The uneasy relationship between auction conditions and cooling-off periods
If a residential property sells at auction, there’s no cooling-off period. Nor is there one if a property is passed in, though contracts are exchanged later that same day. But when can it be said that an auction has taken place? Or a property has been passed in? And when does the cooling-off period apply?
Section 66T of the Conveyancing Act 1919 (NSW) seems straightforward enough. There’s no cooling-off period if a residential property sells at auction. Similarly, when a property is passed in and contracts are exchanged later that day, there’s no cooling-off period.
But a recent case highlights that section 66T(c) is perhaps not so straightforward as it first appears. There are certain nuances that agents and auctioneers need to be aware of when it comes to auctions and cooling-off periods.
One registered bidder
In the case of Ma v Francis  NSWSC 1224, Ms Ma was selling her property via auction. The auction was scheduled for 10.30am on a Saturday morning. The neighbours turned up and there was quite a crowd, but Mr Francis was the only registered bidder.
A little before 10.30am, Ms Ma decided to negotiate with Mr Francis. However, she also wanted to keep open the possibility of an auction to generate some tension in the negotiations. When 10.30am rolled around, the auction hadn’t started and negotiations between Ms Ma and Mr Francis continued.
Time passed and no bids were called for, and the auctioneer announced that the “show isn’t going to take place just now”. Everyone, except for Mr Francis, went home. Later that same day, a price was agreed, contracts were exchanged and a 10 per cent deposit was paid.
A few days later, Mr Francis rescinded the contract and asked for his deposit back, purporting to exercise the statutory cooling-off right. Ms Ma refused, claiming that there was no cooling-off period. She said Mr Francis’s conduct fundamentally breached the contract and she sought to keep his deposit.
Offered for sale by auction
If there was no cooling-off period, Ms Ma would be entitled to terminate the contract and keep the deposit. Conversely, if there was a cooling-off period, Mr Francis was entitled to a refund of his deposit.
So when does the cooling-off period apply?
The decision in Ma v Francis sets out that the property must be “offered for sale by public auction”, which indicates that the auction at least needs to start.
Justice Pembroke explained in his decision in Ma v Francis that a property is “offered for sale by public auction” where a competitive sale takes place. This means there is the opportunity for people to bid and re-bid on the basis that the sale will be made to the highest bidder. Importantly, this is in circumstances where the bidders don’t know the seller’s reserve.
This means that the auctioneer has to open the auction and request bids. Simply advertising the auction or gathering a crowd at the auction location doesn’t constitute the property being “offered for sale by public auction”.
Justice Pembroke also explained that a property is “passed in” for the purposes of section 66T(c) when the auction is stopped without the property being sold. This will usually be because there has not been a bid or because the highest bid is lower than the seller’s reserve price.
So what’s the upshot?
Where a property passed in at auction is subsequently sold on the day that the auction took place, a cooling-off period will not apply if the auction formally commenced. This is the case whether, the sale is to a registered bidder or another prospective purchaser who did not attend the auction. Further, it’s certainly not unlawful or improper to negotiate with a prospective purchaser prior to auction. However, if the negotiations lead to a contract for sale being exchanged without an auction occurring, then the usual five-business day cooling-off period applies (unless a section 66W certificate is provided).
In light of the decision in Ma v Francis, REINSW has issued Best Practice Guidelines for members.
Where there’s only one registered bidder – or, indeed, no registered bidders – at the auction and the seller wants to ensure there’s no cooling-off period if contracts are subsequently exchanged on auction day, best practice requires the auctioneer to conduct an auction that fulfils all key elements, including:
- Open the auction, including welcoming attendees and announcing that the auction is starting
- State the property’s address
- Advise of any relevant conditions of the contract for sale
- Summarise the relevant auction conditions, as set out in clauses 15 and 16 of the Property and Stock Agents Regulation 2014 (NSW), including that the highest bidder is the buyer (subject to any reserve price)
- Open the bidding and request bids, including allowing bidders to re-bid
- Do not disclose the reserve price to the bidders
- Sell the property to the successful bidder or announce that the property is passed in (if bidding doesn’t reach the reserve price, no bids are received or accepted, the vendor bid is not exceeded or there are no registered bidders)
- Confirm the property is under auction conditions if passed in (noting there is no cooling-off period applicable to any contract of sale exchanged after the auction until midnight that day).
Importantly, ensure all registered bidders are present to witness the formalities set out above. If this is not possible, make a video recording of the auction (if lawful in the circumstances), and arrange for the seller and buyer to sign an authority to exchange stating that: the property has been offered for sale by public auction; the property has been passed in; and there is no cooling-off period.
An alternative approach is to start the auction and secure a bid, so the property is actually offered for sale by public auction. If no bids are made or the reserve price is not met, then the property can be passed in and negotiations can begin after the auction concludes.
However, the property should be withdrawn from sale if it’s not in the seller’s interest for the auction to commence. If this happens and agreement is reached on a sale, a contract for sale should not be exchanged without the buyer’s solicitor or conveyancer providing a section 66W certificate (to ensure that no cooling-off period applies).
26 June 2020 By Cath Dickinson