The potential risks and pitfalls of buying Commercial Property at Auction

While the advantages of buying a commercial property at auction are very attractive, there are also several disadvantages which all Buyers must be aware of from the very outset:

• Unable to raise enquiries: usually when dealing with a property purchase on the open market, a Seller’s solicitor will provide a set of documents to the Buyer’s solicitor and the Buyer’s solicitor will continue to ask questions until completely satisfied prior to completion.

However, in an auction sale, an auction legal pack is provided by the Seller. This is a set of documents provided by the Seller and can include copies of the title register and searches.  However, not every legal pack will contain full information about the property.  Key documents such as asbestos surveys, fire risk assessments, gas and electrical certificates may be missing from the legal pack or be out of date.  All Buyers should review the legal pack carefully before the auction date before deciding on whether to bid or not.

Once a bid has been accepted and the auction contract has been exchanged, there is little or no opportunity to ask the Seller’s solicitor questions about the property. The auction legal pack may be incomplete and not contain everything the Buyer’s solicitor or lender needs thereby leaving the Buyer facing the decision whether to withdraw and risk losing the deposit or to proceed ahead and potentially end up with a property that has a defective title.  Although a Buyer may be willing to proceed if material defects are identified after the auction date, the chances of a lender willing to lend will be slim.

• Payments: Once a Buyer has placed a successful bid, it is vital that they have access to all of their funds needed to complete within the relevant timescales. On the day of the auction, the Buyer will need to pay a deposit (which is usually 10% of the purchase price) and any other auction fees.

On the agreed completion date, the Buyer will need to pay the balance of the purchase price plus any additional sums referred to in the auction contract. If, a Buyer is funding the purchase with a commercial loan then this must be in place in time for completion.  Often, the time it takes to obtain a loan offer and drawdown on the loan money is not done quickly enough for an auction property.  It is important to make a lender aware when applying for a loan for an auction property so that it can be actioned quickly.

• Limited time for surveys: Properties at auction are sold “as is”, and so may be in poor condition. It is common for properties that have been repossessed to be placed into auction. It is often the case with these properties that there is damage or repairs that are required. Once a Buyer has exchanged on an auction contract, they have entered into a legally binding contract with a set completion date. As a result, the Buyer will have limited to arrange for a building survey which may flag any structural defects in the property. It can also be difficult to arrange access to auction properties for the purpose of carrying out a survey before the auction date.  Ideally, all surveys should be done prior to the auction date, however due to time constraints, many Buyers bid for properties without arranging for any surveys at all.

• Not understanding the auction legal pack: Many Buyers read an auction legal pack but do not completely understand the contents and so may end up buying a property which has a defective title or is not fit for immediate occupation. It is also important for Buyers to not only understand the contents of the legal pack but know what documents may be missing from the pack and why that is a risk.  Not properly reading or having any legal assistance when reviewing the legal pack can present a variety of different risks in itself, which could have been mitigated if a solicitor was instructed in good time.

• Misunderstanding the auction buying rules: Auctions themselves can be fast-paced and stressful, especially for first time auction bidders. There are several different auction houses and also different auction methods (e.g. The Modern Method or Traditional Method), each with their own rules.

This is why it is so important that Buyers familiarise themselves with the auction process well in advance of bidding for any properties.  It is important that a Buyer understands the auction process and fully understands how auction fees are calculated, when payments need to be made, when completion is to take place and the consequences of pulling out and not proceeding to completion.