That was the question that the Real Estate Agents Tribunal (in the case of Milne & Bowring vs Real Estate Agents Authority & Eades) had to answer.
Background
A residential property was being auctioned in Auckland. The auction stalled at a price of $2.5 million. The vendors had set a reserve of $2.7 million. The auctioneer halted the auction while he asked the vendors whether they would be prepared to reduce the reserve price. The vendors agreed to reduce the reserve price to $2.6 million.
The auctioneer then spoke to 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bidder advised the auctioneer that he would be prepared to pay $2.7 million for the property, if the property was withdrawn from the auction and sold directly to him.
The auctioneer was not sure what to do. The auctioneer thought that he could not sell the property outside the auction process, as the auction was already in train. He telephoned another experienced auctioneer for advice. He then decided that the only option was for the vendors to cancel the auction and then to deal with the person who made the offer, but there was no guarantee that the person who had made the offer 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 the auction. 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 person that made the offer subsequently bid and the property was sold to him at $2.605 million.
The vendors were unhappy that what had happened resulted in them receiving $95,000 less than they had been offered, and they lodged a complaint with Real Estate Agents Authority.
The Hearing
At the hearing, the vendors gave evidence that they had asked the auctioneer whether the offer of $2.7 million could be put in writing. They claimed that they were told that this was not possible.
The auctioneer denied having been asked to get anything in writing, and said the offer could not have been concluded on the auction form.
At the hearing, the auctioneer called other experienced auctioneers and real estate agents to give expert evidence. The witnesses said that in their view, to withdraw the property from sale would be a 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 6.3, by bringing the industry into disrepute.
In its’ decision, the Tribunal said that while it was important for an agent to act in good faith and act fairly, it could not override that agent’s fiduciary obligations to the vendor.
In this case, the auction terms gave the vendors 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 these rights (the current REINZ/ADLSI auction forum contains the same clause).
The Tribunal said the proper thing to do would have been for the auctioneer to have obtained a written offer, which was subject to the auction being cancelled. The vendors could then have exercised their rights in clause 2.5 to withdraw the property from sale.
As to whether the auctioneer could have used the auction form for the offer, the Tribunal said it was up to the auctioneer to obtain a written offer, and it did not matter how this was achieved. The Tribunal said this could have been done by using the auction terms and adding an additional clause, or by recording a sale on a separate sheet of paper, including reference to the terms and conditions in the standard form of agreements for sale and purchase.
Lessons
1) The standard REINZ/ADLSI auction terms allow a vendor to withdraw a property from sale at any time before it has been sold.
2) Therefore, even though it might be part way through an auction, there is nothing to stop a bidder from making an offer to purchase the property on condition that the auction is cancelled.
3) It will then be up to the vendor to decide whether to take that offer, or to continue with the auction in the hope of obtaining a better offer.
4) In this situation, any offer should be recorded in writing before the auction is cancelled.
Disclaimer: This information is correct at time of publication, designed as a general guide and should not replace specific legal advice on a particular issue.
