Auction sales v traditional sales: what charities should know

Article author: Arani Arunan, Associate

Given the ongoing challenges in the residential market due to cost-of-living increases and the volatility of the political landscape, auction sales can be an effective alternative to traditional sales for charities looking to sell their legacy properties. This article summarises how the auction process works and explains its key benefits.

How auctions work

As would be the case with a traditional sale, before they decide to put a property up for auction, a charity's trustees must be satisfied that they have the power to dispose of it.  They must also be of the view that a disposal by auction would be in the charity's best interests.

If the property is held by or on trust for a single charity (in the context of an estate, this means a property that has been appropriated to the charity outright, rather than to multiple beneficiaries), the trustees must also obtain a valuation report from a designated adviser acting exclusively for the charity: This is often known as a section 119 report. It is important to check that the adviser has ability in and experience of valuing property that is similar to, and within the same area as, the property being disposed of.  Having considered the report, the trustees must also be satisfied that the proposed terms are the best that can reasonably be obtained for the charity.

Once the decision to proceed with an auction sale has been made, charities should ensure that a well-prepared auction legal pack is provided to the auctioneer in good time before any auction date. This pack provides potential bidders with essential information about a property and contains the conditions of sale that will form part of the contract between the successful bidder and the charity.  Theseshould include a condition that, if the highest bidder is a connected person, the transaction will only be able to proceed if an order of the Charity Commission is obtained.  This is because the Charities Act 2011 prohibits the disposal of property by a charity to a connected person without prior consent.  "Connected person" is defined in the Act but, essentially, it means an individual or an organisation that has a close association with the charity.

Potential bidders will view the auction legal pack in advance of the auction to carry out their own due diligence. We recommend that charities instruct their legal advisers to prepare the pack at least six weeks before the auction so that it is ready to be presented to buyers approximately two weeks in advance. This enhances the marketability of a legacy property to a wide range of buyers by allowing plenty of time for the market to digest the particulars of the property and raise their enquiries. A suitably comprehensive legal pack is also key to attracting buyers and maximising the likelihood for a competitive bidding process on an auction day. 

If a designated adviser's report was required, the trustees must set a reserve price for the sale, which must be equal to or higher than the lowest valuation given in the report. The reserve price is the minimum price that the property is allowed to sell for at auction. Provided that it is met, the fall of the gavel indicates that contracts have been exchanged and the successful bidder has entered into a legally binding contract with the charity.

Completion of the purchase will take place on the day set by the charity in the conditions of sale. Should the successful bidder for any reason decide to pull out of the purchase, they would most likely lose their deposit.

Benefits of selling properties at auction

1. Speed

Auctions can be an attractive option for charities that are keen to generate income from their legacy properties as soon as possible, or where the market is more limited due to practical or legal issues with the property. Auctions often take place on a monthly basis. Charities can choose to fix the completion date for their properties at as few as 20 days from the date of the auction. In contrast, traditional property sales (by private treaty) often take three months or longer to complete once an offer has been accepted. Consequently, the speed and efficiency of auction sales are of particular benefit to charities that are looking to limit the costs associated with holding void or empty assets.

2. Certainty of sale

With the traditional auction method, when the gavel falls on the day of the auction, the successful bidder enters into a legally binding contract with the charity and is required to pay the deposit immediately.  This lowers the likelihood of the sale falling through as the successful bidder will face financial and, potentially, legal penalties if they choose to back out of an auction sale. Conversely, when selling via the private treaty method, there is a greater risk that a sale does not complete following the acceptance of an offer if, for instance, the buyer changes their mind or the buyer's funding falls through. The modern method of auction sits in the middle ground between the two; the buyer is not tied in following the auction, allowing time to obtain finance.

There is, of course, a chance of a property failing to sell at auction. The  risk of this happening is reduced by following valuation advice as to the guide price set (and, where appropriate, following the advice of the designated adviser). Charities can also liaise with the auctioneer to ensure that the property is appropriately marketed.

3. Wide range of buyers

Although loans can be secured to purchase properties at auction, buyers have a limited window to do this, and lenders may not be able to carry out their full due diligence or satisfy their strict requirements. Consequently, auctions tend to appeal to a wider pool of cash buyers compared to a private treaty sale. These buyers are looking for long-term investment opportunities and can purchase properties quickly.  

Other points to note

When selling legacy properties, a key consideration for charities is value: charities are legally obligated to obtain the best price possible (whether a section 119 report is required or not). There is a common misconception that auction sales are primarily used as a method to dispose of "distressed properties" quickly and this can compromise on the sale price achievable.  In reality, it is common for auctioned properties to sell for above their reserve price due to the nature of an auction's competitive bidding process and the diversity of the pool of potential bidders.

Nevertheless, auction sales are also an option where legacy properties may appear less desirable to buyers because of title issues, defects or perhaps outdated features. Cash buyers at auctions are likely to view such properties through a commercial lens. Consequently, there is a greater likelihood that these properties would be sold at auction rather than a traditional sale.

Get in touch

Whether your charity is looking for a firm to prepare an auction legal pack, or you are considering whether a legacy property is suitable for an auction sale, we have someone who can help. Please contact Anna Phillips or Rebecca Kibby, either of whom will be able to provide guidance.