Selling or buying commercial property at auction

  • Posted

Property is usually sold at auction for a particular reason. It may be that the seller wants the property sold quickly and requires the certainty of knowing that when the hammer goes down, the property will definitely sell (instead of waiting until the buyer is ready to exchange contracts in the usual way). Alternatively, if the property is unusual and difficult to value, an auction may be the best way of selling it. Properties put up for sale at auction may also be those which are not easy to sell in the usual way due to being of poor or mixed quality, if they require substantial renovation, or if the legal title is not straightforward. For this reason, as stated in further detail below, buyers should always be wary and make sure they carry out a survey and legal investigations whenever possible before buying at auction.

Why sell or buy at auction?

As stated above, from a seller’s point of view, auctions provide certainty and speed. The property may sell for a higher price than on the general open market, if there is more than one interested purchaser. The seller can put a reserve on the price, thereby ensuring that the property will not sell for less than an acceptable minimum amount. However, auctioneer’s fees are usually higher than an agent’s fees and will need to be paid whether or not the property actually sells at the auction. From a buyer’s point of view, buying at auction provides speed and certainty. Instead of waiting for weeks (or even months) while the paperwork is negotiated between the solicitors, if the buyer’s bid is accepted at the auction, a binding contract comes into effect. Completion will then take place at a fixed later date. The buyer will also hope to get the property at less than he may have had to pay on the open market, if there are no or few other interested purchasers, although there is of course always a risk of getting carried away and bidding at a higher amount than originally intended!

What should a seller do before the auction?

Anyone who is considering selling property at auction should always instruct solicitors as soon as possible, so that the paperwork can be prepared and any problems sorted out (so far as possible). If the property is let to residential tenants, the seller’s solicitors will need to check whether notices need to be served on those tenants before the auction. Certain tenants of residential property have rights of first refusal if their landlord intends to dispose of its interest in the property. If those rights apply, it is essential that notices in a specified form are served on the tenants before the auction, offering to sell the property to them on the same terms as the successful bidder at the auction. The notices must be served not less than four months and not more than six months before the date of the auction, and must give a period of not less than two months before the auction date during which the offer can be accepted. Legal advice should always be sought before serving such notice, as there are strict terms and conditions to be complied with. For any property being sold at auction, the seller’s solicitors will need to prepare the auction “bundle”. This must contain copies of all documents relating to the property, including copies of all the title documents, copies of any tenancy documents, replies to standard commercial property enquiries (CPSE’s) and copies of the standard property searches (which will be carried out by the seller’s solicitors). This will then be sent to the auctioneers, who will send copies of the bundle to any interested purchasers on request before the auction. The bundle will also be available for inspection at the auction. In addition, the seller’s solicitors may receive further requests for information from interested purchasers (or their solicitors) before the auction. In addition, the seller’s solicitors will draft Special Conditions of Sale, which will be attached to the auctioneers’ General Conditions of Sale. The Special Conditions will set out any specific conditions relating to the particular property – for example, details of any tenancies, whether any arrears are to be paid by the buyer, any rights which are being specifically granted or reserved over land retained by the seller, whether VAT will be payable on the purchase price, and whether any Capital Allowances are available.

What should a buyer do before the auction?

We would always advise any interested purchaser to appoint a surveyor and solicitors before bidding for property at auction. The successful bidder will immediately enter into a binding contract to purchase the property and will take the property in whatever condition it may be. If the buyer subsequently discovers that the property is not in good condition, it cannot withdraw from the contract because of that. It is therefore important to have a survey of the property carried out before the auction, so that the buyer is aware of the condition of the property (and any problems affecting it) and can take that into account when deciding how much to bid (if at all). Unlike a purchase in the general open market, the buyer will not be permitted to make any changes to the form of contract or transfer. The auction conditions will usually state that the seller is not obliged to answer any queries raised by the buyer or its solicitors after the auction. It is therefore very important that, if possible, an interested purchaser appoints solicitors to review the property documentation before the auction. The buyer cannot withdraw from the purchase after the auction because of matters affecting the property that could have been discovered by inspecting the auction bundle beforehand. There may well be legal issues relating to the property which mean that it cannot be used in the way the buyer intended – for example, a restriction on a use of a property for residential purposes, where the buyer had intended to convert it into a home – but the buyer will still be contractually bound to complete the purchase nevertheless. Even if the buyer has not instructed solicitors before the auction, it is still important to do so after the successful bid. Although the buyer usually cannot withdraw, raise enquiries or make any changes to the documentation, the solicitors will be able to advise on the contents of the auction bundle and how they affect the use of the property. The solicitors may also recommend that, for example, title insurance is put in place to deal with certain problems. The solicitors can also advise as to any particular terms of the contract – for example, if the property is at the buyer’s risk from the auction, the buyer should immediately insure it. The buyer should also ensure that it has funds in place to buy the property (including Stamp Duty Land Tax, land registration fees and solicitors’ fees etc) before bidding. If the buyer will require a loan, it should ensure that the lending company is aware that this will be an auction purchase and has committed to lend the money before the auction, as the buyer will be contractually bound to purchase the property whether or not the loan is actually in place.

What happens after a successful bid at auction?

After a successful bid, the buyer will be required to sign a Memorandum of Sale at the auction and to pay a deposit, usually 10% of the purchase price. The General Conditions and Special Conditions will be attached to the Memorandum of Sale and together these will form the contract. The form of transfer to be entered into on the completion date will usually be attached. The auctioneers will then send the signed Memorandum of Sale to the seller’s solicitors, who will then send the transfer to the buyer’s solicitors to be signed. The auction conditions will usually specify a fixed date for completion and payment of the balance of the purchase price. The buyer’s solicitors may try to make amendments to the form of transfer and/or raise enquiries relating to the property but as stated above, the auction conditions will usually state that no amendments and/or enquiries are permitted after the auction. If for any reason the buyer fails to complete on the specified completion date, the auction conditions will usually provide that the seller’ solicitors can serve a notice to complete on the buyer (or its solicitors), requiring the buyer to complete the purchase by a specified date. Interest will then become payable in addition to the purchase price. If the buyer fails to compete the purchase by the date specified in the notice, the contract will then be void but the auction conditions will usually provide that the buyer will be liable for the difference (if any) between the amount of the auction bid and the price for which the seller is subsequently able to re-sell the property. This could be a substantial amount and shows why it is so important to be ready, able and willing – and in full knowledge of all material facts relating to the property – before bidding at auction.

For further information please contact Victoria Sandberg.

Please note the contents of this note are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.