International Private Investors Commercial Property Auctions

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1 Page 1 International Private Investors Commercial Property Auctions Charles Anderson, Partner, Farrer & Co LLP This Note is to assist international private investors and their off-shore trustees in acquiring UK commercial property at auction. The market has seen a recent upsurge in properties brought to auction with relatively vibrant results in Q A number of private investors and their trustees returning to UK property investment may not be familiar with current procedures for buying at auction. Farrer & Co have been advising clients to ensure that they are best placed to access auction properties. The guidance in this Note is based on our experience of selling and buying at auction in the last six months. First, some points from a seller's perspective: 1. Auction sales are often attractive where there is uncertainty as to value. 2. Auction sales offer an exposure to a diverse and generally committed market sector. 3. Auction sales provide a degree of certainty as to the process with a definite marketing period prior to the auction and then fixed exchange and completion dates. From our experience, some practical points for sellers are: 1. Auctioneers' fees are payable regardless of whether the property sells 2. In respect of legal fees, sellers do have to make the decision as to whether to instruct their lawyers to deal with all Sale Pack enquiries raised by potential buyers. The additional expense has to be considered in the context of increasing the prospects of a good price. 3. Even though a binding contract is created on the fall of the hammer, our experience has been that, post auction, there may still be further legal work particularly where the buyer only brings in a funder after the auction; often, the seller has to accept that its lawyers will have to undertake further work to satisfy the funder if the seller wishes to ensure completion on the due date. 4. From the point of view of the management and control of the seller, if it is a non-uk company, the sale process at auction arguably raises fewer issues than buying (see below). However, it is still essential to ensure that the decision to sell, and that sale is to be at auction, is properly taken and duly minuted by the directors.auctioneers' fees are payable regardless of whether the property sells Moving on to the points that we feel are of relevance to private investors and their trustees: 1. The Investor's Team It is important that the investor puts its team in place at an early stage. Although, this is just as applicable to private treaty purchases, in respect of auctions it is often the case that the investor and its advisers have to move quickly in the auction scenario where the investor is not the selected bidder and the purchase is on nonnegotiable terms. The key team members are: This note presents some insights into the processes by which international investors may ensure that they are best placed to acquire commercial and residential property in England. (a) the client and generally its off-shore trustees/directors

2 Page 2 (b) the investment surveyor, generally the party who will have sourced the desired lot(s) (c) the building surveyor, although generally auction properties are bought on the basis of merely an inspection rather than a full survey (d) the lawyers particularly to advise on property matters (auction process and conditions) and tax (particularly VAT) see below 2. The Auction Catalogue and the Sale Pack The Auction Catalogue sets out basic details of the property and its lettings and contains the legal conditions of sale. The Catalogue will give details of the seller's lawyers from whom the Sale Pack should be obtained in as good time as possible before the auction. On receipt of the Catalogue and the Legal Pack: (a) Auction process and conditions Either the investment surveyor or the lawyers should advise on the procedures for bidding at the auction and exchanging the contracts. It is particularly important for off-shore investors and their trustees to ensure that the required steps are taken to enable a bid to be made in compliance with the auction conditions (b) Sale Pack content The Sale Pack contains the title and letting information primarily for the lawyer and the investment surveyor but also relevant information to be passed to the client/trustees/building surveyor in advance of inspection of the property. It is key at this stage that the lawyers consider the quality of the Sale Pack and identify any missing information, particularly missing searches and enquiries specific instructions may be needed from the trustees as to the level of due diligence and whether to commission additional searches and enquiries. Also at this stage, the lawyers may be able to identify the scope for the seller responding to further enquiries and amendments to the sale conditions. 3. Auction Process The investor and its trustees will need to be advised as to the precise process for a compliant bid and exchange; there are slightly differing procedures between the major auctioneers. A preliminary is to establish that it is not necessary for the bidder to be registered formally as a bidder. Generally, this is not the case although it is encouraged by the auctioneers as they like to acquire as much information as possible as to likely bidders. Next is to consider whether to bid remotely or "in the room". Our experience of private investors on more substantial lots is that they will want to be in the auction room; there is the "buzz" that comes with real-time bidding for what might be a "trophy" asset. Also, investors may wish to be present to assess the strength and mood of the market particularly when bidding for a number of properties at the same auction. Where the bidder is a company incorporated outside the UK, which is very often the case, the biggest preliminary issue to consider is ensuring that it remains managed and controlled outside the UK. If management and control is being exercised in the UK then the company will be UK resident for tax purposes and therefore liable to tax on any gains it realises. Care should be taken to ensure that the client, in particular, does not usurp the role of the board of directors because of his personal involvement with the acquisition process. We advise that: The board should be involved in the process from the outset, receiving full details of the property to be acquired and a full briefing on the process this will require;

3 Page 3 The board should meet to consider the potential acquisition and make the decisions as to whether to bid and the ceiling price they are prepared to pay One or more of the directors should be involved in the inspection process Having made (and carefully minuted) the decision to buy, the directors should decide how they propose to bid. One of the directors can be mandated to do so, or written authority can be given to the client to bid on the board's behalf. The directors should resolve that whoever is bidding should be indemnified in relation to potential personal liability. One or more of the directors should attend the auction, either to bid or to ensure that anyone other than a director mandated to bid does not exceed the authority the board has conferred. If bids are to be made remotely, trustees and directors should be aware that there are a number of formalities to be observed often at least two days in advance of the auction. These include registering as a remote bidder, sending a signed auction contract to the auctioneers and delivering a UK clearing bank cheque for the proposed deposit to the auctioneers. Accordingly, for remote bidding early contact between the trustees/board and the auctioneers is essential. 4. The Bidder Auction processes have become more stringent in recent years, particularly in relation to the bidder: (a) (b) (c) successful bidders are required to produce evidence of identity, particularly passport and utility bill (and in some cases certified copies as well). Identification requirements vary from auctioneer to auctioneer but in one instance bidders are required to provide evidence as to the identity of both the bidder and the buyer certain auctioneers' conditions provide that the bidders are personally liable in addition to the disclosed buyer successful bidders are required to produce a UK clearing bank cheque for the deposit (generally 10 per cent). Additionally, trustees and company boards should be aware that the bidder is likely to require: (a) specific authority to bid on behalf of the buyer (b) funds from the buyer in respect of the deposit so as to be sure that the delivered deposit cheque will be honoured (c) an indemnity in respect of liability under the contract (d) possibly, security in respect of the sum to be bid It is therefore important that the trustees identify the bidder at an early stage. This has to be considered in the overall context to ensure that the person who bids does not compromise the off-shore tax/trust status (see above in relation to companies). It is unlikely that investor's lawyers will agree to act as bidders, largely because of the potential liability. However, we attend at the auction to assist with the process particularly with client account deposit cheques, assuming funds have been deposited in the client account prior to the auction. 5. Successful Bid Upon a successful bid, the bidder will be required to complete a form setting out the bidder's details and those of the buyer. The bidder will be expected then to attend at the Sales Desk to sign the Memorandum of Sale and to hand over the deposit cheque. The hammer is the moment of sale but the contract memorandum records the sale.

4 Page 4 Generally, the seller's signed Memorandum is sent to the buyer's solicitors within a day or so after the auction. The deposit is generally held by the auctioneers or seller's lawyers as "stakeholders", ie it cannot be released to the seller until completion and, for example, will not be lost as part of any insolvency of the seller. 6. Auction Conditions The legal sale conditions at auction comprise: (a) Common Auction Conditions (often referred to as the General Conditions); these are an industry set of standard conditions not dissimilar to private treaty conditions; particular points are: the buyer has to pay to the seller on completion any arrears of rent accordingly, appropriate enquiries need to be made and funds available the seller is obliged to insure the property until completion. (b) Extra Conditions of Sale; each auctioneer will generally amend the General Conditions by these "extra conditions of sale" generally administrative amendments to reflect the specific auctioneer's procedures. (c) Specific Conditions of Sale are the specific conditions applicable to the relevant lot, for example disclosing the title and identifying any lease issues. (d) The Addendum, an important feature being the final update of the other conditions produced in the days leading up to and on the day of the auction itself. It is vital that the investor and its lawyers check any Addendum conditions which apply to the desired lot. In summary, particular points for private investors and their trustees are: (a) Due Diligence The fundamental point of an auction is that, on the hammer, the buyer is committed to buy the property on the auction conditions without the right to raise any further enquiries. Accordingly, it is for the investor and its trustees to liaise with its advisers to identify the due diligence and further enquiries to be undertaken prior to the auction. (b) Identity of the buyer Under the auction conditions, the property may only be sold to the entity named as the buyer in the Sale Memorandum as there is no right to direct the seller to transfer the property to any other entity, the investor and its trustees must at an early stage establish the identity of the vehicle to acquire the property (c) VAT The auction conditions state that the buyer is registered for VAT and will before completion make a VAT option to tax in respect of the property. These provisions do not create a problem where the investor's purchasing vehicle is already VAT registered but, often, we are acting for trusts which purchase through subsidiary companies incorporated specifically for the purchase and, importantly, are not VAT registered at the date of the auction. In such cases, the buyer will be in breach on account of not being VAT registered. Our practice is to contact the auctioneers and the seller's solicitors well in an advance to agree a variation whereby the buyer will be obliged to submit a VAT registration application as soon as possible after the auction. In effect, this replicates the position under private treaty sales to a non-vat registered new subsidiary.

5 Page 5 (d) Insurance As the auction conditions provide that the seller insures up to completion, trustees will be concerned to establish that the amount of cover is adequate. The auction conditions do provide that the buyer may request an increase of the cover with the buyer paying any additional premium. Accordingly the trustees should at an early stage give consideration to the adequacy of the disclosed insurance cover. (e) Arrears As mentioned above, the auction conditions provide that the buyer must pay rent arrears to the seller on completion. The buyer's solicitors will advise as to whether there are any disclosed arrears so that appropriate funds may be made available. (f) Management of the Property The auction conditions provide that the seller will continue to manage the property until completion and, importantly for the buyer, in consultation with the buyer; the seller must comply with the buyer's reasonable requirements. The buyer's solicitors will advise on any disclosed management matters where the buyer's input may be desirable before completion, for example rent reviews, lease renewals or recovery of arrears. (g) Search Fees Auction conditions are increasingly providing that the buyer has to reimburse the seller the cost of the searches included in the Sales Pack. Appropriate funds will be required at completion. (h) Leasehold Properties If a long leasehold interest is being bought the auction conditions require the buyer "promptly" to provide references and such other relevant information as the landlord may require for it to consent to the sale. The buyer must also comply with the landlord's other lawful requirements. Although in the case of the sale of a long leasehold interest at a premium, a landlord should have little concern as to the financial status of the buyer (there being only a nominal rent under a long lease) a recent case has held that a newly incorporated single purpose vehicle is not a respectable and responsible person (ie some security was needed for the assignee), albeit in the context of a market rent lease. The investor and its team should: liaise prior to the auction to consider what may be offered in terms of information and security and seek to clear with seller and auctioneers exactly what will be required by and acceptable to the landlord. If you require further information on anything covered in this briefing please contact Charles Anderson (charles.anderson@farrer.co.uk; ), or your usual contact at the firm on Further information can also be found on the Property page on our website. This publication is a general summary of the law. circumstances. It should not replace legal advice tailored to your specific Farrer & Co LLP, January 2015