Selling property at auction can, at times, seem an attractive, quick-fire solution for over-burdened sellers whilst offering potentially rich pickings for bargainhunters. Neither scenario is without its risk as the very nature of property auctions can offer loopholes for identity fraudsters and money launderers.
In July 2012 auctioneers had to pay out damages when a property sale failed to complete. The auctioneers had signed the memorandum of sale on behalf of the seller but, following the auction, the correct owner had stepped forward and denied having authorised any sale. The owner claimed that a third party had used his identity to try to sell the property and obtain money by way of fraudulent deception. Damages were awarded to the prospective buyer who had paid the deposit to the auctioneers and then been unable to complete the purchase.
Usually however, the worry about identity involves the buyer. Whilst some auction houses insist on potential bidders’ pre-registration (at which point anti-money laundering and identity checks are sometimes carried out), not all auctioneers require pre-registration as they believe it overly restricts potential interest in the properties being sold. Instead, they advise potential bidders to bring satisfactory methods of identification of their name and address with them so that basic identity checks can be carried out following a successful bid, with full money laundering and ID checks being carried out after the auction day by the seller’s solicitor.
The problem with bring-along ID is that when the hammer falls, a binding contract is formed. If the winning bidder then reveals he has forgotten his identity documentation and/or fails to provide the necessary evidence in the days after the auction day then the auctioneer alongside the seller’s solicitor has to decide whether the contract can proceed or not. Anecdotal evidence even suggests that, in a worst case scenario, an aggrieved borrower might maliciously bid for his repossessed home and then refuse to provide the required evidence.
The RICS Common Auction Conditions require the winning bidder to provide proof of identity before leaving the auction but only if required by the auctioneer. RICS advises that identification of the buyer is not currently a requirement under the Money Laundering Regulations 2007 so it is a matter of discretion for the auction house. There is however an obligation to report suspicious activity and the RICS guidance for auctioneers recommends that it is good business practice to confirm that the person proffering the cheque and signing the memorandum of sale are indeed who they claim to be. Experience suggests that auction houses invariably follow the recommendations and ask for ID evidence but, in practice, auctioneers and solicitors often have to make a snapshot decision if ID evidence is not available.
That decision includes the tricky question of the deposit. The binding contract for sale will require a deposit to be handed over to the seller or auctioneer but usually the cheque isn’t cashed until identity checks have been completed. If satisfactory proof is provided, the deposit can be cashed and the contract continues. If satisfactory ID evidence is not provided the auctioneers could treat this as a repudiation of the contract as agent for the seller. However, it would take a brave auctioneer to take the draconian step of repudiating the contract if a buyer had forgotten his ID documents. Rather than lose the sale, the auction house, under guidance from the seller’s solicitor, usually allows a short period for the seller to provide the evidence before threatening to pull the contract.
For the seller, it is a no-win situation. If the buyer fails to produce his ID evidence, the seller is left facing:
- Wasted time and costs. The seller will have to formally rescind the contract and re-submit the property in the next auction. Amendments to the particulars and auction package will be required if there have been any changes to the property in the interim (for example rent arrears and tenant defaults). Any holding costs will continue to mount in the interim which may be a challenge to the seller and any funder if the seller is financially stretched.
- Renewed searches. If the next auction is several months away, any Local Authority search provided in the auction package may have passed its recommended ‘shelf life’ of three months and will have to be renewed.
- Price. Waiting for the next auction could result in a price reduction if the market is unsteady or a Budget or other legal change occurs in the interim (for example a change to stamp duty rates).
An added injury is that whilst the seller can theoretically claim damages from the winning bidder for breach of contract, in practice this may well be very difficult if the buyer’s identity cannot be satisfactorily established.
RICS has issued a draft sixth edition of their note “Auctioneers selling real estate” which is a best practice guide for auctioneers but also covers what buyers and sellers can expect. This publication offers practical tips and advice for all those involved in auction sales. Richard Auterac, Chairman and Auctioneer at Acuitus and Chairman of the RICS Real Estate Auction Group comments “the relationship between the legal profession and auctioneers is key to the successful implementation of a client’s sale instructions and an open and trusting partnership has always proved to be the best for all parties. For too long the contractual and procedural issues to selling and buying at auction have been clouded in mystery... There has been a strong movement by the RICS auction group to engage with all the stakeholders of which the legal profession is the most important in order to increase transparency. This has led to the publication of some important RICS documents such as the Best Practice Guidance Notes, Money Laundering Guidance, the Common Auction Conditions and the newly published Solicitor’s Guide to the CAC and Model Terms of Appointment. Consumer protection must drive auction standards but sometimes auctioneers needs protection themselves! I am grateful to Hogan Lovells for highlighting these important issues which demonstrate the need for a strong bond between solicitors and auctioneers in order to ensure this fundamental method of sale continues to evolve and provides a viable market place for buyers and sellers.”
In light of these comments and our own experience, the conclusion is clear: a case of mistaken identity can deal a hammer blow to anyone caught out.