Partner Katja Wigham, in our Commercial Property team, provides advice if you are considering purchasing a commercial freehold property at auction.
Purchasing a commercial property at auction, whether to use ‘as is’ for commercial premises or as a development project, has its benefits. The auction process itself is quick, and the property can often be purchased at a cheaper price. However, there are important things to consider when purchasing a property/lot at auction.
You are bound by the contract as soon as the hammer falls, you therefore need to be sure that you can complete the purchase, and that you are content with what you are buying.
A ‘legal pack’ will usually be available to download from the site on which the property/lot is being advertised. The legal pack contains information relating to the property/lot, typically including title documents, replies to standard property enquiries, property search results (although not always) and possibly any other documents that may be held (e.g. surveys, warranties etc.).
It is common for a prospective purchaser to delay seeking legal advice until they know that they have been successful with their bid in order to avoid ‘wasted’ legal costs if they will not be purchasing the property/lot. We can however offer a brief review of the legal pack in which we would raise any red flag issues with you, this would not be a full in-depth report but would highlight any issues that could affect your decision to bid in the first place.
As an example of how waiving review of the legal pack and proceeding directly to purchase can be detrimental, the title to the property may contain a restrictive covenant which prohibits the use of the property for anything other than a ‘piece of land’. If you intend to develop and use the property/lot for another purpose, then you would be in breach of this covenant (regardless of whether you were successful in obtaining planning permission for the proposed development as this is a separate issue). Breaching restrictive covenants can be costly if enforced by those benefitting from the same and could, as with this example, make the property unusable and you may then be forced to sell on at a loss. This would of course waste time and money, when an initial review could have revealed the issue.
If you will be relying on a mortgage to complete the purchase, an initial review of the legal pack is perhaps even more crucial as the lender will require investigation of the title to ascertain whether the property will provide sufficient security. If there are defects in the title this could adversely affect the value of the property, or prevent the lender from agreeing to loan the monies for completion at all. Without the mortgage proceeds it may be that you would default on the purchase, in which case you would be required to pay compensation and would lose your deposit (subject to the terms of the contract you have entered into).
It is therefore recommended that legal advice is sought and an initial review of the property documents is carried out before committing to buy a property/lot at auction.
For further information or legal advice, please contact firstname.lastname@example.org or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.