Gazundering and gazumping, avoiding the perils

Research suggests that nearly a third of recent sellers have suffered gazundering, which property pundits attribute to a downturn in the market. But, in some areas, the lack of suitable properties means there is still fierce competition for homes, with buyers trying to outbid each other via gazumping.

‘It is certainly a challenging time to be moving home,’ agrees Neil Shearer, a Conveyancer in the residential property team with. ‘Unfortunately, some buyers and sellers are taking advantage of the current market to renegotiate the agreed price, threatening to pull out if their demands are not met. The good news is there are things you and your solicitor can do to reduce the risks.’

Gazundering, and why it is a problem

With gazundering, the parties agree on a price, and the sale is proceeding, but the buyer then lowers their offer, threatening to pull out if the seller refuses to accept their reduced offer. Gazundering tends to be more common in a falling market, where the gazundering buyer exploits the seller’s fear that they may struggle to achieve the same price again.

Gazundering can happen at any time between accepting an offer and exchanging contracts. However, it is most common just before exchange. This is the moment both parties commit legally. As a seller, you will already have made a significant emotional and financial investment in your move, and the buyer knows this; it is the point at which their ultimatum is likely to have the most impact. The stakes are high, particularly if you are buying another property with your sale proceeds. If you call your buyer’s bluff and they walk away, you risk losing your new home too, particularly if your seller is in a chain of linked transactions. However, giving in to their demands could cost you dearly too. It can feel like a lose-lose situation.

Gazumping, and why it is a problem

Gazumping is the flip side of gazundering. It is generally more common in a rising market, but can happen whenever there is strong competition over a property. A seller accepts an offer from a buyer, and it seems like the purchase is progressing normally. However, the seller then accepts a higher offer from another buyer.

If this happens to you, your seller may invite you to increase your offer. This may secure your purchase, but it could escalate into a bidding war or a contract race. Even if the seller accepts your increased offer, you may find it hard to trust them, fearing they may try the same thing again.

Just like gazundering, gazumping can be costly emotionally and financially. If you decide to pull out, you will lose the benefit of the money you have already spent, for example, on a survey or conveyancing searches. If you are selling your own home, and are in a chain, it could also endanger that transaction unless you find a replacement purchase quickly or decide to move out anyway.

Is gazundering or gazumping legal?

Most people consider both practices to be unethical, but neither is unlawful. Either party may change their mind right up until exchange of contracts. It is only then that the transaction becomes legally binding.

The Government considered changing the law to prevent gazumping when it reviewed the house-buying process in 2018. However, it found this would be hard to do without creating other problems. It also took the view that a greater commitment from buyers and sellers earlier in the process could reduce the risks.

How you can reduce the risk of gazundering or gazumping

Until there is a binding contract in place, both buyers and sellers are at risk of the other one changing their mind. So, minimising the time gap between offer and exchange will help reduce this risk. Specific action you can take will depend on whether you are buying or selling.

Sellers

If you are a seller, you should address any issue that could delay your sale in advance. For example, your home may have an extension that does not have the requisite planning permission, or that needs consent under a title restriction. Applying for retrospective consent or taking out a suitable insurance policy could prevent this from becoming an issue later. Discuss your plans with your solicitor at an early stage; they can carry out a title audit of your property and pre-empt any issues.

It is also a good idea to consider your buyer’s position before accepting their offer. Ask yourself how proceedable they are. Generally, the more complex a chain the more scope there is for problems to arise. However, there is no hard and fast rule; sometimes a first-time buyer who has a mortgage offer in place may be less inclined to risk their purchase than a cash-buyer looking for an easy bargain.

Buyers

If you are a buyer, make your offer conditional on the seller removing their property from the market. Their estate agent has to tell them about any offer they receive. However, if they are no longer actively marketing a property, the chances of receiving a better offer will be a lot lower.

Ensure you can proceed quickly and efficiently. Arrange your finances well in advance, and have your solicitor and surveyor lined up. Monitor the progress of your sale. Return any papers your solicitor sends you for completion and respond to their questions promptly. If you show you are a serious proceedable buyer, any seller should think twice about risking their sale. Where possible, develop a rapport with them; they will be less likely to renege on a promise if they like and trust you.

Some other things to consider

If you are a buyer, you may also want to consider a lockout agreement. This is a separate agreement that prevents a seller from selling to anybody else for a fixed period. In return, you undertake to progress your purchase diligently.

Lockout agreements do not suit everyone; they involve additional expense and negotiating one could prolong your purchase and unsettle your seller. However, they can be useful in some circumstances. If you are concerned about gazumping, discuss this possibility with your solicitor.

It is now also possible to take out a home protection insurance policy. This will not stop you from being gazumped, but it can help with the additional expense you may suffer as a result.

How can I keep my transaction on track?

It may not always be possible to eliminate the risk of gazundering or gazumping, but there is a lot you can do to protect yourself. Either can be down to one party’s greed, but frustration and poor communication can also encourage these practices.

Due diligence at the outset, and understanding your buyer or seller and their motivation, will help. So too will having the right professionals on board. Our solicitors are proactive and communicate well, giving both parties confidence the transaction will progress as it should. That, and the swift resolution of any legal issues, is often the best safeguard against the perils of gazumping and gazundering.

For further information, please contact Neil in the residential property  team on 0191 297 0011 or email wb@kiddspoorlaw.co.uk.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

What is the registered charge on a property?

If you take out a mortgage to buy your home, your lender will almost certainly register a charge against it at the Land Registry. The charge does not transfer ownership. However, it will give the lender important rights, including the ability to sell your home if you default on your loan.

‘When borrowing to buy a property, most of us give little thought to how the lender protects their interest,’ explains Neil Shearer, a Conveyancer in the residential property team with Kidd & Spoor. ‘However, the creation of a legal charge will affect how you, as an owner, can deal with your property. Conversely, if you decide to lend money to someone, for example to get on the housing ladder, it can be a useful tool to protect your loan.’

In this article, Neil answers some of your frequently asked questions about registered charges on property.

What is a registered charge?

Although there are technical differences between a charge and a mortgage, people often use the words interchangeably. A charge is a legal interest in property, which the owner (called the chargor or mortgagor) creates in favour of a third party (the chargee or mortgagee). This is usually to secure debt, typically a mortgage used to buy a house. A charge gives the lender certain rights over the property. For example, they can sell the property and use the proceeds to pay off the outstanding debt if the borrower is unable to.

Most land is now registered at the Land Registry. If this is the case, to be legally effective, the charge must also be registered. It is then known as a registered charge.

If the land is not yet registered, then the creation of a legal charge will usually mean the owner must apply for registration of both the land and the charge.

Registration of a legal charge also provides a state-backed guarantee of its validity, so it is the preferred type of security for many lenders.

How does a registered charge affect me as a property owner?

The existence of a registered charge is unlikely to affect you on a day-to-day basis provided you comply with your mortgage terms; it is important to know what these are. For example, many standard mortgages will prevent you letting your property without your lender’s consent. There are certain statutory safeguards, but failing to comply with your mortgage terms could put your home at risk.

However, when selling your property or remortgaging, you or your solicitor will need to deal with any registered charge. First, you must check carefully the amount needed to pay off your outstanding debt. You will need to repay this to ensure the lender releases their charge on completion. Remember to factor this into your budget. The mechanics are usually quite straightforward, although this will depend on your lender. Having a solicitor who understands your lender’s detailed requirements can help ensure the process runs smoothly.

There is a restriction against my title at the Land Registry. Is this normal?

It is quite common for a lender to restrict a borrower’s ability to transfer or grant another charge over the property. Your property is their security for your debt; they may not want the hassle of having to deal with a third party or to risk their security becoming diluted. The restriction typically prevents the registration of a disposal or another charge without their consent.

During a sale, this is usually not a problem if you are using an experienced conveyancer. Provided the restriction clearly refers to the charge you are paying off, the Land Registry will cancel it automatically. However, your solicitor should check the wording of the restriction carefully. If it does not refer specifically to that charge, they may need to apply for its removal so your transaction can proceed.

Can you have more than one registered charge over a property?

In theory, there is no limit to the number of charges you can register against a property. However, many lenders restrict their borrower’s ability to take out a second mortgage, and you will need to check your mortgage terms and any restriction carefully. If you want to borrow more money, secured by a second charge, you may need your existing lender’s consent. They will want to make sure you can afford both loan repayments. They may also require your new lender to enter a deed of priority. This sets out how the lenders will deal with the property, and apportion the sale proceeds, should one of them realise their security. In practice, some borrowers prefer to remortgage for a larger amount than to negotiate a second charge.

I have finally paid off my mortgage, what happens next?

This depends upon your mortgage lender. Some charge an administration fee for releasing their security, particularly if you are paying your loan off early. Many lenders release their charge automatically once you have paid your debt in full. They should send you details of this with your final redemption statement. If in any doubt, speak to your lender.

Your solicitor can check Land Registry records no longer show the charge registered against your property. You should ask them to do this before putting your property on the market. Having to chase an old lender to formally release their charge could unnecessarily delay your transaction.

If I lend money, can I secure it with a registered charge?

Yes, but speak to your solicitor first. If you are acting commercially, for example, through peer-to-peer lending, you may require authorisation from the Financial Conduct Authority. If your main purpose is to help a family member, and you do not charge interest, it is unlikely you will require authorisation. However, the rules are complex, and the potential penalties for non-compliance significant. So, it is important to take professional advice. Our solicitors have experience in this area and can help guide you through the detailed requirements. If you are lending money to a company, the charge must also be registered at Companies House within the statutory time limit to be valid.

I am lending money to a family member; do I need to register a charge?

Perhaps you are considering lending money to help your child buy their first home. In this case, taking a legal charge over their property may seem a little formal. However, being clear about expectations at the outset, for example, when and how they should repay the loan can prevent ill feeling or disputes arising later. It can also help if you are concerned about treating all your children equally. Putting the arrangement on a formal footing can head off any suggestion of favouritism. There may even be issues which are not immediately apparent, which discussion with a trusted advisor may bring to light. For example, what do you want to happen if your child runs into difficulties repaying? Setting this out in a separate loan agreement, but referred to in the registered charge, would also help to keep those details off the register and private.

Having a registered legal charge means you should be able to recoup your advance even if your child’s circumstances change. For example, if they lose their home because of marriage break-up or insolvency. The loan will also form part of your estate should you die – unless, of course, you agree to write it off in that event.

How we can help

If you have plans that involve a registered charge, then discussing your intentions with your solicitor in advance will mean they can tailor arrangements to suit your individual circumstances.

For further information, please contact Neil Shearer in the residential property team on 0191 297 0011 or email ns@kiddspoorlaw.co.uk.

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

Selling a property through the modern method of auction

Online auctions, especially the ‘modern method’ of auction, continue to grow in popularity. Last year saw a 40 per cent rise in the value of property sold at auction, much of this online. But what exactly is the modern method of auction, and is it something you should consider?

‘For a seller there are certainly some advantages to the modern method of auction, such as speed and a defined timetable,’ admits Neil Shearer, a Conveyancer in the conveyancing team with Kidd & Spoor Solicitors Ltd. ‘However, there are also pitfalls for the unwary and so it is important to consider how it would work for you.’

Neil Shearer answers some common questions about the modern method of auction.

What is the modern method of auction?

Typically, the modern method of auction takes place online over a fixed period. As a seller, you enter into an agreement with the auctioneer who invites bids for your property. This usually takes place on a special online platform where the mechanics are similar to an eBay auction, but for property.

At the end of the agreed period, the winning bidder must pay a reservation fee. This varies, but is typically five per cent of the purchase price. The successful bidder then has a fixed period, usually 28 days, to exchange contracts, and a further 28 days to complete their purchase.

How is the modern method of auction different?

Commentators sometimes call the modern method of auction a hybrid model as it combines elements of a conventional sale and auction.

  • Agents – an agent promoting a property via the modern method of auction may lack the professional qualifications of a traditional auctioneer, although some work in partnership with a local estate agent who will advertise your property, conduct viewings, and deal with enquiries. In this respect, it can be more like a conventional sale than an auction. However, the agent may use the auction to drum up interest.
  • Timeline – unlike a conventional sale, there is a strictly defined timeline.
  • No binding agreement – unlike a traditional auction, there is no binding agreement when the auction ends. The winning bidder must pay a reservation fee, but there is no obligation to proceed until exchange of contracts. Either of you may change your mind before then, but the buyer will lose their reservation fee unless it is your decision.
  • Reservation fee – because the reservation fee is a substantial sum, there is a strong incentive for them to proceed.
  • Legal pack – as with a traditional auction, the buyer needs to check your title to the property before bidding. They will do this by examining the pack of legal information which needs to be prepared in advance for all bidders.

 

Who prepares the legal pack?

Your solicitor should prepare this. It can take some time to collect all the relevant details, particularly if your property is leasehold, and it is necessary to factor in enough time to obtain all the searches.

Some online auctioneers offer to prepare the legal pack inhouse, or through an associated conveyancer. While this may seem appealing, it may not be your best option.

The pack must be accurate and comprehensive, not only to give bidders the information they need, but to safeguard you. A misrepresentation could make you liable to pay compensation in the future, while an undisclosed title issue could derail your sale even after the auction has ended.

It is important the pack is prepared by somebody who fully understands both the legal issues and your individual needs, and who will always put these first.

If you are considering selling in this way, talk to us as soon as possible. Having a comprehensive legal pack is essential if you want to appeal to as many serious bidders as possible.

Who bears the costs in a modern method auction?

With a conventional sale, both parties bear their own legal costs. The seller pays the agent’s fees, usually from the sale proceeds, and so there is little or no expenditure upfront for either party.

An auction, traditional or modern, generates more upfront costs, for example, in preparing the legal pack. Administration and sales fees can vary between online providers, and not all costs may be immediately apparent. It is important to read the terms of any agreement carefully. If in doubt, your solicitor can help clarify things.

With the modern method of auction, the costs of selling are often passed on to the buyer. As a seller, you may find this attractive. On the other hand, it could deter some potential buyers from bidding.

What are the advantages of the modern method of auction?

The greatest benefit for many is the shorter timescale. A conventional sale on average takes 12 weeks from accepting the buyer’s offer. With the modern method of auction, this drops to 8 weeks.

When estimating timescales, you should also factor in the time it will take to prepare the legal pack. However, the time taken to secure an offer using the modern method of auction is typically less than half that of a conventional sale, which means the modern method of auction may be quicker overall.

Although there is less certainty than with a traditional auction, the reservation fee should reduce the risk of the transaction not proceeding. An estimated 30 per cent of conventional sales fall through. In contrast, according to one online agent, only five per cent of modern method auction sales fail to complete.

You will also have a fixed timetable to work to, which suits some sellers.

What are the disadvantages of the modern method of auction?

The modern method of auction may appeal to a wider range of buyers than a traditional auction.

However, the price you achieve may be less than with a conventional sale which will benefit from a longer marketing period and appeal to more buyers.

The reservation period gives buyers more funding options than a traditional auction, but the modern method of auction is not generally suitable for those needing to sell their own property to proceed. In addition, some buyers may find the risk associated with the reservation fee and associated costs off-putting.

Should I sell my property using the modern method of auction?

This is very much a personal decision and will depend upon your circumstances, your property, and market conditions.

With a desirable well-presented property in an area with high demand, you may get a better price using a conventional agent.

Conversely, if your property has particular problems, for example, a short residential lease, then a traditional auction can provide greater certainty; the successful bidder is committed to the purchase as soon as the auctioneer’s gavel falls. Under the modern method of auction they may change their mind, although the payment of a substantial reservation fee makes this less likely.

Before committing yourself, always read the documentation thoroughly. This applies to your agreement with the online auctioneer and the agreement you will enter into with your buyer. As with a traditional auction, the sale terms will be set well in advance with little scope for negotiation or changing circumstances once the auction has ended. It is important to understand the terms fully and to have confidence they meet your requirements.

How we can help

With the modern method of auction, things can move very quickly; when the auction ends, you will only have a short time to complete.

Having your own solicitor on board from the outset, to prepare your legal pack, means they can check your title and pre-empt any issues which could otherwise derail your sale.

We will be best placed to manage the entire conveyancing process, so you can complete on time, confident that your interests are being put first.

For further information, please contact Neil Shearer in the conveyancing team on 0191 2970011 or email wb@kiddspoorlaw.co.uk