Dealing with property auction issues

Property auctions are an increasingly popular way for property owners to sell their properties and for potential buyers to snap up a bargain

However, what at first sight appears to be a bargain can turn out to be an extremely costly mistake.

Property auction issues

We have acted on several cases for purchasers who have successfully bid on a property only to discover some significant problem with it.

Examples of situations where buyers have encountered difficulties could include:

• The purchaser of a long residential lease which was already subject to forfeiture proceedings by the landlord due to significant breaches of the terms of the lease. The new owner would inherit a considerable financial liability to the freehold landlord or faced the forfeiture of the lease.
• The property being described in a certain way or to include certain things, such as a larger piece of land or parking space, when this is not the case.
• The purchaser of a freehold of a commercial property discovering that the seller had reached an informal agreement with the existing tenant regarding the rent payable, which did not reflect the terms of the lease provided in the auction pack.
• A seller of a flat suggesting that it was able to extend the term of the lease and assign the benefit of this to the buyer when in fact legally, this was not possible.
• Including out-of-date searches in the auction pack, which did not reflect the true position.

In all cases, it is vital that you read the small print, and that you are aware of issues like the difference between buying at a traditional auction and a modern method auction.

The importance of taking legal advice on buying property at auction

One thing that many of the examples above have in common is that the buyer did not take any legal advice on the contents of the auction pack before bidding on the property. Whilst talking to a property auction conveyancing solicitor before bidding on property at auction may not seem like a necessary expense, it can reduce the risk of costly mistakes.

Whilst such advice cannot remove the inherent risk of purchasing a property at auction completely, asking a solicitor to check through the auction pack, identify potential issues and discuss the contractual terms will provide a bidder with a more informed idea of the risk that they are prepared to take and the amount they consider reasonable to bid.

Pre-auction enquiries can be raised with the seller or agent and whilst there would be no obligation on them to respond, if they want to maximise the bids they receive, it might be in their interests to do so.

If you are considering purchasing a property at auction and would like to instruct Cunningtons to assist in considering the auction pack, please do get in touch.

Misrepresentation at property auctions

We have previously written about misrepresentation in a residential property context (read My Seller Lied To Me here). This article focusses on property misrepresentation in the context of auctions.

The first thing that needs to be said about auctions is that generally, the applicable contractual terms have not been negotiated between the parties. They are generally presented in the auction pack on a “take it or leave it” basis. It is not uncommon for contractual terms to be heavily one-sided and to pass all the risk (and normally the cost) on to the successful bidder.

The contractual terms will invariably contain what are known as limitation or exclusion of liability clauses, which seek to limit or exclude liability for things said about the property which might not be factually accurate. Sometimes what are called “whole agreement” clauses are included, and these seek to specifically exclude anything said about the property which might otherwise have become a contractual term. Effectively, these clauses seek to protect the seller by saying that anything said about the property which is not included in the contract cannot be relied on if they turn out to be inaccurate.

Whilst “buyer beware” or “caveat emptor” is a principle of law, meaning that buyers should undertake the necessary steps they want to check the suitability of what they are going to purchase, the law does seek to balance the requirement for buyers to do this against the broad requirement for sellers to at least try to be accurate in the information that they provide. Certainly in cases of fraudulent or reckless misrepresentation there is some scope to challenge clauses which seek to limit or exclude liability.

Section 3 of the Misrepresentation Act 1967 provides that any terms within a contract which would exclude or restrict a seller’s liability for misrepresentation, or limit the remedy available to a buyer for this, are of no effect unless they are “reasonable”. If such terms are unreasonable and of no effect, then the misrepresentation is actionable and a claim can be pursued.

Test of Reasonableness

The test of reasonableness is contained in Section 11 and Schedule 2 of the Unfair Contract Terms Act 1977 (UCTA).

Sadly for buyers, there is not a black-or-white, yes-or-no test or criteria to determine whether or not such clauses are reasonable or not; merely examples of what may or may not be reasonable in the circumstances. The test is to a large degree subjective and this means that the Court has the ability to consider what the parties knew, or ought reasonably to have known, about the situation at the time. Each of these cases is therefore very fact-specific and a careful consideration of all of the facts is necessary.

Broadly, the guidelines set out in UCTA which the Court will consider are:

• the bargaining positions of the parties, taking account of alternatives that the buyer might have, such as alternative property;
• whether there has been an inducement to agree to the term or had an opportunity to enter into a similar contract with someone else without such a term;
• whether the buyer knew or ought reasonably to have known of the existence and the extent of the term;
• where the term excludes or restricts liability if some condition was not complied with, whether it was reasonable at the time the contract was entered into to expect that this condition would be met.

Case law on exclusion and limitation of liability clauses is extensive. This is understandable to the extent that the law exists to balance the interests of a seller to sell a property without fear of a future claim and the right of a buyer not to be misled, certainly not deliberately. Whilst cases can provide helpful guidance and may be relevant to your particular circumstances, they are rarely conclusive of the matter, as when situations like this arise, there are always factual differences.

Further advice for auction buyers

Check carefully what the terms say about the fees. Often there will be a contractual clause obliging the successful bidder to pay the seller’s legal costs. These can sometimes be quite high and an unexpected expense which should otherwise have been factored into your decision in respect of the maximum bid you are prepared to make.

Often, searches are included in auction packs, as it would be a rare circumstance when a buyer would have time to undertake their own searches. Normally the cost of these searches will be passed on to the successful bidder as well. Any searches should be checked carefully for what they reveal. They should be checked to make sure they are up-to-date. If there is missing information or queries which come out of the searches, the risk of this should be considered when bidding for a property. If searches are inadequate, then checking the auction terms to see whether the buyer can rescind the contract in the event of discovering something untoward later is worthwhile doing.

If you require finance or a mortgage to purchase the property, make sure that your lender is on board and satisfied that the property is going to provide good security.

We have acted for clients who have successfully bid on a property, paid a sizeable deposit and then discovered a defect in the title to the property, or something else which makes the property unsuitable security for a mortgage. The lender then withdraws the mortgage offer, leaving the client in a position of being unable to complete, and therefore liable to lose their deposit, or have to seek a bridging loan or some other finance at considerably worse rates.

Can Cunningtons help?

As you can appreciate, it is much easier to avoid legal problems with a property before you bid on it. So we would strongly recommend inspecting a property first, as well as talking to a property conveyancing solicitor. Otherwise, any savings you make through buying property at auction could disappear in a misrepresentation claim.

We would be interested to know about your experiences of purchasing property at auction.

If you feel that you have purchased a property pursuant to a misrepresentation, then we may be able to assist you, let us know your experiences in the comments section below.