Question

What happens if someone bids and doesn’t have the means to pay?

Answer

This sums up the essential difference between an auction and a private treaty sale. By private treaty the buyer makes an offer but no one (neither buyer nor seller) really feels any compunction at pulling out or changing the terms. The seller can hope for a gazump and the buyer will find any detrimental comment by his lawyer or surveyor to try to chip the price at the last minute.

At auction the buyer does all his homework up front and comes to the auction ready to commit to an exchange of contracts. Or at least he should do.

But occasionally things go wrong. In May 2008 for example the banks started to withdraw from property lending wholesale so that regular buyers who thought that they had facilities committed to buy at auctions in April but then found that their lenders had changed their minds, or more likely, suddenly imposed rigorous terms which could not be met. Some buyers took this phlegmatically – as regular auction buyers they were used to taking chances, especially if they had bought unseen, they expected to lose their deposit and would take that “on the cheek”.

What they didn’t realise that there are other remedies open to a seller and also to an auctioneer. They will have exchanged a contract and in addition to loosing the deposit they could also expect to be sued for any loss which accrued to the seller. The property might be put back to auction and re sold but at the very least there would be additional expenses as well as interest accruing, but in a falling market (in 2008 it was more like a sinking market) they could also be pursued for the loss in value.

In addition, the bidder might expect the auctioneer to refuse to accept bids from him in the future. The essence for the seller is to act fast and decisively. Of course in a weak market where there may only be one buyer, it is worth the seller taking a flexible approach and perhaps offering more time, or even a concession; there is no point in incurring legal costs in suing when there are no assets to recover.