Deposit at Auction
By Bailey Compton 8 Dec 2023
Who has the cheque book? In some demographics, we may ask the question, who knows what a cheque book is? The faithful cheque which has been the catalyst for businesses for 125 years is definitely close to death!
The passing of the cheque however leaves us with a void. Under the Cheques Act 1986, a cheque has the power of legal currency. Firstly, if you were given a cheque, you knew that it equated to the dollar value set out on the face of the cheque. Secondly, if it bounced, you didn’t need to enforce a contract, you could merely sue a person for altering a false cheque.
The cheque has now been replaced by EFT. Unfortunately, the government hasn’t seen it fit to protect EFT like it did with cheques. There is no law in relation to when an EFT is legal currency, that is, when it hits your account or when you’re given a transmission slip.
This has never become more poignant than on auction day. People turn up to auction with no cheque to pay the deposit. The winner is to transfer the money to you by EFT. Question is whether consideration has been paid on the day of the auction by the giving of a transcript or was it when you received the money in your account. In short, I’m not certain which one it is.
For a contract to be valid, there must be four legs present:
– Intention to become legally bound.
It is referred to as a leg of a contract because it’s linked to a horse. They all believe that if you cut up a leg of a horse it would fall over and the affected party has the right to terminate it. Hence, if one of these legs of a contract are missing, the contract is void.
We recently had a case where a leading agent conducted an auction. The property had a reserve of $3.25 million. Auction got to $2.8 million and the property was passed in. The agent was able to get $3 million on a contract prior to the highest bidder leaving the auction room. He took no consideration.
At 7pm that evening, the vendor finally signed the contract for $3 million. The agent exchanged the contract without an authority to exchange and without receiving a deposit.
Sunday morning came and the agent received a phone call from the purchaser. The purchaser suffering the normal remorse withdrew from the sale. On Monday, the vendor’s solicitor received a letter from the purchaser’s solicitor saying that there was no contract and therefore the exchange was not valid.
It is true that, the contract was exchanged under auction conditions prescribed in the Property and Stock Agents Act 2002, that is, it was exchanged before midnight of the day of the auction. It was not, however, exchanged under the hammer. Once the hammer was brought down, the property was never selling under the hammer. It may exchange under auction conditions, but it is not sold under the power of the auction and the rights given to an auctioneer.
We were asked to provide advice on this particular auction. We were given a sales advice which indicated that no deposit had been received from the purchaser.
We advised clearly that, there was no contract. No consideration has been paid at all therefore no contract existed between the parties. This raises a question, for all agents undertaking auctions, about the deposit.
This case gives us two lessons:
1. When exchanging a contract on the day of the auction, you need to take some form of legal tender. Because we don’t know if a transmission slip is legal tender, it is best practice to consider that it isn’t legal and isn’t consideration. We advise all our clients to take some cash on the day of the auction and the rest via EFT. You would issue a trust account receipt stating “$100 in cash and $199,900 via EFT”.
2. The agent did not obtain an authority to exchange. Section 64 of the Property and Stock Agents Act 2002 states that an agent can only exchange a contract if they have obtained an authority to exchange. A failure to obtain authority to exchange does not affect the validity of the contract but section 64(3) states that, if there was an error of the taking of the deposit, the agent becomes liable. By failing to obtain the authority to exchange, the agent has become liable for the loss.
In short, get some money on the day of the auction as a deposit to ensure consideration has been taken, and make certain you protect yourself by getting authority to exchange.