Property Auction – Bait Guide Prices, Phoney Reserves and Illegal Bidding

11 Hurstwood Court, Finchley Road, London NW11 0AP

A purpose-built, two-bedroom flat held on lease for 99 years from 21 January 1936 at 18 guineas p.a. Less than 12 years unexpired.

  • 19 Jan 2012 – Lease purchased by a charity for investment
  • 4 April 2023 – Lease offered at auction by Barnett Ross on behalf of that charity: guide price £80,000 – hammer price £155,000.
  • Soon afterwards – Booked into Savills’ auction sale for 10 May by the auction buyer.
  • 9 May 2023 – S.42 Notice (LRHUD Act 1993) served on freeholder (lessee-controlled company) claiming new lease proposing to pay £69,995.Counter Notice required by 26 July 2023.
  • 10 May 2023 – Savills’ auction: Lot 32. Published guide price £80,000. Barnett Ross raised concerns in view of contract at £155,000. Lot withdrawn and removed from catalogue.
  • Soon afterwards – Booked into Auction House London auction sale for 24 May.
  • 15 May 2023 – Auction buyer completes purchase at £155,000.
  • Mid-May 2023 – Auction House London catalogue published: Lot 16: guide price £80,000. Legal pack included EPC and Conditions of Sale only.
  • 19 May 2023 – Solicitor for the freeholder (my client) notified lessee’s solicitor and auctioneer by letter that the S.42 Notice of Claim is contended to be invalid.
  • 19 May 2023 – Guide price changed to £140,000+. Other documents uploaded to auction pack, including letter from freeholder’s solicitor.
  • 23 May 2023 – Guide price changed to £150,000+
  • 24 May 2023 – Stated to be sold for £170,000 (documentary confirmation awaited).

But, that stated price is not the total payable. The Special Conditions in the Auction House London sale, prepared by solicitors, is riddled with mandatory extras for which it is stated that no invoices will be provided:

4. On or before completion the Buyer shall pay the Seller the full cost of any searches including any indemnity policy or any other search provided by the Seller in the auction pack up to £600.00. The seller will not be providing an invoice and the General/Standard Conditions is varied accordingly. In addition, in relation to the transfer the seller’s solicitors shall prepare the engrossment for which the Buyer shall pay the Seller’s solicitors £150.00 plus VAT per transfer with the balance of purchase monies on completion and such payment shall be made by telegraphic transfer together with the completion monies to the Seller’s solicitors. The seller will not be providing an invoice and the General/Standard Conditions is varied accordingly. (Emphasis added)

16. On or before completion the Buyer is liable to pay the Seller six thousand and eighty pounds as an additional premium in consideration of the seller’s efforts to acquire and market the property. For the avoidance of doubt, the sum payable under this clause is not referable to any particular costs or expenses incurred by the seller, but represents an additional fixed sum payable by the buyer. The seller will not be providing an invoice and the General/Standard is varied accordingly. (Emphasis added)

17. The Buyer shall pay a contribution towards the sellers legal and auctioneers fees in the sum of one thousand six hundred pounds and an amount equivalent to the VAT paid by the Seller. The seller will not be providing an invoice and the General/Standard Conditions is varied accordingly. (Emphasis added)

30. (a) A Section 42 Notice dated 09/05/23 pursuant to Chapter II of Part I of Leasehold, Reform, Housing and Urban Development Act 1993 has been served by the party that transferred the Property to the Seller in respect of a grant of a new lease of the Property (“Notice of Claim”). The Seller and the Seller’s legal representatives take no responsibility or liability whatsoever regarding the validity of the Notice of claim which has been served and no warranties whether express or implied regarding the validity of the Notice of Claim are provided. The service and validity of the Notice of Claim is solely at the Buyer’s risk and the Buyer must rely on their own legal advice. The Seller and the Seller’s legal representatives will incur no liability whatsoever to the Buyer with regard to the service of preparation of the notice of Claim and the Seller will incur no liability whatsoever to the Buyer in the event of the competent landlord disputing the validity of the Notice of Claim. The Seller will incur no liability whatsoever to the Buyer in the event of the competent landlord serving a counter notice pursuant to Section 45 of the Act to the effect that the landlord does not admit that the party that transferred the Property to the Seller had a right to acquire a new Lease of the Property on the date of service of the Notice.

30. (b) The Seller shall rely solely on its own professional valuation and legal advice in respect of the premium that has been inserted into the Notice of Claim and the validity of the Notice of Claim due the premium inserted and the Seller shall rely solely on its own professional valuation advice in respect of the premium likely to be payable for the lease extension. (Emphasis added)

30. (d) The Section 42 notice dated 09/05/23 pursuant to Chapter II of Part I of Leasehold Reform, Housing and Urban Development Act 1993 was assigned to the Seller by way of a deed of assignment dated 16th May 2023 (“Deed of Assignment”). A redacted copy of the Deed of Assignment is included in the legal pack and the Seller and the Seller’s legal representatives take no responsibility or liability whatsoever regarding the validity of the Deed of Assignment and no warranties whether express or implied regarding the validity of the Deed of Assignment are provided. The validity of the Deed of Assignment is solely at the Buyer’s risk and the Buyer must rely on their own legal advice. The Seller and the Seller’s legal representatives will incur no liability whatsoever to the Buyer with regard to the Deed of Assignment and the Seller will incur no liability whatsoever to the Buyer in the event of the competent landlord disputing the validity of the Deed of Assignment. The Buyer shall indemnify the Seller for any costs that the Seller incurs or has incurred due to the Deed of Assignment. The Seller will not be providing an invoice and the General/Standard conditions are varied accordingly. (Emphasis added)

30. (e) It is hereby agreed that the Seller shall not be responsible for any statutory deposits, abortive costs, premium, costs, expenses claims demands losses or any other monies or liabilities whatsoever following the service of the Notice of Claim and/or the Deed of Assignment. The Buyer further covenants that it will pay to the Landlord and indemnify the Seller from and against all premiums, costs, expenses, claims demands losses or any other monies or liabilities pursuant to or arising from the Notice of Claim and/or the Deed of Assignment. The Buyer shall pay any costs, statutory deposits, abortive costs, premiums, costs, expenses claims demands losses or any other monies or liabilities whatsoever following the service of the Notice and/or the Deed of Assignment on demand. The Seller will not be providing an invoice and the General/Standard Conditions are varied accordingly. (Emphasis added)

30. (h) The Buyer shall pay the Seller’s costs and legal fees in relation to the drafting and preparation of the Notice of Claim, the Deed of Assignment, the assignment of the Notice of Claim to the Buyer and for all work in relation to this clause 30 and any other work undertaken as a result of the Notice of Claim, the Deed of Assignment and the assignment of the Notice of Claim to the Buyer. The Buyer shall reimburse any such amounts to the Seller on completion regardless as to whether the Buyer desires the assignment of the Notice of Claim and notwithstanding the validity of the Notice of Claim, the Deed of Assignment or the assignment of the Notice of Claim to the Buyer. The seller will not be providing an invoice and the General/Standard Conditions are varied accordingly.(Emphasis added)

30. (i) The Buyer shall fund the statutory deposit payable under the provisions of the 1993 Act or any Regulations under such Act. (Emphasis added)

Dodgy auction practices are not new. The Sale of Land by Auction Act 1867 was concerned with auction bids made on behalf of the vendor following the case of Mortimer –v- Bell in which the other bidders were the auctioneer and a puffer.

4 Where sales are invalid in law to be also invalid in equity.
And whereas there is at present a conflict between Her Majesty’s courts of law and equity in respect of the validity of sales by auction of land where a puffer (defined as a person appointed to bid on part of the owner) has bid, although no right of bidding on behalf of the owner was reserved, the courts of law holding that all such sales are absolutely illegal, and the courts of equity under some circumstances giving effect to them but even in courts of equity the rule is unsettled: And whereas it is expedient that an end should be put to such conflicting and unsettled opinions: Be it therefore enacted, that from and after the passing of this Act whenever a sale by auction of land would be invalid at law by reason of the employment of a puffer, the same shall be deemed invalid in equity as well as at law.

The RICS Common Auction Conditions (Edition 4) includes the statement:

Where there is a reserve PRICE the SELLER may bid (or ask US or another agent to bid on the SELLER’s behalf) up to the reserve PRICE but may not make a bid equal to or exceeding the reserve PRICE. You accept that it is possible that all bids up to the reserve PRICE are bids made by or on behalf of the SELLER. (emphasis added)

Another dodgy area is guide prices: in December 2020, Richard Auterac (Chairman of RICS Auctions Group) published an article titled: Failure to act ethically will put auctions market’s key role at risk. He said:

Given that it (the guide price) has a substantial impact on a potential buyer’s propensity to bid, the auctioneer needs to make prominent their definition of a guide price….What a guide price cannot be is to be set deliberately low with the intention of drawing in bidders with an expectation of a purchase price that will never be acceptable to the seller (emphasis added).

Paragraph 4.12 of the RICS Professional Statement Auctioneers selling real estate (7th edition March 2018) has this mandatory statement on Guide price:

Members must comply with the Consumer Protection from Unfair Trading Regulations 2008. These apply to commercial practices before, during and after, a contract is made. The CPRs contain a general prohibition of unfair commercial practices. They also prohibit 31 specific commercial practices and specifically ban using ‘bait advertising’ techniques…(emphasis added).

This is supported by a ruling of the Advertising Standards Authority issued in July 2014.

In Allen –v- Leicester City Council [2013] UKUT 016 (LC) – the Upper Tribunal (UT) found at Paragraph 45:

An auction is a recognised method of disposal to achieve open market value. Bids are made openly. It differs from an informal or formal tender where prospective purchasers make their offers in confidence and where there is scope for misjudging the market and offering considerably more than the other bidders.

Some valuers familiar with auctions do not share that opinion. Contrast that with a recent FtT decision (LON/ooBF/OLR/2022/0904) in which an expert valuer analysed 706 ground rent sales from Allsop Residential Auctions from Sep 2019 – Feb 2023 to assess capitalisation rates. For stated reasons, these were filtered to 119 useful transactions for further analysis from which 29 best comparables were selected, again for stated reasons. These suggested a range of 6.8% p.a. to 15.01% p.a. Outliers were excluded reducing the range from 7.25% p.a. to 10.92% p.a. with a median of 8.82% p.a. which the FtT endorsed and determined.

In Brickfield –v- Ullah ([2022] UKUT 25 (LC)), a short leasehold interest in a property had been bought at one price and then resold at public auction at a much higher price. The Brickfield UT Panel referred to that Paragraph 45 of the Allen –v- Leicester decision and stated: That it is entirely uncontroversial…..but were faced with two market transactions at very different prices and continued at their Paragraph 34:

…we do not consider that either of the sales, in isolation, is reliable…..We note, however, that the auction room would probably have been aware of the original S.42 Notice suggesting a premium of £49,590 (described elsewhere in the decision as ‘beguiling’), but Brickfield’s Counter Notice at £198,620 post-dated the auction by some months. Were the respondents persuaded to pay a price thinking that the eventual premium would be modest? We just don’t know: neither did the FtT.

Maybe, but what was known was this lack of the parties acting knowledgeably and prudently – key features of market value derived from a market price. The RICS Professional standard Comparable Evidence in Real Estate Valuation 1st edition states in Section 2:

Ideally, comparable evidence should be:

  • Comprehensive – there should be several comparables rather than a single transaction or event.

Several transactions allow any inequalities of extent of knowledge, exercise of prudence and differences in negotiating strengths and weaknesses to be discernible to the experienced valuer (if large) or evened out (if small).

Those valuers who sometimes advise auction buyers and sellers find that they have to research the marketing history of a property, check the information given by the auctioneers, check the guide price given against brackets of reality, check the reliability and sometimes honesty of the documents published with the auction pack and check the stated ‘sold by’ published price against what later is recorded at the Land Registry. They do not always share the confidence which some others have in auction procedures and compliance with the law and Ethical Standards.

Consider the Brickfield –v- Ullah facts:

42 Queens Court, Rocklands Drive, Harrow HA3 8RL

A purpose-built, two-bedroom flat leased for 99 years less 3 days from 29 September 1936 at 12 guineas p.a. (16.23 years unexpired at the Leasehold Reform Act valuation date).

  • 4 July 2023 – S.42 Notice served proposing a premium of £49,950 providing 4 months for service of the S.45 Counter Notice.
  • 4 July 2019 Existing leasehold interest sold for £112,000 to Birdview Homes Limited.
  • Date not known – Booked into Allsop’s auction on 18 July 2019.
  • 18 July 2019 – Hammer price of £175,000 achieved.
  • 18 Nov 2019 – Brickfield serves S.45 Counter Notice contending for a premium of £198,620.
  • 20 April 2021 – First-tier Tribunal determines premium payable of £128,774.
  • 26 Jan 2022 – Upper Tribunal determined premium payable of £153,498.
  • 11 Feb 2023 – Mr Ullah completed the purchase of a new lease.

Upper Tribunal’s Comments:

We are aware in coming to this figure that the amount the respondents will in the end have paid (being the auction price of £175,000 and now the premium of £153,498) exceeds the value of the long lease by a considerable distance. But in the absence of any evidence from the tenants we cannot comment on that, and can see no reason why the appellant landlord should be penalised for the tenants’ decision to bid that amount.

Could this have happened if each of the professionals involved at the different stages had acted in accordance with appropriate Ethical Standards?

It is not only cases linked to Leasehold Reform Act valuations which play “poker games” in the auction rooms. An Estates Gazette article of July 2020 by John Townsend, FRICS highlighted the need to check a property’s sales history illustrated by the case of 37 High Street, Maldon, Essex (Auctioneers: Barnard Marcus):

  • March 2020 (failed to sell): “The bidding reached £592,000. Was available at £625,000. No longer available.”
  • April (failed to sell): “Was available at £500,000. No longer available.”
  • May (‘sold’ for £396,000).
  • June (guided at £330,000, ‘sold’ at £466,000).
  • July (guided at £450,000 – “unsold – contact the auctioneer”).

The Special Conditions of Sale (produced at the very last minute) provided for it to be a conditional contract with a seller’s right to rescind by notice at any time before completion!

Interesting Footnote: The Registered Proprietor of the freehold as from 23.12.2021 is J B Fennell Ltd: “The value stated as at 23 December 2021 was £600,000.” The landlord of the ground-floor shop Number 37 in 2004 was J B Fennell Ltd. J B Fennell Ltd’s balance sheet to 28/2/2022, published at Companies House, shows total net assets of £15,802 and compulsory strike-off application discontinued on 1 February 2023.
Rescission

5 Cloudesley Road, St Leonards-on Sea TN37 6JW

Freehold semi-detached house arranged as two vertical maisonettes each with its own front door.

  • 02 March 2022 – Submitted to Savills’ auction. Unsold, noted to be available at £675,000.
  • 05 April 2022 – Submitted to Savills’ auction. Unsold, noted contact the auctioneer.
  • 12 May 2022 – Submitted to Allsop’s auction. Unsold, stated to be available at £590,750.
  • 3 Nov 2022 – Submitted to Allsop’s auction. Unsold, bidding stated to have reached £591,000.
  • 30 March 2023 – Submitted to Allsop’s auction and noted as sold for £542,000.
  • 19 April 2023 – One of the maisonettes (15A) submitted to Auction House London sale and noted to have sold at £286,000, freehold.
  • 10 May 2023 – That same maisonette, 15A, submitted to Savills’ auction and noted to have sold at £244,000, freehold.
  • 24 May 2023 – The other maisonette (15B) submitted to Auction House London sale with a guide price of £210,000+. Noted to have sold at £380,000, freehold.

It is acknowledged that Land Registry delays mean that properties said to have been sold at auction cannot be promptly confirmed by Land Registry records. Sometimes it transpires that what has been reported as sold at a particular price is not supported by subsequent Land Registry records. Properties reported to have been sold at a price but then re-offered at the next sale and reported as sold at a lower price, deserve explanation which would need examination of the auctioneer’s file. Reports of bidding stated to have reached a particular figure, but unsold, deserve explanation of the extent to which bids were made by or on behalf of the vendor.

It is suggested that some auction houses routinely disregard the law and Ethical Standards to an extent that makes their published results unreliable for valuation purposes. An auction result is a price, for that property, at that auction, on that day. It is not market value and should never be treated as such without rigorous checks and investigation.

RICS Rules of Conduct: Rule 5

Members and firms must act in the public interest, take responsibility for their actions and act to prevent harm and maintain public confidence in the profession.

Properties do not just appear in an auction catalogue: information must be gathered, sometimes statutory or other Notices have to be served, the contents of the auction pack have to be prepared, the catalogue description must be prepared, checked and authorised, if there are any special conditions of sale they must be identified and drafted. At different stages, valuers, solicitors, auctioneers and sometimes others are involved. The general assumption is that they are all doing their job in a professional manner with due attention paid to relevant laws and Ethical Standards.

The Mr Ullahs of this world ultimately pay when dodgy practices have been employed. Job done. No questions raised. No-one held accountable. Move on to the next one.

The auction vendors for 42 Queens Court, Harrow and 11 Hurstwood Court, London NW11 have different corporate names but share a common director according to Companies House records.

BRMT – June 2023