Buying a house at auction is not ALL the buyers risk

Apr 11, 2022

Buying a house at an auction has always been fraught with risk for the unwary. It is not always the case, but often a house is in an auction sale because there are problems with it that have made it difficult to sell on the open market in the usual way.

A buyer contemplating an auction purchase should:

  1. go and see it (or at the very least take a proper look at it on e.g. Google earth)
  2. get their own survey done as to the state of the property,
  3. ensure that their finance is all in place and,
  4. ideally have their solicitor review the auction pack information,

to ensure they understand what they are contemplating buying before they attend the auction and make a bid.

If their bid is successful, they will have to pay 10% of the purchase price immediately and complete the purchase 28 days later. The accepted bid is the contract as between seller and buyer and a buyer cannot then change their mind without losing their deposit.

Most people have heard of the maxim “caveat emptor” [Buyer beware] and because of the short timescales involved, it is particularly apt as a warning in an auction purchase.

However, sellers do have legal obligations to disclose title defects and to do more than make bland comments in the legal pack that the buyer was deemed to have knowledge of its contents. The SPS Groundworks & Building Ltd –v Mahil  2022 Appeal decision is a case in point.

Here, Ms Mahil bid at auction for a plot of land on 12 February 2019 with a view to having a family home for her built on it; as it was described as having “excellent scope for development”; and “a superb investment opportunity”; with both descriptions being qualified by the words “subject to planning permission”.

Her bid of £130,000 + vat was successful. She duly paid her £13,000 deposit and only after leaving the auction was, she (i) told by the local authority that it would not be possible to build on the land and (ii) downloaded the legal pack and discovered the overage clause.

She refused to complete; the seller issued a Notice to Complete and when she still refused, they accepted the contract was at an end, retained her deposit and arranged to sell the land again. The sale price achieved at the second attempt was £75,000 plus vat, so the seller then sued her for the shortfall. She counterclaimed for the return of her £13,000 deposit and the buyer’s premium she had been obliged to pay in the sum of £14,000.

She argued on two grounds (i) that she had been induced into entering into the contract by a misrepresentation on the part of the seller and (ii) that there had been a failure to disclose the title defect (namely the overage clause) and as a consequence she had been entitled to walk away from the contract.

She lost in the County Court; appealed to the High Court and was successful.

The High Court was very clear that her misrepresentation argument failed; but confirmed that the seller had a duty of disclosure in respect of defects of title and was obliged to give potential buyers full frank and fair information and a proper opportunity to get information about a title defect.

The High Court Judge was clear that just because a purchaser was imprudent in not checking things carefully (Ms Mahli had not read the legal pack prior to bidding); that did not remove the seller’s responsibility to make disclosure. References in the auction brochure and by the auctioneer of the need to read the legal pack were not enough to comply with the disclosure duty. The overage clause should have been specifically brought to a possible buyer’s attention, in the particulars of sale.

Ms Mahil got home because of a title defect. Had the problem been nothing to do with the title, her appeal would have failed, and she would have had to have paid SPS the £40,000 odd that they had sued her for (plus a substantial contribution to their legal fees).

To get her money back she had to take the case all the way to Appeal. Her legal fees would have far exceeded the £27,000 she was trying to recover, and any costs Order made against SPS, would most likely have been for “standard costs” which generally work out at about ⅔ of actual costs.

Buying at auction is still fraught with danger for the unsophisticated buyer. However sellers also need to bear in mind that title defects cannot be “buried in the small print” or reasonability passed across to the bidders; by relying on standard auction conditions that state that “the lot is sold subject to all matters contained in the documents”.

How can we help?

If you have a property dispute that needs settling, you can contact our Dispute Resolution team at drteam@herrington-carmichael.com who can advise your best options.

 

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Frankie Tierney

Frankie Tierney

Partner, Disputes Resolution

t: 01276 854 917
e: frankie.tierney@herrington-carmichael.com

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