for disappointment.
The rising popularity of auctions
Amidst a turbulent property market and
unfavourable mortgage rates, transacting with speed
and certainty is ever more attractive to commercial
sellers – a package offered more readily by the auction process. With contracts exchanged on the fall of
the hammer and a typical completion timeline of 28
days (in accordance with the Royal Institution of
Chartered Surveyors Common Auction Conditions
(“CAC“)), auctions are on the rise. A growing commercial property auction market also increases the
likelihood of securing a true market price, paired with
confidence the deal will go through. So what is the
catch?
Going once, going twice, but dodgy due diligence
won’t suffice
So how are these risks mitigated? Unsurprisingly, the
answer is due diligence. The auction pack could well
contain information which prospective buyers deem
comprehensive, but closer scrutiny by an expert
(be that surveyor, commercial property solicitor or
planning consultant) could reveal:
l a restrictive covenant which could hamstring
development;
Caution before auction
As both the buyer and the seller are bound by the
terms of the contract at the point the hammer falls on
the highest successful bid, the buyer’s due diligence
on the property must be conducted before the auction. However, buyers are often reticent about spending money on legal work which might turn out to be
pointless if they are outbid. The fact remains, a blind
purchase may later reveal severe defects in the property or its title (particularly if the property being auctioned was tricky to sell on the open market), and
there is limited time to perfect them before completion and perhaps no obligation on the seller to assist to
resolve any such defect. Any defect, if known, may
have lowered the price the buyer was willing to pay
or even precluded a bid altogether. The buyer may
not be able to claim any of the unexpected cost of
dealing with the newfound issue(s) from the seller.
a lack of planning permission and potential
inability to secure it from the local planning authority;
l
l arrears on the subsisting tenancies for which the
buyer must account to the seller;
l an Energy Performance Certificate rating not up
to scratch for the buyer’s purposes;
l the property’s use class is incompatible with the
buyer’s intended use;
l insufficient easements or lack of formal access rights
where needed; or
A non-cash purchase will require meticulous financial
planning prior to auction, and certainly an agreement
in principle with the lender. The ultimate sale price
can also differ considerably from the ‘guide price’ –
leading to unanticipated expense.
l structural issues such as subsidence.
This list is not exhaustive. A legal expert could also
pinpoint information which is missing from the auction pack, such as missing searches or incomplete title
documentation.
The CAC (19.1) states that the buyer must pay the
deposit before leaving the auction venue. If the buyer
is unable or unwilling to pay the balance, the seller
may, at any time after completion date, serve the
buyer with a ‘notice to complete.’ This allows 10 days
from service of the notice for completion. Thereafter,
the seller is entitled to:
l retain the deposit;
l sue for the remainder of the purchase price;
l claim damages for breach of contract; and
l relist the property and sell elsewhere.
In order to identify any issues which may not be revealed by the title documents, buyers are strongly advised to commission a survey of the property. At the
very least, buyers should physically visit the property
during the marketing period prior to auction. This
could reveal, for example, rights of way burdening the
property for the benefit of neighbouring land or the
need of extensive renovations. Buyers looking to
move straight into an office or shop should be doubly
advised to check the property is in good repair, whilst
others may welcome remedial work.
For the seller, marketing property with an auction
house incurs higher fees. Sellers need to pay a
EXPERT WITNESS JOURNAL
69
DECEMBER 2023