©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.