Selling a Commercial Property at Auction: The Key Considerations

The Key Legal Considerations

Selling a commercial property at auction can be an effective way to achieve a swift and certain sale. However, the success of an auction often depends on the quality of the legal preparation undertaken before the property is marketed. A well-prepared legal pack helps minimise risk, provides bidders with confidence and reduces the likelihood of issues arising after the auction. Below are our key considerations from a legal perspective.

1.  Title and Searches

• The title register should be reviewed for any restrictive covenants, easements, boundary discrepancies, overage rights, mortgages/charges, or for any requirements of a landlord or superior landlord.
• Consider whether there are any title defects and, if so, seek to resolve them before the auction. Where any issues cannot be remedied in advance of the auction, consider whether indemnity insurance is a suitable alternative.  
• Consider whether to include up-to-date searches (local authority, drainage, environmental, etc) in the legal pack and order these in good time prior to the auction if they are to be included.
• Consider whether any environmental reports or known contamination issues should be disclosed, particularly where the property has previously been used for industrial or commercial purposes.

2.  Tenancies and Occupational Arrangements

• For investment properties, gather all relevant lease documentation that is to be included in the legal pack including current occupational leases, licences, rent deposit deeds, side letters and any superior leases.
• Consider whether there are any existing rent arrears, ongoing rent review or lease renewal negotiations, any pending break notices, service charge disputes or dilapidations claims.
• Confirm whether the property is to be sold subject to any existing tenancies or on a vacant possession basis and reflect this clearly in the special conditions.

3.  Auction Pack and Special Conditions

• The legal pack would usually contain official copies of the register and title plan, the special conditions, any search results, planning permissions, listed building consents, building regulations approvals and completion certificates (where applicable), the energy performance certificate (EPC), replies to commercial property standard enquiries (CPSEs) and any other relevant documentation.
• The special conditions are particularly important as they govern the timescales for completion (typically 20 business days), along with the deposit arrangements, apportionments of rent and service charge, and any liability for known defects.
• In the preparation of the special conditions of sale, sellers should consider whether they wish to include a clause requiring the successful purchaser to reimburse the seller's legal costs and disbursements. Where such a provision is included, it forms part of the contractual terms on which the property is offered for sale and should be clearly disclosed to prospective bidders before the auction.

4.  VAT and Tax Points

• Consider whether the property has been opted to tax.  If so, the sale will generally be subject to VAT unless the transaction qualifies as a transfer of a going concern (TOGC). If the transaction does qualify as a TOGC, it may fall outside the scope of VAT, provided the relevant conditions are satisfied.
• TOGC treatment may be available where the property is sold with the benefit of an existing property rental business, for example, where it is tenanted and the buyer intends to continue that business. This is subject to certain conditions including the buyer opting to tax the property before completion, where required.
• The VAT position should be made clear in the special conditions as this can affect the price payable by a prospective purchaser.
• Consider whether capital allowances information should be made available to prospective purchasers, particularly where fixtures and fittings are included in the sale.

5.  Completion Obligations

• Obtain redemption figures for any mortgage or charge and ensure the lender will release the security by the completion date.
• Calculate any apportionments of rent, service charge and insurance from the completion date and prepare completion statements in advance.
• Where the seller is a company, charity, trustee or attorney, ensure that any relevant authority to sell is evidenced and that any board resolution or trustee consent is in place.

6.  Misrepresentation Risk

• Bidders often carry out limited pre-auction due diligence, placing greater reliance on the legal pack and marketing materials. The seller is therefore exposed to misrepresentation claims if any information proves inaccurate.
• Ensure that the marketing particulars, auctioneers' details and the legal pack are consistent. Conflicting information — even if unintentional — can be actionable.
• Sellers should also notify their solicitors and auctioneers promptly if any information changes after the legal pack has been prepared but before the auction takes place.

Should you need expert legal advice regarding any of the above or indeed any other property law matters, please contact Jonathon Lewis at Jonathon.lewis@fieldingsporter.co.uk or telephone 01204 540900.

The contents of this article are for general information purposes only and shall not be deemed to be or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.