Property Scam – Auction Sales

Posted:27th May 2020

EMG Solicitor’s Disputes & Litigation team have come across a number of cases of property fraud in recent months which all have similar features.

The cases involve relatively cheap properties in the North East of England which are offered for sale at auction. The seller is also always a limited company.

What makes the properties stand out is that they are advertised as having sitting tenants on long tenancies (for 2 or 3 years) and with very good rental returns. The properties therefore appear to be sound investments and so fetch a higher price.

Unfortunately, once the property sale completes, the buyer discovers that there is no tenant. What’s worse, the properties are in a very poor state of repair.

Case study

Mr S was looking to build up a small property portfolio with money that he had inherited from a relative. He decided to buy a property at auction. This was a 2 bedroom terraced house in an ex-mining village in County Durham. The property was advertised as having a tenant who had recently signed a 3 year tenancy agreement at a monthly rent of £500 and so the gross yearly income from the property was said to be £6,000.

Including auction fees, Mr S paid £30,000 for the property and so he was looking forward to a gross return on his investment of up to 20% per year.

Unfortunately, once the purchase had completed, Mr S discovered that there was no tenant. Actually, it looked as though the property had not been occupied for a long time and generally it was in a very poor state of repair.

Mr S has been advised that the property might only be worth around £20,000 after essential repairs have been carried out. In addition, if he let it out, he could only expect to receive around £300 per month in rent. He therefore now needs to decide whether he should cut his losses and try to sell the property or find a tenant.

Matthew Sigsworth, a solicitor in our Disputes & Litigation team, is currently advising clients in similar situations to Mr S about the potential civil claims which they might have against the companies they bought their properties from. These claims include claims in breach of contract, fraudulent misrepresentation and civil fraud.

He is also advising about whether these claims can also be brought against the directors of companies personally, for example where it can be proved that the directors have acted dishonestly.

If the claims are successful, buyers will be awarded compensation for their losses. Part of these will be the difference between the price they paid for their properties and the actual market value of the property at that time. In the example above, Mr S’s losses would include the £10,000 he paid above the real market value of his property and the money he has to spend on essential repairs.

If you require advice in relation to this or any similar matter, please do not hesitate to contact Matthew directly at [email protected] or ring us on 0191 500 6989.