Frequently Asked Questions about Property Auctions
This is a copy of a blog post I wrote on www.matrix-legal.com/site/blog back in June 2016.
Why are properties sold at auction?
Properties can be sold at auction for a variety of reasons. These include:
the Seller needs a quick sale
the Property may have been repossessed and offering the property for sale through auction meets the mortgagee in possession’s legal obligations
the Property may need redevelopment or refurbishment and it’s easier to attract developers or investors at auction
the Property may have various issues affecting it which has made it difficult to sell it in the open market
the Seller wants the certainty of a sale bound by legal obligations (when the gavel falls, contract is deemed exchanged). A primary advantage of selling property at auction is the speed and certainty of the sale transaction. The buyer is legally bound to buy the property at the fall of the hammer/gavel so there is no need for further negotiations on price, no change of mind/heart and there is no chain so less uncertainty and hassle. Completion usually takes place 21 – 28 days later.
Choosing an Auction House
Selecting the correct auction house could mean the difference between selling a property at auction quickly or not selling the property at all.
Factors such as location of the property in comparison to the venue where the auction house conducts the auction, the auctioneer’s knowledge of the property & the neighbourhood and the auctioneer’s recommended reserve and guide prices are important in deciding which auction house to instruct on the sale of a property at auction.
What is an Auction Legal Pack?
The lawyers acting for a seller of property at auction must prepare a legal pack for the property and deal with any statutory notices (if relevant). The legal pack must be prepared well in advance of the auction date so that prospective buyers have sufficient time to have the legal pack reviewed so they can decide whether or not to bid for the property at auction.
The auction legal pack will contain some (if not all) of the following:
the RICS Common Auction Conditions (3rd Edition) (‘the CACS’)
any special conditions
official entries for the title and copy documents referred in the title registers
searches (carried out with relevant authorities)
replies to enquiries
draft deed of covenant
draft transfer deed (TR1)
if being sold by fixed charge receivers, letters of appointment for the property
copies of any leases or tenancies, rent deposits
EPC (Energy Performance Certificate)
any gas safety certificates or electrical certificates
any rent deposit details
details of any (financial) arrears
the Memorandum of Sale
(if relevant) copy/ies of planning permission and/or building regulation certificate(s)
Is an Auction Sale Contract different from a standard Sale Contract?
Yes. Unlike a standard residential transaction, an auction sale contract is binding as soon as the final bid is accepted and the hammer/gavel falls. The winning bidder must pay a deposit (which is usually 10% of the winning bid/purchase price) immediately and the balance on completion.
Another distinction from a standard contract for sale of property is that Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 does not apply to an auction contract so it is binding even if made orally. In practice the successful bidder/buyer will be asked to sign a memorandum of sale setting out the terms of the sale.
What does an Auction Sale Contract usually include?
A property auction sale contract will contain some (if not all) of the following:
General and Extra Conditions of Sale
Special Conditions of Sale
Addendum
What are General and Extra Conditions of Sale?
The general conditions are standard conditions that apply to all properties being sold in the relevant auction. These are produced by the auction house and usually included in the auction catalogue. General conditions are usually based on the CACS or incorporate these conditions completely. The standard conditions of sale (5th edition) (‘SCS’) or the Standard Commercial Property Conditions (2nd edition) (‘SCPC’) can also be used.
The CACS were drafted for use in property auction sales and include clauses that are not in the SCS or SCPC.
Extra conditions of sale are produced by the auctioneers and vary the general conditions of sale for all properties included for sale in the relevant auction.
What are Special Conditions of Sale?
The Special Conditions contain any amendments required to the general conditions for the relevant property. Special Conditions are produced by the Seller’s legal advisor and are read and amended in conjunction with the General Conditions of Sale and Extra Conditions. Special Conditions usually include:
details about the property
amendments needed to the general and extra conditions
details of any new terms, covenants or easements, VAT and tenancies
What is an Addendum?
An addendum is sometimes made available a few days prior to or on the day of the auction. It is used to amend any errors in the legal pack or auction catalogue.
When does Completion of the Sale & Purchase happen?
Usually 28 days after the contract is exchanged (which is usually the auction date) but shorter or longer periods can be agreed.
Allowing completion to take place more than 28 days (6 weeks is common) makes the property more attractive to prospective buyers because they have more time to organise their finances.
Does the Buyer pay all the Seller’s costs?
There are different opinions on this. Our view is that whilst it is customary to have the Buyer reimburse all of the Seller’s auction sale related costs, such as cost of searches, legal costs and auctioneer’s fees, this should be treated with some caution. Passing most of the Seller’s auction sale related costs to the Buyer could put the Buyer off bidding for the Property as it could make the Property too expensive or it could undervalue the Property because the Buyers factors in the high reimbursement costs into a reduced purchase price. Consider adjusting the guide and reserve prices to keep the Property competitively marketable if seeking reimbursement of all costs from a Buyer.
Why Buy at Auction?
Buying a property through auction has several benefits over buying a property in the open market. These include:
the property could be purchased at a good price, possibly less that the full open market value
the auction process is quick and certain
the properties available for sale at auction may offer opportunities for improvement and to increase value
if the property is let, rental income can be collected from completion
What are Guide and Reserve Prices?
A Guide Price for a property being sold at auction is an indication of what price the property is expected to sell for.
A Reserve Price is the lowest price the Seller is willing to accept for the sale of the Property. If a Seller sets a reserve price, this is disclosed in the auction catalogue, but the amount of the reserve is not.
Some Sellers do not set a reserve price on a property they are selling – this increases interest in the property from prospective buyers as it could mean that the property could be bought for substantially lower than its full open market value.