Selling land at auction
Mark Pawlowski examines the contractual aspects of selling land by public auction
Land may be sold at public auction for a variety of reasons. For example, the sale may take the form of the sale of investment ‘ground rents’ (i.e. reversions on long leases), or of commercial property, the value of which has to be realised because of liquidation or some other economic imperative. In many instances, the sale will involve a mortgagee seeking to sell residential property following repossession. Auction sales of land can also occur in other situations, for example, where the property to be sold is owned by an employer who needs to realise the same, having previously used it to house a previous employee or a current employee who has been relocated.
Benefits of an auction sale
Selling land by way of auction is arguably a more economically efficient way of selling property than by the normal route of private treaty where land is offered for sale at a fixed price and presented for sale on a ‘take it or leave it’ basis. An auction sale positively encourages a healthy system of barter. Furthermore, because auction sales occur only at a specific time and place, buyers in attendance will be focused on achieving a fair price for the property in question. The atmosphere of competitive bidding can generate potentially a better price than an ordinary open market sale.
Different contractual scenarios
The complexity of auction sales throws up a variety of different contractual scenarios, all of which have a valuable role to play in protecting the interests of both buyer and seller. The so-called ‘taking part contract’ between bidders inter se ensures that all the participants at the auction play the bidding game by the auction rules. A breach of these rules lays an individual bidder open to a claim in damages against a fellow bidder for the lost chance of bidding for a particular lot or, alternatively, damages representing his pre-contract expenditure.
The contract which exists between the auction house and each bidder also safeguards the economic interests of each bidder. Thus, if the auction house fails to entertain a genuine bid and awards the lot in question to a rival bidder for a smaller bid, or simply ignores a bidder and sells the lot for the same price to another, the disappointed bidder will have a claim in damages for the lost profit (if any) which could have been earned if his bid had been properly accepted. Alternatively, the disappointed bidder may claim reliance loss damages.
Finally, there is the sale contract itself which comes into existence between the seller and successful bidder when the auctioneer accepts the highest bid for a lot in the customary manner of hitting the hammer on the block. This orthodoxy suggests that, by striking the block, the auctioneer accepts the bidder’s offer to purchase the lot in question.
Role of the auctioneer
An auctioneer acts as an agent of the vendor of the land to be sold at the auction. His role, however, extends beyond simply conducting the auction. In the case of a sale of land, he will act on behalf of the vendor in a similar way to an estate agent involving himself in each step of selling the property from pre-inspection to final contract signing.
He may also be a valuer or surveyor. In particular, the auctioneer will normally evaluate the property for sale by auction, gathering and compiling the necessary information for the auction catalogue featuring relevant photographs, descriptions and guide prices. He will also be responsible for advertising and promoting the auction and making potential buyers aware of the properties on offer.
The auction process
A sale of land by public auction, rather than an ordinary sale of land by private treaty, throws up unique problems of law and practice. As far as the auctioneer is concerned, however, the preparation for the auction will not be dissimilar to the preparation of land sold by private treaty in so far as the auctioneer will, as we have seen, act as agent for the vendor and will typically communicate with the seller’s solicitor who will be charged with the drawing up of a sale contract incorporating the standard (and any special) conditions of sale.
So far as the potential bidder is concerned, unlike a purchaser proceeding by private treaty, he will not know whether he has been successful until the auction has been held. Despite this uncertainty, a potential bidder must, in advance of the auction, be prepared for the consequences which flow from a successful bid. In this connection, he must make all the necessary standard searches preceding the signing of a binding contract and ensure that he has the appropriate finance in place so as to fund the purchase. For many, it will often be impracticable to proceed with a land purchase at auction where reliance is being placed on the sale of an existing property unless appropriate bridging loan facilities are in place.
Additionally, many purchasers of domestic property will be dependent upon the availability of a mortgage which will often prove difficult to secure before the auction sale. That said, several steps can be taken to facilitate the conveyancing process. Thus, it is relatively common for the vendor’s solicitors to effect local (and other) searches of the property before the auction and to make the results available to potential bidders. Also, standard enquiries before contract can be answered on a pro-forma basis.
Once a bid for the land has been accepted by the auctioneer, by the fall of the hammer, the successful bidder will be treated as having entered into a binding contract with the vendor. It is submitted, however, that this contract represents, in effect, a collateral contract with the vendor to buy the land in question. It is only after a bid has been accepted that the final stage of the auction process results normally in the parties entering into a written agreement, signed by both parties. This written agreement represents the formal contract of sale between buyer and seller of the land in question incorporating the general (and any special) conditions of sale.
If the purchaser refuses to complete the purchase, he will be in breach of his contract, for which the vendor may claim damages representing any difference between the price bid at the auction and any subsequent fall in the market price for the property.
In this connection, the auctioneer may be instructed to place the property back into auction at the next available opportunity so as to mitigate the seller’s loss. If there is a shortfall in price at a subsequent auction, the difference between this shortfall and the accepted bid of the bidder in breach will necessarily represent the seller’s damages for breach of contract.
If, on the other hand, a higher price is obtained at the subsequent auction, the seller would suffer no loss and merely nominal damages may be awarded to mark the breach. Conversely, if the seller refuses to go ahead with the transaction, the purchaser would be well-placed to seek a decree of specific performance of the contract or, if a decree is refused, to claim damages in lieu of performance.
Requirement of writing
For land sold at private auction, the requirement of a written agreement, signed by both parties in compliance with s.2(1) of the Law of Property (Miscellaneous Provisions) Act 1989, applies in the same way as it does for other standard land sales by private treaty.
Significantly, however, s.2(5)(b) of the 1989 Act expressly exempts contracts for the sale of land made in the course of a public auction from the formality of writing. In this connection, the Law Commission, Transfers of Land: Formalities for Contracts for Sale, etc. of Land, (Law Com No. 164, 1987), at para. 4.11, in reference to the desirability of providing a statutory exception for public auction sales, stated:
“We appreciate that the effect of our recommendation is that it will no longer be necessary for any written agreement to come into being. However, at present the [auctioneer’s] memorandum can come into existence and may be signed without actually involving the parties themselves. It is thus not a formality which necessarily serves the function of warning people what they are doing or making sure they understand the importance of the contract. There is little doubt that in the vast majority of cases the terms of the contract will continue to be put into writing, and if they were not, the courts would readily decide any dispute as to terms as they do now with other oral contracts. However, we propose confining this exception to public auctions since other forms of auction would still seem to call for the protective functions of formalities.”
The logic of distinguishing between a private and public sale at auction is hard to understand. The need for evidential certainty in terms of the price paid, the identity of the property and names of the parties must surely apply to both types of transaction. The effect of abolishing any requirement of writing in the case of land sales by public auction is to render such sales complete simply by the fall of the hammer as with chattels. However, the need for some form of written statement of terms in such cases is beyond doubt, not only to safeguard the interests of the buyer but also to protect the seller.
Since the Law Commission clearly envisaged there would always be such a document in practice, it is all the more surprising that the requirement of writing was not put on a statutory footing. As mentioned earlier, once a bid for the land has been accepted, the successful bidder is treated normally as having entered into a collateral contract with the vendor.
The mechanism of a collateral contract is an important and necessary mechanism so as bind the parties prior to a formal contract of sale which, it is submitted, has just as much relevance to public as well as private auction sales. In the writer's view, no distinction should be made between the two types of sale so that the written requirements of s.2 should apply to both types of transaction.
Points for the practitioner
Selling land at public auction raises a number of issues. Once a bid for the land has been accepted by the auctioneer, by the fall of the hammer, the successful bidder will be treated as having entered into a binding contract with the vendor.
This contract, however, represents, in effect, a collateral contract with the vendor to buy the land in question – an important and necessary mechanism, it is submitted, which is employed in order to define the parties’ legal relationship prior to the execution of a formal written contract of sale. So far as the sale contract itself is concerned, a distinction is drawn, as we have seen, between private and public auction sales in so far as s.2(5)(b) of the 1989 Act exempts public auction sales of land from the formality of writing.
Although the Law Commission, in its 1987 report, suggested that this caused no practical difficulties, it also acknowledged that, in the vast majority of cases, the terms of the parties’ sale agreement will be put into writing. In the writer's view, therefore, the protective functions of legal formality should apply to both private and public auction sales of land, not least in order to avoid the possibility of an evidential vacuum in such sales, but also to better reflect auction practice.
Mark Pawlowski is a barrister and professor emeritus of property law, School of Law, University of Greenwich gre.ac.uk/law