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Anjana Pathare Dahya
Commercial real estate
There are various kinds of properties that may be suitable for sale at an auction. These include properties that are hard to value or that need renovation, properties that are let to tenants, and properties that need planning permission for their use.
2 minute read
1 March 2022
The main advantages of selling at an auction are certainty of sale upon the fall of the hammer, and speed in that the sale contract is binding on acceptance of a bid at auction, which cuts out lengthy negotiations. Ease and efficiency are also incentives – the popularity of online platforms for property auctions, rather than the traditional in-person style, has in some ways transformed the auction process.
The primary disadvantage of an auction sale is arguably the cost. The seller has to pay the auctioneer’s fees even if a property is not successfully sold. If it is sold, the auctioneer’s commission fee could also be higher than an agent’s fee on a private sale. There is though the chance that the seller may ultimately gain more than what it was expecting, if bids are made beyond the set “reserve price” of the property. The final buying price may therefore be higher at an auction than in a privately arranged sale.
The auctioneer will have various deadlines for the seller to submit items for the auction of the property. Traditionally known as an “auction catalogue”, which contains specific details of the property to be sold, the equivalent with online platforms may be known as the “particulars of sale page”, which goes live on a set date. The content of the draft or “proof” particulars of sale page need to be reviewed by the seller and its legal advisers to ensure that it is accurate prior to the deadline.
The seller and its legal advisers must also prepare and submit a legal pack to the auctioneer, in preparation for the auction sale. The pack will include the official title register and plan, leases and other tenancy documents, replies to standard enquiries and applicable supporting information such as property search results, service charge information, insurance documents, asbestos reports, VAT information, fire risk assessments, health and safety reports and energy performance certificates (“EPCs”). The seller will also be required to provide the draft sale contract – this may comprise the “general conditions” of sale, together with certain “special conditions” that apply to the specific lot that is being sold by the seller. Further transaction documents, such as a draft transfer deed and, if relevant, draft rent authority letters, may also be included. With online auctions, the legal packs (together with EPCs and draft contractual documents) can be uploaded by the seller’s legal advisers to a specific portal on the auctioneer’s website, after which marketing of the property commences and the items will be made available online.
Tenanted properties may present some challenges to sellers. Such properties may be subject to tenants’ rights of first refusal under the Landlord & Tenant Act 1987, so the seller will have to comply with statutory notice procedures in order to offer the property for sale at auction. The seller will also have to include full and complete copies of tenancy documentation, together with service charge documents, rent payment histories, rent deposit information and other relevant material, for example correspondence relating to any tenant disputes. This process may be cumbersome if the property is very heavily tenanted, and the documentation is difficult to gather. With sales of leasehold properties that require landlord’s consent, the contract will also usually be conditional upon such consent being obtained. Business tenancies may also be protected by statutory security of tenure under the Landlord and Tenant Act 1954, which may not be attractive to an incoming buyer as new landlord.
As mentioned, the seller has to adhere to a fairly strict auction timetable and may have to accept that ultimately, the property may not be suitable for auction, or that it may be difficult to adequately prepare the documents for an auction sale. Care needs to be taken to ensure there is no incorrect or misleading information provided to the auctioneer, which may then be made available to the public at large. The prospect of hefty auctioneers’ fees and commission charges may also be off-putting to sellers, as well as compliance with the auctioneer’s own stringent due diligence and money laundering checks. Ordering property searches and up to date EPCs may also contribute to time and cost pressures on the seller, so it would be worth considering what is needed and ordering these early.
Despite some potential hurdles however, selling at auction still appears an attractive option to many property owners. The comfort factor of having a reserve price, together with the speed, simplicity and the relative certainty of sale, minimises the seller’s time and energy spent in achieving a sale by private means or prolonged negotiations. The trend towards online property auctions means that the process is also arguably becoming more streamlined. Such “virtual auctions” also seem to be particularly valuable at this current time, given the unpredictable nature of the pandemic and on-going requirements for social distancing.
1 March 2022
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