AUCTION CAUTION

©The Star

(Used by permission)

 

by Bhag Singh

 

Properties sold at an auction may appear to be cheap. But buyers need to understand the various aspects that could indirectly hike up the price. LOOKING at the advertisements in the daily newspapers, it would appear that a large number of properties are being auctioned off every weekend. The indicated prices appear to be way below the market price, making it appear like an attractive purchase.

 A reader wanted to know whether it is safe to buy a property at an auction, and whether the buyer is adequately-protected by the law. He also asked if properties could be auctioned off without a court order.

Well, court approval is only required if there is a precondition in the loan agreement requiring approval of the court before it can be sold. Otherwise the court is only involved if the land has a charge registered under the National Land Code.

 

Right to sell

 Almost all the auctions in the advertisements include a reference to a bank, a financial institution or a borrower. This would suggest a loan default scenario. The words “assignee” and “assignor” in the advertisements suggest that the property in question does not have separate individual titles to enable a charge to be registered.Where there is no individual title and the loan is granted on the basis of a loan agreement and a Deed of Assignment, the lender is entitled to dispose of the property on the strength of a Power of Attorney, unless there is a restriction.

 In fact, most such documents allow the lender to dispose of the property without any prior court approval. The agreement may not mention an auction but the auction mechanism is utilised to make the intended disposal known to a wider audience to get the best price and show transparency.Before buying a house at an auction, the buyer needs to be aware of the issues and complexities involved. The offer price may appear to be cheap but there could be other aspects that could increase the cost of the transaction.

 

Contractual relationship

 To start with, the property may not necessarily be available at the indicated price. This is merely the reserve price at which the bidding will start. Depending on the property and the buyers it has attracted, the price could end up much more than the reserve price.

 An auction creates a setting to put in place a contractual relationship between the parties involved. The process starts with the publication of an advertisement.Following the advertisement, the auctioneer invites bids for a particular item for sale and starts the ball rolling. This is referred to as an invitation to a treat. If a bid is made pursuant to such invitation, that in law constitutes an offer, which the auctioneer is free to accept or reject. However, the sale by an auctioneer is concluded when he announces its completion by the fall of the hammer or in any other customary manner.

 The next question that arises is: what are the terms and conditions on which the property is purchased? When property is purchased from a developer, there is the standard Sale and Purchase Agreement, if it is a housing accommodation. When a property is acquired through a sub-sale, the terms are set out in the Sale and Purchase Agreement, which is the result of negotiations between the parties. Conditions of sale

However, the scenario in an auction sale is different. This is because the property is sold based on the Conditions of Sale, which become the terms on which the property is transacted.

 These Conditions of Sale are always available before the auction takes place. An individual bidder at the auction ought to obtain and familiarise himself with these terms and conditions before the bid. This is because if the bid is successful, he will be deemed to have entered into a contract on those terms.

An example of a clause in a Condition of Sale which illustrates the risks a bidder must assume when he purchases a property, reads as follows:

“The property is sold on an ‘as is where is’ basis without vacant possession subject to (a) all express and/or implied conditions, restriction-in-interest affecting the Master Land and that which may be imposed/endorsed on the document of individual strata title to the property upon the issuance thereof, (b) all easements, covenants, charges, caveats, liabilities, (including but not limited to liabilities to the local authorities incurred but not ascertained and any rates made but not demanded) and any adverse claims in respect of the Property; and (c) all tenancies, lease, occupiers and rights (if any) of any tenant or occupier, subsisting thereon or therefore without any obligations arising to define the same respectively.”

 It is a common and acceptable practice to purchase a property subject to express and implied restrictions endorsed on the document of title. But if there are tenants on the land, the bidder has to take the responsibility of evicting them and bear the costs incurred with the added risk that compensation may not be recoverable. The same would apply in the case of a need to have a caveat removed. This is different from purchasing a property from a developer or an ordinary individual where the vendor has an undertaking that the property is free from encumbrances which could include caveats, and that the seller will hand over the property to the buyer with vacant possession as part of his obligation.

 To reinforce the rights of the seller or rather the seller’s lack of obligations, such Conditions of Sale often provide a condition binding the purchaser to admit that he has inspected the property and is buying it in the condition that it is in. An example of a Condition of Sale which exonerates the seller from handing over the property with vacant possession has a clause which reads as follows:

 “The successful purchaser shall at his own costs and expense take possession of the property after the payment of the balance purchase price. The assignee/lender or its agents have no obligation to deliver vacant possession of the property and the successful purchaser is prohibited from entering the property before the payment of the balance of purchase price and/or late payment interest.”

 

Need for caution

 It would be in the interest of the bidder to visit the property and inspect it to familiarise himself with the condition of the property. The photographs in the newspaper or leaflet may not convey the real state of the property which the bidder expects to acquire. These are just some of the conditions of sale. A detailed examination of the Conditions of Sale in auctions could disclose a host of responsibilities which the seller may exclude himself from.

 In conclusion it must be said that a valuable property may well be acquired at an auction. However, there is a need to make adequate inquiries and investigations, and consider all the factors in order to end up with a good bargain.