by Gary Murphy and Peter Sayle
Twenty years ago the sale of property by public auction was regarded by many as a sale of last resort. During the past decade this had radically changed: both vendors and purchasers have grown to regard the auction process as the most effective method of sale for nearly all types of property, but it has a particular relevance to insolvency matters.
According to Dun & Bradstreet, receiverships for the first quarter of 1990 more than doubled compared with the same period in 1989. This recent marked increase in business failures has resulted in the need for the insolvency practitioner to employ a method of sale which is both fast and finite. The auction sale not only satisfies these requirements but also illustrates to all concerned that the best market price has unequivocally been achieved.
Why auction?
Apart from the undoubted advantage of maximising competition, an auction sale provides several very real benefits for the insolvency practitioner, over and above other methods of disposal.
Many potential vendors will have suffered the frustrations of the subject-to-contract sale by private treaty. Negotiations lead to an acceptable price, but are then followed by interminable delays as the purchaser tries to renegotiate — and often pulls out altogether. The impact of the original marketing has been lost, and the whole process has to be started again.
At auction, the vendor dictates the terms of the contract, which are printed in the form of the special conditions of sale prepared by the vendor’s solicitors and appear at the back of the auctioneer’s catalogue. These conditions, coupled with the auctioneer’s general conditions and particulars of sale, will form the basis of the contract. The successful purchaser will sign the memorandum of sale and pay the required 10% deposit. Contracts are exchanged, either in the auction room, prior to or after the sale depending upon the circumstances. Prior to the sale the vendor holds all the cards. It is up to the purchaser to make legal inquiries (although search documents will have already been obtained to expedite this aspect), instruct a surveyor, arrange finance and make any other necessary preparations he may feel appropriate. When the hammer falls at the auction, there is immediately a binding contract of sale. In this way, the uncertainty surrounding a sale by other methods is removed and the insolvency practitioner can look forward to receipt of relatively quantifiable funds on a specific date.
The insolvency practitioner is under a legal obligation to all interested creditors to achieve — and to be seen to achieve — the best price reasonably obtainable. An auction sale is totally public and, if prepared properly, will give rise to maximum exposure of the lots offered. The larger firms of property auctioneers will usually prepare a total of 20,000 commercial and/or residential catalogues for each auction, which are distributed nation-wide and overseas. Advertisements appear in both national and local publications for a period of four weeks preceding the sale. A “For Sale” board is erected at the property where appropriate, and direct mail marketing is carried out to pre-identified groups of special purchasers. Consequently, it is very difficult for anyone to suggest that the best price has not been achieved in open market conditions.
It may occasionally be the case that property offered for sale by auction in an insolvency matter has been exposed to the market previously by private treaty, usually through a local estate agent. In such cases, interest may have been shown and sometimes offers made which have failed to come to fruition. The auction sale has the effect of focusing the minds of potential purchasers. An interested party, who previously had little pressure upon him to exchange, may now feel that further delays would risk a higher bid elsewhere and the subsequent loss of the deal.
At a recent major auction sale at the May Fair InterContinental, London, the Cambourne Hotel in Leinster Square, Bayswater, was offered for sale with full vacant possession on behalf of Messrs Touche Ross & Co in their capacity as receivers. The auctioneer’s research revealed that the building had been offered for sale privately for some 18 months prior to receiving instruction, with the result that many local hoteliers were well aware of its availability, although none had been willing to commit himself to an irrevocable purchase. Furthermore, there was no shortage of comparable accommodation readily available, there having been some eight hotels, in varying degrees of repair, available for purchase during the auction marketing period. The threat of the sale, combined with the genuine intentions of the vendor to achieve a binding contract, resulted in the successful disposal of the property in the room for a figure in excess of £1.5m.
The threat of an auction will have a similar effect on the special purchaser, for example, an adjoining occupier or a tenant. The risk of losing this important purchase to a higher bidder in an auction room will very often extract a substantial bid prior to the sale. The auctioneers will advise whether this should be accepted or whether it is likely to be exceeded at auction.
The four-week marketing period prior to a sale gives a good opportunity to assess the strength of the market. Very often offers are made and price indications given by potential bidders. The numbers of requests made to the vendor’s solicitors for documents is an extremely helpful measure of the market-place. By staying in close contact with those who have registered their interest, the auctioneers will be able to agree with the receiver or liquidator concerned the reserve price which will accommodate the major part of the market-place and thus ensure a sale.
The atmosphere of an auction room can be extremely exciting, and an interested party will often bid in excess of the figure he had previously set as his maximum as a result of this excitement and the confidence and enthusiasm that competitive bidders may be showing.
Indeed, in some cases, properties are bought by investors or developers directly “off the catalogue” without the benefit of any pre-contract research at all. These buyers are often the professionals, who will accept the risk of a bad buy as an occupational hazard. Often such a buyer is very welcome for lots which have proved difficult to sell in the past.
Sites which are suitable for a variety of alternative uses often achieve higher prices at auction as a result of competition between different types of buyer. For example, a freehold residential estate of around 15 acres — Home Farm in Pryford — comprising a farm cottage, a derelict gatehouse, stables, loose boxes and various outbuildings was sold at a London auction in April for £550,000 on behalf of mortgagees.
The site had the benefit of various planning consents for development and extension of the existing buildings as well as presenting potential for further development. Accordingly, interest was attracted from not only owner-occupiers but also developers and investors.
In an uncertain market, the genuine intention of the vendor to sell is all important to the buyer, who does not wish to waste time investigating the purchase of property which is ultimately over-priced on reserve. By advertising a property for sale by auction as being sold on behalf of receivers, liquidators or mortgagees, for example, these fears are allayed. Furthermore, if the insolvency practitioner and the auctioneers agree a pre-auction guide price that is realistic, potential bidders will perceive the sale to be a genuine one and will be encouraged to take things further.
Tenders, while much favoured by some vendors, especially in a strong market, are not popular with property investors: they do not like bidding “blind”, and often will not tender for a property at all. To lose out on one prospective purchaser in this way could result in the best price not being obtained.
A London or local auction?
The success of any auction depends on attracting the maximum number of genuine bidders to the auction room. Assuming that a wider market-place exists for individual lots than that within the locality of the property itself, it is usually easier for buyers to travel to London from various parts of the country than it would be for them to travel to most other parts of the UK.
London is the property auction and business centre of the UK, and therefore a far greater degree of exposure and publicity would be accorded to the sale.
The major UK property auction firms have traditionally held their sales in London, and up to 700 regular buyers are often present at each sale. Through both national and local advertising, competition among buyers can be maximised by making the property available to both regular bidders as well as to potential local bidders with a specific interest in any particular lot.
For example, in May the Kingsnorth Industrial Estate at Hoo, near Rochester in Kent, was sold by auction. The site, which extended to almost 15 acres, comprised over 96,000 sq ft of industrial space, fully let and producing £187,000 pa. The property was offered by order of mortgagees and realised £1.8m under the hammer. The purchaser was a Kent-based property company which bought in competition with potential buyers from London and elsewhere.
Sequence of events
In virtually all cases of business failure, following the appointment of the insolvency practitioner, the assessment of the potential values, and perhaps liabilities, of a company’s assets becomes an immediate priority. It is therefore essential in such cases for the auctioneers to provide an estimate, within days, of the prices likely to be realised on sale of these assets at their next available auction. Once in receipt of this information, the insolvency practitioner can decide whether the sale of some or all of these assets should proceed.
Most major UK auction houses hold six or more auctions every year, each one conducted at a prestigious London hotel. Instructions are normally sought for each sale up to 10 weeks prior to the auction date itself with the list for entries closing approximately six weeks prior. This allows two weeks prior to the start of marketing for the collation and preparation of the catalogue.
Upon receipt of instructions each lot is inspected by a surveyor, buildings measured and photographs taken for the catalogue. Investigations are completed and particulars of sale are prepared, with copies sent to the client and to the client’s solicitors for approval and return. The client’s solicitors are provided with a set of the auctioneers’ general conditions of sale to enable the preparation of the special conditions of sale dealing with legal matters specific to each lot.
The catalogue goes to press around five weeks before the sale and is dispatched to buyers whose names are registered on the residential or commercial mailing lists. Two catalogues are produced by Allsop & Co — a commercial catalogue (approximately 15,000 copies) which contains brief details of its residential properties, and a residential, land and leisure catalogue itself (approximately 7,000 copies).
While the catalogue is being printed, detailed research is carried out to determine the likely realisation upon sale of each particular lot. In the case of commercial properties, estimated rental values are assessed and clients are advised accordingly. In this way, by the time the catalogue is printed and distributed, each surveyor within the auction house has a comprehensive list of guide prices, reserve prices (which remain confidential) and estimated rental values where appropriate.
Throughout the four-week marketing period the names of all interested parties are recorded, regardless of whether or not their initial inquiry was for particulars of sale or in the form of a pre-auction offer. Levels of interest are monitored extremely closely in order that advice on reserve is geared to the strength of the market-place. This matching of price to demand is the key to the success of the sale.
At the auction itself the vendor’s solicitors are normally present to deal with legal inquiries, although it is the policy of some auctioneers to avoid dealing with possibly damaging questions during the course of the auction. Purchasers are reminded that they have had four weeks or so to prepare themselves for the day, and they are advised that if they are in any way unclear as to the nature of the lot in which they are interested they should speak privately to one of the auctioneer’s assistants.
Upon the fall of the hammer the successful purchaser is required to sign a contract of sale and pay a 10% deposit. In practice, the vendor’s part contract is signed by a partner of the auction house. Even in the unlikely event of the purchaser absconding, the auctioneer has authority to sign for both parties.
The following morning all deposit cheques are specially cleared and the purchaser’s part contracts sent to the vendor’s solicitors.
Completion of the sale will normally take place 28 days after exchange, unless otherwise provided for, and the auctioneer will account to the client for the deposit moneys less the fees due to him.
In the event of a lot failing to sell under the hammer, a sale can often be concluded immediately afterwards in the auction room. If not, all parties whose interest was registered prior to the auction will be contacted with a view to the negotiation of a sale afterwards.
While the auction method is normally used to realise the value of the company’s assets on a piecemeal basis, it is also suitable for the realisation of the assets for continuity. The auction date dicates the deadline by which prospective purchasers of the business have to make up their minds, and the phrase “unless sold previously for continuity of production” incorporated in the publicity allows the vendor to effect a sale of the assets as a whole at any time prior to the auctioneer taking the rostrum; hesitant purchasers must therefore show their true intent. If the method briefly outlined above is used, the effort to effect a sale as a whole can run in tandem with the auction preparation, thus ensuring full exposure to the potential market and a sale by whatever means within a reasonable period.
The practice of selling off certain company assets prior to auction piecemeal should be resisted, as this has the effect of reducing the auction as an occasion; while individual prices are, of course, important, the total realisation is what really matters. The effect that the sale of certain prime items can have on the overall result cannot always be foreseen.
Speculators
It is becoming increasingly common for speculators to approach receivers/liquidators with “one-lot bids” and, having successfully acquired all the assets, arrange a piecemeal auction for the sole purpose of producing a quick profit. There are several very adept firms now in the market-place operating this system and such approaches should be considered very carefully. Acceptance undermines the principle that creditors should benefit in full from the sale of company assets.
Plant and machinery
In insolvency matters, the receiver or liquidator is often called upon to administer the disposal of plant, machinery, trade stocks and chattels as well as the sale of landed property. To cater for these requirements, one or two London property auctioneers have joined forces with specialist plant and machinery auctioneers.
An auction sale is no longer regarded as the “dumping ground” that it may have been 20 years ago. Today, the major London auction practices are dealing with the sale of multi-million-pound properties regularly. Auction sale has been successful in cases where other methods of sale have failed.
Virtually all types of property could be suitable for auction provided that the insolvency practitioner and the auctioneers are able to agree a realistic reserve price. Furthermore, since such vendors are duty bound to obtain the best price on disposal, the advantages of a professionally run auction sale are difficult to ignore.
