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Auction sales under the hammer from identity fraud

Selling property at auction can, at times, seem an attractive, quick-fire solution for over-burdened sellers whilst offering potentially ripe pickings for bargain-hunters. Neither scenario is without its risk as the very nature of property auctions can offer loopholes for identity fraudsters and money launderers.

In July of this year auctioneers had to pay out damages when a property sale failed to complete.  The auctioneers had signed the memorandum of sale on behalf of the seller but, following the auction, the correct owner had stepped forward and denied having authorised any sale.    The owner claimed that a third party had used his identity to try and sell the property and obtain money by way of fraudulent deception.  Damages were awarded to the prospective buyer who had paid the deposit to the auctioneers and then been unable to complete the purchase.

Usually however, the worry about identity involves the buyer.  Whilst some auction houses insist on potential bidders pre-registering (at which point anti-money laundering and identity checks are carried out), not all auctioneers require this as they believe it overly restricts potential interest in the properties being sold. Instead, they advise potential bidders to bring satisfactory methods of identification with them so that the checks can be carried out following a successful bid.

The problem with this method is that when the hammer falls, a binding contract is formed.  If the winning bidder then reveals he has forgotten his identity documentation the auctioneer has to decide whether the contract can proceed or not.  Anecdotal evidence even suggests that, in a worst case scenario, an aggrieved borrower might maliciously bid for his repossessed home and then refuse to provide ID evidence.

The RICS Common Auction Conditions, which are widely used, require the winning bidder to provide proof of identity before leaving the auction but only if required by the auctioneer. RICS advise that identification of the buyer is not currently a requirement under the Money Laundering Regulations 2007 so it is a matter of discretion for the auction house.  There is however an obligation to report suspicious activity and the RICS guidelines recommend that it is good business practice to confirm that the person proffering the cheque and signing the memorandum of sale are indeed who they claim to be.  Experience suggests that auction houses invariably follow the recommendations and ask for ID evidence but then have to make a snapshot decision if ID evidence is not available.

If identity is not confirmed, there is the tricky question of the deposit.  The binding contract for sale will require a deposit to be handed over to the seller or auctioneer but usually the cheque isn’t cashed until identity checks have been completed.  If satisfactory proof is provided, the deposit can be cashed and the contract continues. If satisfactory ID evidence is not provided or the deposit itself is not provided, the auctioneers can treat this as a repudiation of the contract as agent for the seller.

Despite these safeguards it would take a brave auctioneer to take the draconian step of repudiating the contract if a buyer had forgotten his ID documents which frequently happens.  In this case, rather than lose the sale, the auction houses usually allow a short period for the seller to provide the evidence before threatening to pull the contract.

For the seller, it is a no-win situation if the buyer fails to produce his ID evidence:

  1. Wasted time and costs.  The seller will have to formally rescind the contract and re-submit the property in the next auction. Amendments to the particulars and auction package will be required if there have been any changes to the property in the interim (for example rent arrears and tenant defaults).  Any holding costs will continue to mount in the interim, which may be a challenge to the seller, and any funder, if the seller is financially stretched.
  2. Renewed searches.  If the next auction is several months away, any Local Authority search provided in the auction package may have reached its recommended ‘shelf life’ of three months and may have to be renewed.
  3. Price.  Waiting for the next auction could have price implications if the market is unsteady or a Budget or other legal change occurs in the interim (for example a change to stamp duty rates).

An added injury is that whilst the seller can theoretically claim damages from the winning bidder for breach of contract, in practice this may well be very difficult if the buyer’s identity cannot be satisfactorily established.

RICS has issued a draft sixth edition of their note “Auctioneers selling real estate” which is a best practice guide for auctioneers but also covers what buyers and sellers can expect.  Comments are invited by 3 December at:
https://consultations.rics.org/consult.ti/auctioneers/consultationHome but the conclusion for sellers and buyers alike is simple: a case of mistaken identity can deal a hammer blow to anyone caught out.