Buying property is always a bit of a risky endeavour. When you agree a sale through an estate agent you have a bit of leeway though. This is because the seller or the buyer can pull out of the sale without any kind of penalty. It's not the same with property auctions though.
Buyers can pull out after an auction, but it comes with heavy penalties. This is because they'll be in breach of contract. They'll lose the deposit they paid (which is normally 10% of the purchase price), and may be liable for additional costs too such as the seller's fees, and other penalties.
Let's cover auction contracts in more detail, including what you need to do to protect yourself if you're planning to buy at auction.
1. Is a property auction legally binding?
Property auctions are legally binding from the moment the gavel falls. At this point the property officially exchanges, and the buyer and seller are legally committed to completing the purchase. However, you can retract a bid before the hammer falls.
The first part of this is set out in Section 57(2) of the Sale of Goods Act 1979:
"A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other customary manner"
So once the hammer falls, the deal is done and you're in contract to complete. It's legally binding.
However, the same piece of legislation also states the following:
"until the announcement is made [i.e. the fall of the gavel] any bidder may retract his bid."
This means that you can still withdraw your bid during the auction, but not once the hammer has fallen.
If you place the highest bid and the hammer falls then you're in a legally binding contract with the seller. You must complete otherwise you'll be in breach of this contract.
This is summed up nicely by Jon Stock, a Litigation Solicitor at Cunningtons LLP: "When you put in a bid on a property at auction, the moment the hammer falls, if you are the top bidder, you are contractually bound to complete the purchase".
1.1. What if you change your mind after an auction?
If you change your mind after the auction then you can decide to withdraw from the purchase, but this will result in heavy penalties. You will forfeit the deposit you've paid (which is usually 10% of the purchase price). You may also have to cover the other side's costs, and any other losses they incur as a result.
This makes "changing your mind" after the auction a very costly choice!
Why would a buyer change their mind after an auction?
There are 3 main reasons buyers change their mind after an auction. All are largely preventable - so it pays to be prepared.
- Condition: You may find something wrong with the condition of the property. (For example you may find out it has structural issues, or you identify Japanese Knotweed there).
- Legals: Your solicitor may find something wrong with the legal title of the property. (For example, there may be enforcement notices or restrictions that affect your plans).
- Change of circumstance: Maybe things just change, and you decide you no longer want to go through with the purchase for personal reasons.
Remember, "problem properties" are one of the main types of properties that go to auction, so due diligence is especially important.
Withdrawing from an auction purchase for any of these reasons is likely to be very costly.
Pre-auction due diligence
This is why you should always do thorough due diligence on a property before bidding at auction:
- You should get a survey on the property to check it's condition,
- You should have a solicitor review the legal pack, to check for any legal issues.
Although this requires a bit of up-front cost, it can save you a fortune. For example, if the surveyor or solicitor finds a serious issue that dissuades you from bidding and helps you avoid a money-pit, it may be the best money you've ever spent!
Finding these types of issues after the auction has finished can cause further problems though. For example, if you were going into the auction with financing ready (such as a mortgage), then your mortgage offer could be affected if you uncover issues later on.
What if this happens, and you no longer have the funds to pay?
1.2. What happens if you bid at an auction and can't pay?
If you're the highest bidder when the gavel falls then you're legally committed to the purchase. But if you can't pay then you won't be able to complete. This would put you in breach of contract. You'd lose your deposit, and face other penalties too.
We've covered this topic in more detail here, but this article contains a good overview.
You should always go into an auction with your financing all ready to go. Never bid hoping to "figure it out" later on.
However, even if you get your financing in place before the auction, you may still face financing problems. These can materialise if you uncover some structural or legal issue with the property after you've placed the winning bid.
These need to be disclosed to the lender, and at that point they may decide not to lend. This leaves you with no way to complete the purchase.
"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"
- Cunningtons Solicitors, a firm authorised and regulated by the SRA.
Again, it's just so important to do due diligence before the auction. Even if you're a cash buyer you should do it, but if you're relying on a lender then you certainly should. Otherwise, you risk being in this position.
If you can't pay you'll face heavy penalties for having to withdraw.
1.3. What penalties are there if you don't complete an auction purchase?
In general, you face up to three types of financial penalty:
- You'll lose your deposit (typically 10%) or reservation fee (typically £6,000).
- You may have to cover the the other side's fees too.
- You may even be liable for future losses they might incur.
This depends on the type of auction. If you're buying through a traditional auction you'll forfeit your 10% deposit. If you're buying through a modern auction then it's typically less as you pay a reservation fee rather than a deposit. A reservation fee is typically around £6,000. Still a significant amount though.
Unfortunately, you may face other penalties on top. You may need to cover the seller's legal fees, and any other losses they incur as a result of you withdrawing from the purchase.
Damages & depreciation
The "other losses" can even include depreciation of the property. Here's a quote from Co-op Legal Service's article on the matter:
"The seller can claim damages: The seller could claim losses incurred due to market depreciation – so if the value of the property has decreased from the date the contract was breached the buyer has to pay the difference"
- Co-op Legal Services, authorised and regulated by the SRA, registration number 567391
As an example, imagine a situation where the property falls in value between when you withdraw from the purchase and when the seller can next sell it. If this happens you may have to compensate them for this fall in value.
If you're considering withdrawing from an auction purchase you should absolutely consult with a solicitor to see how costly it could be for you.
Should you still withdraw from an auction in spite of the penalties?
Despite the heavy penalties you'd face if you fail to complete, it may still make sense to withdraw from the purchase in some cases. This may be the case if you feel the cost of the issues you've uncovered are going to be more than the penalties you'll face.
You should consult a solicitor if you're thinking about this. You're really between a rock and a hard place either way. (This is why pre-auction due diligence is so important).
But what if you feel hard done by with the auction? What if you feel the property was actually mis-sold, and you should be the one who's compensated?
2. Can you get out of an auction contract?
As we've covered, you can withdraw from an auction, but you have heavy penalties to pay because of the contract you're tied into. However, is it possible to get out of an auction contract altogether?
In most cases you cannot get out of an auction contract. However, if the seller has made misrepresentations about the property then you may have a legal claim against them. This could get you out of an auction contract.
This is complicated area of law though, and you should consult a specialist in contract law.
The nuts and bolts are as follows:
- Section 3 of the Misrepresentations Act 1967 covers terms within a contract that try to exclude or restrict a seller's liability for making misrepresentations. (In very simplistic terms, it restricts you from just creating a contract that basically says you can lie about the property!)
- It says that any such contract terms are of no effect unless they're reasonable.
- If the terms are unreasonable, and if the seller has made misrepresentations, then you may have a claim you can pursue.
- This could get you out of the auction contract.
As we said though, this is a highly technical area of law and any situation would need to be approached on a case-by-case basis.
To learn more, check out this fantastic article by Cunningtons Solicitors on Misrepresentations at Property Auctions.
3. What happens if you back out of an auction bid?
In this article we've covered the fact that auctions are legally binding, and we've run through the penalties you'd typically face. But what about the actual process if you withdraw from an auction?
We'll be covering this topic in a future article. To subscribe for updates, email us at firstname.lastname@example.org.
By Matthew Cooper, Founder of Home Selling Expert