Time and again, we are instructed to complete auction purchases by bidders unaware that, when the gavel drops, they are already “locked in”, and by the time our clients contact us they have already sealed the deal, with very little understanding of the legal implications. Every potential bidder should ask themselves:
1. Do I have, or need “permission” for my plans?
Market demand is increasing for auction properties being sold as flexible spaces, for repurposing, mixed use and hybrid working. This “new-normal” increases the risk that auction buyers might unknowingly fall short of planning regulations.
For example, local planning restrictions might prevent repurposing parts commercial buildings for residential use, and other planning conditions might inhibit property investor’s development plans entirely.
Legal documents made available on auctioneers’ websites (‘Auction Packs’) are a starting point and essential reading to check for planning issues, especially if a bidder has development in mind. Any would be developer should always make their own enquiries with the Planning Authorities and if necessary, seek independent advice on planning issues well ahead of the auction day.
2. What are my liabilities?
The Common Auction Conditions (‘CAC’) are used by auctioneers to govern bidders’ and sellers’ obligations. In brief, the CAC prescribe various matters to which each property is sold (discussed further below) and clarifies what parties must do at every stage.
Bidders should – at the very least – familiarise themselves with the CAC and understand their liabilities once the hammer is brought down, for example, if:
- the bidder is unable to complete
- the seller registered for VAT and a VAT election applies to the property
- the bidder is unable to comply with all pre-completion steps
- any tenants’ right of first refusal has not been complied with
- any Special Conditions vary the CAC and the buyer must pay additional costs and disbursements or new restrictive covenants are being imposed on the land.
If bidders are confused by any of the above points, they are strongly advised to take legal advice.
3. Is the seller hiding something?
Every bidder should understand that, under the CAC, sellers have a more limited disclosure obligation and might be economical with information supplied to attract more bids.
For example, sellers might choose not to disclose all the facts surrounding a history of complaints with their landlords and, depending on the terms of the lease, these issues may continue to bind auction buyers. Misrepresentation can be difficult to prove, so bidders should carefully research properties and consider whether they need legal advice.
4. Will my finance be ready for completion?
It is dangerous for auction buyers to place a bid unless they are certain they will have funds ready for completion.
Non- cash buyers should ensure cleared funds can be drawn down from their mortgage lenders within the completion window, which is generally up to 28 days after an auction. Most mainstream lenders require separate legal advice and a certificate of title for the property, so this can be a slow process. Quick short term bridging finance options might be available; however, these carry their own inherent risks.
Bidders who do not have funds to complete risk losing their deposit and other financial penalties, so they absolutely must be certain of their funding.
5. Should I read the Auction Pack?
Often, Auction Packs will be bidders’ only source of information to decide whether to place a bid.
Under the CAC, auction sellers are only liable for statements given in their Auction Pack and, even if bidders have not read the Auction Pack, or they are incomplete, bidders are still deemed to buy with full knowledge of the property.
Bidders should always read the Auction Pack – legal advice can help them understand what is being disclosed and, importantly, when sellers might be withholding something… which can sometimes be more telling.
6. Will the building fall down?
Under the CAC sellers give no warranties as to the state and condition of the auction property – bidders must satisfy themselves and inspect and/ or arrange a professional survey – unfortunately they tend to refrain from commissioning surveys due to perceived time constraints or to minimise costs.
However, as auction lots are listed for around one month, there is usually enough time for proactive bidders to inspect properties themselves at the very least, to check for, and clarify, any obvious structural issues.
Other surveys available also include a basic valuation, level 2 survey (conducted generally visually) or a full structural survey (from inside the property).
7. What does this legal jargon mean?
Auction Packs should contain title documents confirming a sellers’ capacity to sell; they may also contain restrictions, legal charges, or other encumbrances which bind the land.
For leasehold lots, leases should contain rights, restrictions, and obligations. If the lease is old and/or has been extended over the time, a careful analysis of old-fashioned language and jargon might be necessary. Likewise, for freehold lots, historic title deeds might place cumbersome restrictions on the land in favour of third parties.
Either way, bidders should always read the title documents, or they risk buying a property which lacks essential rights and/or restricts their intended uses. If bidders are confused by any legal jargon, they should consider taking legal advice.
It is hoped this brief summary will be a useful aide-memoire to help potential bidders grasp the large information deficit they may face buying at auction – legal advice should always be sought if bidders have concerns.
Contact our Commercial Property Team
The above is accurate as at 21 October 2022. The information above may be subject to change during these ever-changing times.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.