Auctions: purchasing property

Points to consider

9 May 2014

Jeremy Ferris looks at the three principal areas to consider when intending to purchase at auction

There is an auction in two days' time and I want to buy an industrial site next door to my existing haulage business to increase parking capacity. The site has various occupiers – the owner tells me that none of them have written agreements and they will all be willing to leave. The auction particulars confirm that there are 'various occupiers' on site and that the purchaser should 'make their own enquiries'. What are the risks in proceeding?

The auction is imminent and there are limits as to what certainty can be given in that period. There are, however, 3 principal areas to consider:

  • the legal process at auction;
  • the status of the occupiers; and
  • any unusual aspect of the purchase.

Winning bid

It is well known that when the hammer falls, a winning bid will constitute an immediate and legally binding contract. The bidder will therefore immediately become liable to pay a 10% deposit with completion of the purchase usually within 28 days. If they cannot pay the remaining 90% of the purchase price within that period – and therefore cannot complete – they lose the deposit.

It is well known that when the hammer falls, a winning bid will constitute an immediate and legally binding contract

The necessary due diligence will include obtaining the legal pack, which can usually be downloaded from the auctioneer's website, and carefully checking the information and property details provided, noting whether there have been any last minute addendums that will be available on the day of the auction. This is particularly important because these will form part of the auction contract.

Multiple occupiers

There are various occupiers; there is however scant information as to how or what they occupy. There are very significant financial and timing risks in proceeding with such a transaction. The intention is to clear the site to allow further parking for vehicles and possession of the majority of the site is therefore required. You need to check with the vendor's solicitor whether it is true that none of the occupiers has a written agreement.

The Landlord and Tenant Act 1954 provides that, an occupier of 'business premises' has protection from eviction and the right to a new lease unless the landlord is able to prove certain 'grounds for possession'. This applies even if there is no written agreement. Not less than six months' notice must be given. You would not be able to rely on  ground (g), that occupation was required for the purposes of your own business, for a period of 5 years from purchase, but you might succeed on ground (f), relating to demolition or reconstruction.

A quick search of the rating list will give an indication of the number and extent of the occupiers and legal advisers can then start to advise as to the risks of proceeding.

You must be advised that a tenant might dispute the validity of your claim for possession and may pursue the matter through court. That may result in a delay of perhaps a year. Further, an outgoing tenant who has protection under the Act will be entitled to be compensated for its eviction even if a valid ground can be established. Such compensation depends on the duration of the tenant's occupation, and may be as much as twice the rateable value of the property.

If successful at auction, to avoid that protracted process (and to give protection as to the legal costs that might be incurred) you should offer a protected tenant a sum that is just greater than they would otherwise be entitled to under the Act. Once an offer is made, any tenant would render themselves liable for the legal costs of proceedings from the date they rejected such an offer.

Property and land searches

Ideally, before the auction the usual property and land searches should be made to ensure there are no problems beneath the surface. Time is limited here but enquiries may still be made. This is an industrial site so a contaminated land report should be obtained to assess the extent of contamination (and the costs of a clean up) and enquiries made as to whether planning is needed for the client's intended use. Also, you will need to be satisfied as to the access to the site.

There is therefore a great deal to do and some of the searches inevitably cannot be concluded in that period. If legal advisers identify the problem areas, you will have to use your knowledge of the site to assess the risks and make a judgment as to whether to proceed. The anticipated timescale, expenditure on legal costs and compensation payable to outgoing tenants can all be factored into the decision, and what sum to bid for the property.

Jeremy Ferris is Senior Associate at Furley Page LLP