Buying a commercial property at auction can be an attractive option for business owners, developers and investors. Auctions offer opportunities to purchase shops, offices, warehouses, industrial units and investment properties, sometimes within a much shorter timescale than a conventional property transaction.
However, buying at auction also comes with risks. In a traditional unconditional auction, once the hammer falls, the successful bidder will generally be legally committed to the purchase.
You are not legally required to instruct a solicitor before bidding at a property auction, but obtaining legal advice beforehand is strongly recommended. Unlike an open market purchase, you will not have the opportunity to investigate problems or renegotiate the terms after your bid has been accepted.
At AFG Law, our Commercial Property team assists buyers with auction legal pack reviews, commercial property purchases and the legal work required to complete an auction transaction.
Why should you use a solicitor when buying property at auction?
When buying a commercial property through an estate agent, there is usually time for your solicitor to investigate the title, raise enquiries and review relevant documents before contracts are exchanged. However, the position is very different with a traditional property auction.
When the hammer falls, the successful bid normally creates a legally binding contract, subject to the auction terms. You will usually need to pay a deposit immediately and complete within the period specified in the contract, often around 20 working days. This means much of the legal investigation should take place before the auction rather than afterwards.
An experienced auction solicitor can identify issues that may affect the property’s value, its intended use or your ability to complete the purchase. For example, a commercial property might have restrictions on how it can be used, an existing tenant with legal rights or a title defect that makes obtaining finance difficult.
These are matters you ideally want to understand before committing to the purchase.
What is an auction legal pack?
When a seller lists a property at auction, their solicitor will usually prepare a collection of documents known as the auction legal pack. The pack provides information about the property and the terms on which it is being sold.
Depending on the transaction, it may include:
- Title documents and plans
- Special Conditions
- Searches and replies to enquiries
- Commercial leases and tenancy documents
- Planning permissions and related documents
- Information about rights of way and restrictive covenants
- Details of additional fees payable by the buyer
The seller’s solicitor prepares the legal documentation on behalf of the seller. They do not represent the buyer or provide independent advice about whether the property is a suitable purchase. It is therefore important to have the documents reviewed by a solicitor acting in your interests.
AFG Law offers an auction legal pack review service to help buyers understand the legal implications before bidding.
What does an auction solicitor check before you bid?
A legal pack review is an important part of your due diligence, particularly when purchasing commercial premises. Your solicitor can examine the title to establish what you are buying and whether any legal restrictions could affect your plans.
For example, if you intend to purchase a shop and convert it into offices or residential accommodation, you need to consider whether the title contains restrictions that could prevent the proposed use. Planning permission and other consents may also be required.
Your solicitor may also identify issues involving:
Existing commercial tenants
If a property is sold with a tenant in occupation, you need to understand the terms of the lease, rent payment and review arrangements and the tenant’s rights. A tenant may have security of tenure under the Landlord and Tenant Act 1954, potentially affecting your ability to recover possession of the property.
Our article on buying commercial property with a tenant in occupation explains why these arrangements require careful consideration.
Rights of way and access
Use of a property may depend on having access across neighbouring land. Your solicitor can investigate whether appropriate legal rights exist.
Restrictions and title defects
Restrictive covenants, missing documentation or inconsistencies in the registered title can affect the property’s use, development potential or mortgageability of the property.
Additional costs
The Special Conditions may require the buyer to pay costs beyond the purchase price. These could include search fees, seller’s legal costs, auction administration charges or other contractual expenses. The small print can make a significant difference to the overall cost of the transaction.
What are special conditions of sale?
The special conditions form part of the auction contract and deal with the particular property and transaction.
For example, they will specify the completion deadline, additional fees payable, the who pays the rent arrears or the consequences of failing to complete on time.
Some conditions may place responsibilities on the buyer that would not ordinarily arise in an open market commercial property purchase. It is important not to assume that all auction contracts contain the same terms.
A solicitor can review the special conditions and explain the financial and legal obligations you would accept by bidding.
Can you arrange a solicitor after becoming the winning bidder at auction?
Yes, but waiting until after the auction creates additional risks. In a traditional auction, you will likely be contractually committed by the time you instruct a solicitor. Your solicitor will still need to deal with the post-auction legal work, including reviewing the contract, dealing with completion requirements and arranging registration.
However, if a serious problem is discovered after the auction, you may have limited options. You cannot necessarily withdraw simply because the property is unsuitable, your lender refuses finance or the legal documents contain terms you had not appreciated.
For that reason, we recommend arranging legal advice before bidding wherever possible.
Do you exchange contracts at a property auction?
In an open market property purchase, the parties usually exchange contracts after the legal investigations have been completed and both sides are ready to proceed.
In a traditional auction, the contract generally becomes binding when the successful bid is accepted in accordance with the auction conditions. The memorandum of sale and other documentation record the agreement. The buyer then has to complete within the agreed period.
However, not every property that sells at auction follows this process. Some properties are sold through the modern method of auction. This generally means the buyer, when they make a winning bid, pays a reservation fee and enters into a reservation agreement. The buyer than has a fixed period, usually 56 days, to exchange contracts. A buyer in a modern auction is not generally bound by a contract until exchange of contracts takes place. If they decide to withdraw from a transaction due to a title issue, they may do so. It often means the buyer will lose their reservation fee but they will not face a claim for breach of contract.
What happens after you win a commercial property auction?
Your solicitor will receive the auction pack and the memorandum of sale from the auctioneers. , They will then confirm the completion requirements and liaise with the seller’s solicitor.
They will also prepare the necessary completion documentation and arrange for the purchase funds to be transferred.
Depending on the transaction, the work may include calculating Stamp Duty Land Tax (SDLT), submitting the relevant return and registering the transfer with HM Land Registry.
Commercial property transactions can involve additional considerations, including VAT, existing leases and lender requirements. If you are relying on finance, it is particularly important to establish that funds will be available by the contractual completion date.
AFG Law’s commercial property purchase solicitors can assist with the legal work involved in completing your auction purchase.
What happens if you cannot complete your auction purchase?
Failing to complete a traditional auction purchase can have serious financial consequences. Depending on the contract terms and circumstances, the seller may be entitled to retain the deposit, charge interest, claim damages or pursue other contractual remedies.
The property may also be resold, potentially leaving the original buyer liable for losses arising from their failure to complete.
This is why buyers should investigate the property, review the contract and establish how they will fund the purchase before bidding.
A low guide price does not necessarily mean a property is a bargain, particularly if it has legal complications or substantial additional costs.
Can AFG Law help with commercial property auction purchases?
AFG Law advises businesses, investors and developers buying at auction throughout Bolton, Bury, Manchester and across England and Wales.
Our Commercial Property team can assist with reviewing auction legal packs, identifying potential legal problems, advising on contractual obligations and completing the purchase.
We can also assist sellers who need legal documentation prepared before marketing a property for auction through our auction legal pack preparation service.
If you are considering buying a commercial property at auction, contact AFG Law before placing your bid. Call 01204 377600, email commercialpropertyenquiries@afglaw.co.uk, or complete our online enquiry form to discuss your requirements.