Right to withdraw property from sale by auction

Peter Nolan 129X155                 A recent decision of the Real Estate Agents Disciplinary Tribunal gives guidance for property lawyers who might be faced with having to give advice, on the spot, in a similar situation. The decision also confirms that while an agent must act fairly, the agent’s primary obligation is owed to the vendor.

The case was Milne & Bowring v Real Estate Agents Authority & Eades [2013] NZREADT 60. The decision was handed down on 16 July 2013.

The case arose from an auction of a residential property in Remuera. The auction stalled at a price of $2.5 million when the vendors had set their reserve at $2.7 million. The auctioneer called a pause to the auction while he discussed with the vendors a reduction in the reserve price. The vendors agreed to reduce the reserve price to $2.6 million.

The auctioneer then spoke with the highest bidder.  The highest bidder advised the auctioneer that he would be prepared to pay $2.7 million for the property, if the property was withdrawn from auction and then sold directly to him.

This was an unusual offer and there was a great deal of uncertainty about what to do.  The auctioneer considered that he could not sell the property outside the auction process, while the auction was in train. He phoned another experienced auctioneer for advice. He then concluded that the only option was for the vendors to cancel the auction and to commence dealing with the offeror, but that there was no guarantee that the offeror would not renege on his verbal offer.

The vendors decided that they did not want to cancel the auction and instructed the auctioneer to proceed with it.  There was no discussion about the reserve price, which was left at the reduced figure of $2.6 million.  The auctioneer claimed that the vendors understood that there was a risk that the property might be sold for less than $2.7 million. 

The offeror was apparently upset that his offer was not accepted but was persuaded to stay at the auction.  The offeror subsequently bid at the auction and the property was sold to him for $2.605 million.

The vendors were unhappy that the sale process resulted in them receiving $95,000 less than they had been offered.  They then lodged a complaint with the Real Estate Agents Authority.

At the hearing, the vendors gave evidence that they had asked the auctioneer whether the offer at $2.7 million could be put in writing.  They were told that this was not possible.

The auctioneer denied having been asked to get anything in writing and said that in any event, the offer could not have been concluded on the auction form. 

At the hearing, the auctioneer and the real estate agent involved in the sale called another experienced auctioneer and real estate agent respectively to give expert evidence.  The witnesses gave evidence that to withdraw the property from sale would have been in breach of clause 6.2 of the Real Estate Agents Act (Professional Conduct and Client Care) Rules, which requires licensees to treat all parties fairly.  By withdrawing the property from sale, the other interested parties would be denied the opportunity of participating in the purchase.  The witnesses also claimed that withdrawing the property from sale would be in breach of Rule 6.3 by bringing the industry into disrepute.

In its decision, the Tribunal made it clear that while it was important for an agent to act in good faith and deal fairly, it could not override the agent’s fiduciary obligations to the vendor.

In this case, the auction terms provided in clause 2.5 that the vendors had the right to withdraw the property from sale at any time before it had been sold.  Therefore it was not being unfair to other prospective purchasers for the vendors to exercise this right.  The current REINZ/ADLS auction form (Particulars and Conditions of Sale of Real Estate by Auction, Fourth Edition 2012), contains this same provision, which is a standard clause.

The Tribunal held that the appropriate course of action was for the auctioneer to have obtained from the offeror a written offer, which was subject to the auction being cancelled.

The vendors could then have exercised their rights under clause 2.5 to withdraw the property from sale. 

As to whether the purchasers could have made their offer in writing by signing the auction form, the Tribunal held that it was up to the auctioneers to obtain a written offer and that it did not matter how this was achieved.  The Tribunal said that this could have been done by using the auction terms and adding an additional clause, or otherwise by recording the sale on a separate sheet of paper, including reference to the terms and conditions of the standard form of Agreement for Sale and Purchase.

In my opinion, the Tribunal’s decision is absolutely correct.  However, it may not have been easy for the vendors’ lawyers to have come to the same conclusion themselves in the heat of the moment, if they had been rung for advice by the vendors from the auction room.  For this reason, the decision is worth remembering.

The key points from the decision, which serve as a useful reminder to all property lawyers, are:

  1. The standard REINZ/ADLS auction terms make it clear that the vendor can withdraw the property from sale at any time before it is sold.
  2. Accordingly, even though it might be part way through an auction, there is nothing to stop a bidder making an offer to purchase the property on condition that the auction is cancelled.
  3. In this situation the vendor will need to weigh up whether to take “the bird in the hand”, or to continue with the auction.
  4. Obviously, it will be risky to withdraw a property from sale part way though an auction if the purchaser’s offer has not been committed to writing.  Therefore, it will be prudent to obtain any such offer in writing before withdrawing the property from sale.

In a case such as this, there will still be the risk that the purchaser might not pay the deposit, but that risk will be no greater than the risk that the highest bidder at the auction might not pay the deposit.

Peter Nolan is a barrister and solicitor, and the principal drafter of the Eighth and Ninth Edition revisions to ADLS’s Agreement for Sale and Purchase of Real Estate. 

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