The article “Properties worth Lm3.6 million in first quarterly auction” (Classified, The Sunday Times, March 11) stated that Malta Property Auctioneers were to hold a public auction of immovable property, apparently the first of its kind.
I visited their Website and reviewed the existing laws and wish to give my views on the matter of public auctions of immovable property.
Public auctions are regulated by Act No. 342 of the Laws of Malta and the rules regulating the conduct and procedures to be followed by an auctioneer emanating from Legal Notice No. 69 of 1991.
In the definition contained in the Regulations we find the term “lot” as being “one Article or more than one Article grouped together”. One may reasonably argue that public auctions contemplate solely auctions of movable property. But equally one may argue that auctioning immovable property is not expressly excluded by law.
The aspect of the profitability which auctions of immovable property give the property market cannot be denied.
It is profitable to the seller who fixes the reserve price below which he is not expected to sell the property. It is advantageous to the bidder who may be in for a bargain or conversely is prepared to outbid everyone else to acquire the property he covets. Last, but not least, it is definitely profitable to the auctioneer.
Article 14 of the Regulations states: “The commissions to be charged by an Auctioneer in respect of a ‘lot’ sold at an Auction shall not exceed in respect of a seller 10 per cent and with respect to the buyer 5 per cent.”
A far cry from the 3.5 per cent to 5 per cent due to a real estate agent. There is no indication on the Website of the company that the auctioneer will be charging a rate inferior to legal percentages of Article 14.
The concept of auction of immovable property is not alien to our laws. A judicial sale by auction is the final outcome of a court case ordering a judicial sale by auction of the immovable property subject to hypothecary debts. Judicial sales by auction are common in actions for partitions between co-owners or co-heirs when not enough property exists in the estate for co-heirs or co-partitioners to allow each heir or partitioner to acquire immovable property.
But these procedures are governed by specific and detailed legislation which contemplates a series of steps which have to be observed before the release of the immovable in favour of the highest bidder. Unlike a public auction, the procedure of sub asta has the effect of transferring the property. In fact the procedure constitutes a ‘sale’ to the highest bidder in the proper sense of the word. On termination of the procedures laid down at law the ‘sale’ is concluded vis-à-vis the bidder and when the Court Registrar inscribes its release by an enrolment note in the Public Registry it shall have effect vis-à-vis third parties.
The procedure dispenses with the need for searches to the title of the released property to be carried out by the adjudicated bidder as it provides for the immovable to be released free from hypothecary debts and defects in the title.
A public auction (excluding judicial sales – sub asta), on the other hand, does not have the effect of transferring a ‘clean’ title to the bidder on the date the hammer falls. In case of public auctions at hammer time not even a promise of sale exists and there is little or nothing that binds the parties at this stage.
In the case of a movable auctioned, the fall of the hammer gives the successful bidder rights over the movable auctioned, not so in the case of immovable property as the sale of immovable property and the rights and obligations of sellers and purchasers are regulated exclusively by the title of sale in the Civil Code.
Assuming what is laid down in LN 69 of 1991 applies also to auctions of immovable property, the obligations imposed by the Act and the Regulations on Auctioneers need to be scrupulously observed by them as there are sanctions and penalties imposed in the Act and the Regulations in case of non-compliance.
These, among others, are: 1) that the auctioneer has to be licensed to act as such; b) that catalogues shall be available at the place where the auction is to be held. Copies of same to be placed in ‘each room’; c) that the regulations make the viewing mandatary; d) that Section 6 makes mandatory the obligation on the auctioneer for the period following the publication of the catalogue, to allow two hours minimum for viewing of ‘lots’. I read that the first auction of its kind has 20 properties spread all over the island. I cannot imagine that this requirement can be easily carried out for each immovable by each bidder. In the auction of movables all ‘Lots’ are under one roof.
A similar odd section where immovable property is to be auctioned is the requirement that if the reserve price is not reached, the seller is to “collect an unsold lot after written notice given to him by the auctioneer to that effect”. Moreover if the item remains uncollected, the auctioneer may sell the lot by auction below the reserve price.
How, one may ask, does one ‘collect’ an unsold immovable? An oddity it may be, but one which may have unpleasant consequences for the seller who might find his ‘lot’ auctioned at a ridiculous price.
Regulation No. 17 places the auctioneer in default if he does not release the price to the seller within one month from adjudication in his favour. In this case it is the auctioneer who is at risk.
As the law stands, the transfer of title to immovable property at law can only be made by notarial deed. The period of one month for release of funds is cutting it a bit fine, particularly if the bidder requires bank finance for purchase. How can the bidder expect to release the sale price to the auctioneer before he signs the inevitable notarial deed which is normally signed by the parties after the usual searches are effected? A search inevitably takes time and may be complicated.
Furthermore, practically speaking, how can a bidder prepare finance for a property when he can only know what the finance required is on the date of the auction if his is the larger bid?
At the stage of adjudication to the highest bidder there is no enforceable agreement (such as a promise of sale normally binding both parties as contemplated in the Civil Code indicative of the procedures to be followed for either party to enforce his rights). Assuming that after the adjudication the bidder (or, for that matter, the seller) has second thoughts and desists from signing a promise of sale and (in the case of the bidder) decides to forfeit the 10 per cent deposit which the law (Article 9) states has to be placed with the auctioneer on the reserved price by the bidder. Can the seller enforce his rights against the bidder if no promise of sale has as yet been signed between the parties? I would think not.
Conversely, if the seller refuses to sell, who will be entitled to the deposit made out in the auctioneer’s name? The law (Art. 15 (1) of LN 69/91) gives the auctioneer the right to charge a fee not exceeding the commission (10 per cent to seller or five per cent to buyer) on the reserve price. So this is a ‘win win’ situation for the auctioneer.
In a promise of sale preceding a notarial deed of sale, the seller invariably has the right to force the buyer to purchase the immovable and vice-versa. In default the deposit is forfeited by the bidder. But who is entitled to it? The auctioneer in terms of law, or the seller in terms of the konvenju? Or are we here expecting the bidder/purchaser to pay another 10 per cent on the signing of the konvenju which the seller takes for non-completion in view of the fact that the auctioneer is, in any case, entitled to his 10 per cent commission whether the deed of sale is eventually signed or not?
Another oddity is this question of searches. What happens if there are 15 bidders who will only be known to be bidders in real time on auction date? Is each one expected to have effected full searches when only one stands to acquire the immovable?
Another handicap relating to public auctions of immovables lies in that bidding is unconditional, and once the property is adjudicated, the successful bidder would have to acquire the property unconditionally as he is expected to have made searches and obtained finance prior to auction date, whereas in promises of sale conditions like: ‘Subject to loan’, ‘subject to planning permit’, ‘subject to confirmation by architect’, etc., are invariably included in the konvenju. And in any case searches are effected right up to the signing of public deed.
The fact that searches and bank finance are expected to be available to the bidders prior to bidding date means that such clauses will not be included in the promise of sale which MPA is expecting the parties to sign post-auction adjudication. So the assumption is that the promise of sale is not merely a formality, but is still the first step in a binding legal relationship preceding the sale itself.
Moreover, I cannot see how the practical obstacle presented by the fact that the acquisition price is unknown for finance purposes prior to auction date can be overcome. What would the issue be if the final adjudicated auction price payable to the seller exceeds the sum allowable as finance in a pre-approved loan application made by the successful bidder prior to the auction?
The absence of ad hoc legislation to address these problems and the absence of proper integration between the legal provisions on public auctions and those in the Institute of Sale in the Civil Code, will make attempts at making use of auctions for the sale of immovable property similar to navigation in uncharted waters fraught with difficulties and perils of a practical and legal nature that will undoubtedly rear their head, not in cases where everything works out fine, but in instances when one is faced with problems that find no solution at law in its present form.