The importance of pre-contract due diligence in property transactions

Solicitors always sound caution when acquiring residential or commercial property and emphasise the need to carry out pre-contract due diligence. This is especially relevant for auction purchases, but it’s not uncommon for other forms of contracts to be signed and exchanged prior to any due diligence being carried out.

Buyers should not commit to purchasing a property unless legal advice has been taken, and a recent example should serve as a warning to others considering a similar move.

Many buyers want to reduce costs by buying at auction however it’s important to remember that you are legally bound when your bid is accepted and the hammer falls. The onus is always on the buyer to carry out their due diligence before this and there is often no recourse to the seller if you subsequently discover defects or issues.

Similarly, buyers might sign and exchange contracts by direct negotiations with the seller. A buyer may do this prior to taking legal advice in order to minimise costs, but they may then find themselves bound by the terms of the contract regardless of any defects or issues which may later be discovered.

I was recently approached by someone who had bought a property pre-auction and subject to the auction house’s usual terms and conditions.  They subsequently found out that the seller wasn’t the legal owner. The property also had a number of other very significant title defects, such as a lack of sufficient rights. By signing the auction house’s documents and paying a significant deposit, they had exchanged contracts without taking any legal advice. They decided to walk away from completing the transaction and therefore lost their deposit to the seller and incurred significant auction fees, but this could have been avoided.

There can be genuine reasons why a seller is not the legal owner of the property on the registered title, which can take time to resolve. For example, this could be due to them having recently bought or inherited the property and they are immediately reselling it. This could cause delays to the registration of a subsequent buyer as the legal owner as applications submitted before the most recent application will have priority.

There can also be instances where someone purporting to be the owner of a property may not have any interest in the property, or any authority of the legal owner to sell the property and buyers need to be alert to the possibility that they might have succumbed to deliberate fraud where the seller intends to keep the buyer’s deposit and may try to sell the property again. Legal advice would then need to be sought by the buyer in connection to pursuing the seller for the fraud, but that process will be time consuming, expensive and may not result in a successful outcome.

If you are using finance to fund a property purchase, a lender is likely to take a stricter approach and may insist that the seller is named as the legal owner on the property title prior to releasing the funds.

Whilst issues of registration are less common, more typical issues associated with buying a property at auction include title defects, such as a lack of necessary rights or problematic restrictive covenants, planning or building control issues and structural problems.

For auctions, an auction pack is available to all interested parties before the auction takes place and should contain the title documents.  The auction pack may also contain the usual searches and replies to standard enquiries / usual protocol forms. It is strongly advised that a buyer seeks legal advice on the contents of the auction pack and that their solicitor raises any necessary due diligence enquiries pre-auction.

A property being sold at auction, or one that you are looking to purchase via direct negotiations with a seller, could be a real bargain, but it could also be a very costly problem. You should always seek legal advice before bidding at auction or signing a contract to purchase a property.

James Cheshire is an Associate Solicitor at Taylor Walton Solicitors www.taylorwalton.co.uk