Buying a commercial property at auction can be a great way to acquire a property at a lower price than what you can expect to pay on the open market. However, the process can also be complex and risky, so it is important to seek legal advice from a commercial property solicitor before you embark on this path. In this article, we’ll take you through the auction purchase process, highlighting some key considerations when buying commercial property at auction.
- Advantages and disadvantages of buying commercial property at auction
- Steps to take when purchasing a property at auction
- Can you make an offer on the property before the auction takes place?
- What happens if you don’t go ahead with the purchase?
Advantages and disadvantages of buying commercial property at auction
It is important to be aware of the advantages and disadvantages before making a decision to purchase a commercial property at auction.
The advantages are:
- It is often a cheaper method of purchasing property than through traditional methods.
- It can be a good option if you need to purchase a property quickly and efficiently. Delays can be avoided as there is less of an opportunity to negotiate documents and raise enquiries than there are with the standard purchase process, and there will also be a fixed completion date which is usually set within 28 days of the auction.
The disadvantages are:
- It is inherently riskier, particularly if you do not do your due diligence before you bid at auction. You also have less time to do your due diligence checks. You can minimise these risks by instructing a commercial property solicitor to review the auction pack ahead of the auction.
- Some properties may have defects which may make them difficult to sell on the open market and may require extensive repair work to be done or planning permissions to be obtained in order for the property to be fit for purpose. There may be hidden costs or issues with the property that are not immediately apparent.
- It can often be harder to finance the transaction due to the limited timeframe. You will also need to ensure you have funds available to pay a non-refundable deposit (which is usually 10% of the purchase price) on the day of the auction.
- The contract for sale will be binding at the auction when the hammer falls and there will often be no opportunity for renegotiation, which means that you will be committed to the purchase even if issues arise later that were not immediately apparent.
Steps to take when purchasing a property at auction
Do your research
If you are successful at auction, you will be legally bound to purchase the property. Property purchases are governed by the principle of ‘buyer beware’ which means that the responsibility is on you to find out everything you need to know about the property before you commit to it and to satisfy yourself that there are no dealbreakers or any factors which influence the amount you are prepared to bid. It is therefore essential to carry out thorough due diligence before bidding to ensure that the property is suitable for the intended use and to avoid any potential pitfalls or liabilities.
Most property information will be included in an ‘auction pack’ which will be provided ahead of the auction. The auction pack is usually prepared by the Seller’s solicitors and will give you valuable insight into the property. It will typically contain the legal documents relating to the property including:
- Auction terms and conditions.
- Contract for sale – this will comprise of a set of general conditions based on a standard form, plus any special conditions that apply to the specific property.
- Title register and title plan relating to the property – this will show you details of outstanding charges/mortgages on the property that will need to be released on completion, any consents that are required prior to completing the purchase and it will also set out any rights benefitting or burdening the property and any covenants which govern how you can use the property.
- Leases or tenancy agreements if the property is being sold subject to tenancies.
- Search results – there may also be a special condition in the contract which states that the buyer must reimburse the seller for any search results provided.
- Replies to pre-contract enquiries along with associated documentation such as planning permissions, energy performance certificates, asbestos reports and fire risk assessments.
It is crucial that you thoroughly review the auction pack to ensure that all necessary information is disclosed. Commercial property solicitors should be instructed as they can review the auction pack and help identify any potential issues with the property before the auction such as:
- Lack of planning approval to use the property for the intended use. It can be very expensive to apply to change the use of a property and you are not guaranteed that the local planning authority will grant a planning permission. You will need to ensure that you have factored in any cost implications and the time periods involved in making a planning permission, and you may also need to take advice from a planning consultant on the likelihood of a permission being granted;
- Restrictive covenants which may be breached by any proposed development or use of the property. Your commercial property solicitor can assess whether or not these covenants are enforceable and can provide advice on whether or not a release can be obtained;
- Lack of formal access rights to the property. If the property does not directly abut a public highway, formal rights will need to be granted over any land between the property and the highway or indemnity insurance will need to be obtained;
- Potential ground movement issues as a result of the property historically being used for mining purposes; and
- Identifying missing information and raising enquiries with the seller’s solicitor to request any additional required documents.
The examples above can be expensive to remedy, so it is always a good investment to seek legal advice from a commercial property solicitor before you purchase a property at auction.
Arrange a viewing
You will often have an opportunity to view the property in person before the auction takes place. It is important to take this opportunity to inspect the property carefully before you commit to the purchase in case it reveals any matters which have not been disclosed in the auction pack. A seller has no duty to disclose any matters which would be discoverable on inspection of the property.
You should use the property viewing as an opportunity to:
- Check the surrounding location of the property to see if it is suitable for the existing/intended use. For example, footfall and parking may be important for physical retailers and local transport links will likely be important for manufacturers or warehouses.
- Identify any remedial work that will need to be done that may not have been apparent from the photographs or could otherwise be easily overlooked.
- Identify undisclosed matters i.e. evidence of rights of way or occupiers.
- Investigate how the guide price compares to similar properties in the surrounding area.
Commission a survey
It is strongly recommended that if you are seriously interested in buying the property, you should commission a survey before bidding. A survey can help identify major defects or issues that may not be visible during a viewing such as subsidence or Japanese knotweed.
Sellers use auctions to sell problematic properties where they cannot be sold through traditional means, and a surveyor is more likely to uncover these issues by identifying tell-tale signs.
It is important to ensure you have received a mortgage offer in principle before the auction if funding is required, because you have a contractual commitment to purchase the property once you have been successful at auction. Your commercial property solicitor can advise you on the legal process of obtaining funding and the legal implications of the funding arrangements.
When deciding whether or not funding is required, you should factor in all other associated costs of the auction such as auction fees, stamp duty land tax and professionals’ fees. You should also ensure that you have the funds to pay the deposit on the day of the auction.
If you leave the issue of funding until after the auction and are unable to secure a mortgage offer, you may not have the funds to be able to complete and risk losing your deposit. Alternatively, you may be forced to use expensive short term funding solutions such as bridging finance.
Can you make an offer on the property before the auction takes place?
You can usually make an offer before the auction takes place and this can be a good way to avoid a bidding war with other interested parties, but it is advisable to contact the auctioneer and check the auction terms and conditions to make sure.
A formal written offer will usually be required which should set out the purchase price and any other terms and conditions of the offer. If the seller is desperate to sell quickly, they may be open to accepting your offer as it is realistic, however you should be aware that this could result in paying a higher purchase price than would have been achieved at auction as the seller is unlikely to accept the offer if they feel they will get a better price at auction.
The auctioneer will put your offer forward to the seller and there may be some negotiation. Once the terms have been agreed and/or the offer accepted, the purchase will usually progress based on the usual auction terms.
What happens if you don’t go ahead with the purchase?
If you successfully bid for a property at auction but subsequently change your mind or find yourself unable to secure funding, the seller may serve a ‘notice to complete’ any time after the agreed completion date. This notice will give you a 10 working day grace period in which you may complete the purchase.
If you fail to complete the purchase within this timeframe, the seller is entitled to treat the contract as terminated and has various options available to it including:
- Retaining the deposit; and
- Claiming damages from you to cover any losses it has suffered as a result of your failure to complete.
A failure to complete can be costly when you are the party in default, which is why it is so important to ensure you receive appropriate legal and other professional advice prior to the auction.
With proper legal advice, buying a commercial property at auction can be a great investment. There are, however, several pitfalls you will need to avoid if you want your purchase to go ahead smoothly.
A commercial property solicitor can help you carry out any due diligence work and can advise you on the legal process associated with the different funding options available to you.