Investors losing money at auctions due to misrepresentation of legal pack

8 February 2021 | General

Investors are struggling to recover money from property auction purchases due to vendors misrepresenting the legal pack, according to The Mistoria Group.

Most auctioneers don’t get involved after contracts are exchanged to resolve the disputes, citing them as legal matters.

This results in buyers resorting to litigation.

Mish Liyanage, managing director of The Mistoria Group, said: “Increasingly, we are hearing of investors that have lost significant amounts of money at auctions.

“After going through the purchase process, investors are finding that the development or conversion plans they have proposed to carry out are no longer possible as there are sitting tenants, with no evidence that the deposits have been protected with an approved scheme.

“We are aware of a situation, where an investor stands to lose £28,000, comprising the 10% deposit, auctioneer fees, conveyancing, legal and planning application costs. The intention was to convert the properties to HMOs, but the legal pack/AST failed to disclose the actual position on the rent and deposit. Essentially the vendor misrepresented the legal pack and is in breach of contract.

“Not surprisingly, the auctioneer or the selling agent did not want to get involved, citing it as a legal matter. Despite the investor following the legal advice and the law of the country, he stands to lose a significant amount of money, as it was impossible for him to complete on the property without resolving the issues on the legal pack and tenancy.”

Due to the Coronavirus Act 2020 residential landlords need to give tenants six months’ notice of their intention to seek possession. To enable to service the correct notice, the tenancy information needs to be correct; the deposit protected with an authorised scheme; and the prescribed information served on the tenant(s) and any other ‘relevant person’ (i.e. any person who, in accordance with arrangements made with the tenant, paid the deposit on behalf of the tenant).

If an investor buys a property with tenants in situ without this assurance and further down the line, the tenants provide evidence that they have paid a deposit prior to moving in and it has not been registered in a government approved scheme, the new landlord will be penalised and forced to pay up to three times the amount of deposit.

Liyanage added: “This case highlights how costly this game can be if things go wrong, due to major issues with pre ownership. We are urging investors to be ultra-careful when purchasing property at auction. While vendors and auctioneers gain, buyers stand to lose hard-earned cash.

“My advice to investors who are considering purchasing property with tenants in situ via an auction is to do your homework on the legal pack especially the AST well in advance. Also seek legal advice from the outset and if there is a dispute after the exchange. Ensure from your side as the buyer, you perform all your contractual obligations so that you are not in breach and also keep a log of all correspondence.”

This post has originally been featured in Property Wire.