Belfast Telegraph

Saturday 1 November 2014

Avoid getting hammered by auction contracts

There are unforeseen issues with contracts
There are unforeseen issues with contracts

A pig in a poke: an offering or deal that is foolishly accepted without being examined first.

It is an old phrase originating from the middle ages but it still rings true today and is enshrined in the more familiar commercial principle of 'caveat emptor' or 'buyer beware'. Never is the concept more applicable than in the case of buying a property at auction.

A recent English High Court action has demonstrated some of the difficulties of buying at auction. The vendors were acting as executors of an estate and had no personal knowledge of the property. The purchaser was a property investor whose practice was to buy properties at auction simply by assessing their value based on the rental income and without viewing them. The auction particulars described the property as "a linked end terrace property arranged as a ground floor shop and self-contained flat above with separate street access". The ground floor shop had the benefit of a commercial letting. The first floor flat was not to be included in the sale and was to be leased back to the vendor by way of 125-year lease.

After the auction, at which the contract was signed and a deposit paid, it was discovered by the solicitors that the property also included a ground floor flat served by its own separate entrance door. The purchaser argued he had contracted to buy all the building save for the upstairs flat which was to be retained by the vendor. The ground floor flat would therefore have represented a windfall for the purchaser.

The vendor argued that the contract, on its proper interpretation, did not require him to sell the entire interest in the building and should be amended by the court accordingly.

The court ruled that the proper construction of the contract and the intention of the parties were in fact that the ground floor flat would be retained by the vendor on the same lease-back scheme as the upper floor flat. The court deemed that the contract should be interpreted in accordance with what it would mean to an ordinary reasonable person who had inspected the property and who knew what was visible on such an inspection. The court ruled that there was fault on both sides for failing to inspect the property.

Whilst there can be solutions to title problems for a cash buyer for certain issues that arise, more fundamental problems can lead to litigation and substantial financial loss. If you are not a cash buyer, convincing your lender to accept risks on issues that arise post-auction can be difficult and the contract will not be subject to finance.

Accordingly, if you are intending to buy at auction, be aware that most auction contracts provide that the buyer is deemed to have inspected the property, carried out the usual pre-contract searches and enquiries and is satisfied with the accuracy of the property particulars.

Alistair McKee is an associate partner in the commercial department of Worthingtons Solicitors, Belfast

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