Auction properties with attractive prices often far below market value are often a tempting notion to property buyers. However, whether one is seeking an investment or looking for one’s dream home, there are numerous legal pitfalls associated with purchasing auction properties.
Below are some of the risks that auction bidders should consider before purchasing an auction property, and why they should consider engaging the services of a professional property agent or lawyer to help them navigate through the process.
Private Caveats
A risk in purchasing auctioned properties is the potential for encumbrances to be attached to them, for instance, a private caveat.
A private caveat is a legal notice entered by anyone who has a claim or a caveatable interest over a property to restrain the sale of that property. In effect, this means that a private caveat lodged on an auction property may prevent a successful bidder from getting the legal title of that property transferred to its name, despite being able to pay the full purchase price.
There are various avenues by which a private caveat may be removed:
- through a withdrawal by the party responsible for lodging it, or
- through an application to the Registrar of Titles or via the High Court.
Should the party lodging the caveat actually have a justifiable interest in the property, the likelihood of getting it removed becomes even slimmer. Regardless of which avenue is pursued, the successful bidder ultimately bears the lost time and costs incurred from the process. A fresh title search done just before the auction date can save a potential auction buyer a lot of grief.
Outstanding bills: utilities and service charges
It is not uncommon for a successful bidder of an auction property to be compelled to pay for any outstanding utility and service charges on that property. However, this condition of the sale is easy to overlook and can lead to a successful bidder unknowingly taking on significant costs in addition to the purchase price, and throwing them off their budget.
To mitigate this, potential bidders should obtain a copy of the Proclamation of Sale (POS) and Conditions of Sale (COS) prior to the auction day, and familiarize themselves with all the terms and conditions stipulated in both documents. They lay out useful details to any potential bidder about an auction property, including the sums of any outstanding bills which they will be made responsible for. Be forewarned, try as they may, it is not easy for potential bidders to obtain outstanding account information from the utilities companies or management offices, given that they are not the actual account holders.
Occupants & Squatters
Property buyers typically want their purchased property to be vacant, for their own stay or to rent out. However, unlike in a sub-sale purchase, buying an auction property does not necessarily come with actual vacant possession nor the promise of vacant possession being delivered upon payment of the purchase price.
If it is discovered that an auctioned property is still occupied, the successful bidder must evict them and take possession of the property at their own cost. To legally remove occupants, owners must do so through distress proceedings or through a court order for eviction. This is a lengthy process that could take up to 6 months and costly legal fees. Furthermore, such circumstances are exacerbated if the occupant is found to be a squatter as opposed to a tenant. As the identity of a squatter is often unknown, the process of evicting squatters (compared to tenants holding over) is even more complex.
Hence, potential bidders should be cautious and ensure the vacancy of the property before purchasing it. However, this often proves difficult as most auction properties, especially stratified properties, are closed off and inaccessible to inspection by potential buyers.
LACA Auction Properties
The next legal pitfall concerns auction properties known as a Loan Agreement Cum Assignment (LACA) auctions, involving properties for which the individual title or strata title has yet to be issued. These properties are usually auctioned off by the banks, rather than through the High Court which will grant an order to sell the property. Unfortunately, the transfer of a LACA auction property to a successful bidder may involve complications compared to one effected by way of a court order.
Typically, successful bidders of a LACA auctioned property must first request the developer of that property to issue a strata title, and obtain the developer’s consent to have the strata title transferred to their name. Though seemingly straightforward, delays and complications will surface in situations where the developer has been blacklisted or wound-up. In such a case, a successful bidder will have to approach the liquidator taking over the matter instead. This may be difficult to do and liquidators may request for additional payments from a successful bidder for the issuance of an authorization and consent for the sale (e.g. 1% – 2% of the purchase price).
Conclusion
While most of the pitfalls in purchasing auction properties are avoidable or remediable, they often entail considerable effort, time and resources by a successful bidder to avoid or rectify the situation. Also, for auction properties that are not of high value, any such unforeseen issues could result in highly disproportionate costs.
Instead, doing a thorough due diligence and appointing a lawyer to advise you prior to bidding for an auction property could prevent potential bidders from unwittingly falling into a poverty trap in their pursuit of a good bargain.
***
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the property & tax practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.
