According to property investment specialists, The Mistoria Group, increasing numbers of investor landlords have been facing expensive legal battles when they try to recover losses from property auction purchases, due to the vendors misrepresenting the legal pack.
Auction houses don’t usually get involved in disputes between vendors and purchasers once contracts are exchanged, citing them as legal matters. So, any misrepresentation of the true facts or non-disclosures in the legal pack leaves buyers having to resort to time consuming and expensive litigation.
With the Coronavirus Act 2020 regulations in place residential landlords must currently give tenants a full six months’ notice of their intention to seek possession of a property. Also, with the added complications of much additional documentary evidence needed for the courts following recent regulations changes, it doesn’t take much to be wrong with the paperwork, or a single missing document, for a possession claim to be stymied.
To enable a new owner to serve the notice correctly, the tenancy information must ALL be correct; the deposit protected with an authorised scheme; the prescribed information served on the tenant(s), and any other ‘relevant person’ (i.e. any person who, in accordance with arrangements made with the tenant, who paid the deposit on behalf of the tenant).
The gas certificate and EPC must have been served prior to the letting, and electrical certificates and any licencing fees paid.
If an investor buys a property with tenants in situ without this evidence, further down the line there could be trouble. If sitting tenants provide evidence that they have paid a deposit prior to moving in and it has not been registered in a government approved scheme, or no gas certificate was served, for example, the new landlord could be forced to pay up to three times the amount of deposit, or there could be a long delay in gaining possession.
Mish Liyanage, Managing Director of The Mistoria Group says:
“Increasingly, we are hearing of investors that have lost significant amounts of money at auctions. After going through the purchase process, investors are finding that the development or conversion plans they have proposed to carry out are no longer possible as there are sitting tenants, with no evidence that the deposits have been protected with an approved scheme.
“We are aware of a situation, where an investor stands to lose £28,000, comprising the 10% deposit, auctioneer fees, conveyancing, legal and planning application costs. The intention was to convert the properties to HMOs, but the legal pack/AST failed to disclose the actual position on the rent and deposit. Essentially the vendor misrepresented the legal pack and is in breach of contract.
“Not surprisingly, the auctioneer or the selling agent did not want to get involved, citing it as a legal matter. Despite the investor following the legal advice and the law of the country, he stands to lose a significant amount of money, as it was impossible for him to complete on the property without resolving the issues on the legal pack and tenancy.
“This case highlights how costly this game can be if things go wrong, due to major issues with pre ownership. We are urging investors to be ultra-careful when purchasing property at auction. While vendors and auctioneers gain, buyers stand to lose hard-earned cash.
“My advice to investors who are considering purchasing property with tenants in situ via an auction is to do your homework on the legal pack especially the AST well in advance. Also seek legal advice from the outset and if there is a dispute after the exchange. Ensure from your side as the buyer, you perform all your contractual obligations so that you are not in breach and also keep a log of all correspondence.”
The answer is to allow yourself plenty of time to investigate and do your due diligence thoroughly, especially if you intend to gain possession after purchase to do refurbishment work etc.