Unintentionally Converting an Auction with Reserve to an Absolute Auction

• By: admin
• On: 04/01/2024 14:50:14
• In: Real Estate

These are the key facts of the case. There was an auction for a parcel of land containing approximately 32 acres. The advertisements for the auction did not state that it was “absolute” or “without reserve.” The specific terms of the auction were not in writing. As announced, the successful bidder must sign the written purchase agreement after the auction. Immediately before the auction, the auctioneer stated:

“All right, so we're going to auction this off. The high bidder today will be required to pay a five thousand dollar deposit due today or at the time of the commencement of the sale. It has to be in cash and certified funds. They have fourteen days to complete the sale. There's an agreement to be signed at the end of the sale.”

After this announcement, the auctioneer read the terms of the memorandum of sale that the “successful bidder” would be required to sign. The auctioneer then began calling for bids. There were bids for $30,000.00 and $35,000.00. Then, no more bids were made. The auctioneer then said: “Nobody wants to be forty-five? Going once, going twice, I guess we're going to have to no sell it.” The auctioneer then thanked everyone for coming out.

The auctioneer took the position that this was a reserve auction and withdrew the property from the sale. After the auction, Janson (the bidder who bid $35,000.00) approached the auctioneer. He asked whether his bid of $35,000.00 was the high bid. The auctioneer confirmed it was the high bid, but he would not sell the property for that amount.

Afterward, Janson filed a complaint to force the seller to sell the property to him for $35,000.00. Jason argued that the announcement contained explicit language that the property would be sold and created an absolute auction. The trial court ruled in favor of Janson and ordered the seller to sell the property to him for $35,000.00. The auctioneer and seller appealed.

The Virginia Supreme Court reversed the trial court's decision. It decided that the trial court was wrong in determining that the auction was an absolute auction. Instead, the Court agreed that the auction was a reserve auction. The seller (Williams) was permitted to withdraw the property at any time prior to the fall of the hammer, which he did by declaring there would be no sale. “Therefore, no contract was formed between the parties because Williams' declaration of no sale amounted to a rejection of Janson's offer of $35,000 for the property.”

The Court considered the differences between an absolute auction and an auction with reserve. It highlighted that in an auction with a reserve, the property being sold could be withdrawn prior to the close of the auction. In an absolute auction, after the auctioneer calls for bids on a lot, it cannot be withdrawn unless no bid is made within a reasonable time. In an auction with reserve, the property will only be sold if the highest bid exceeds the reserve price. In an absolute auction, the property is sold to the highest bidder regardless of the bid amount and the seller's notion of the property's value. In an auction with a reserve, the auctioneer (as the seller's agent) invites offers, and the bidders make the actual “offer” to enter the contract. In an absolute auction, the seller makes an offer to sell when the item is offered. A contract is formed with each bid, subject only to receiving a higher bid.

The Court evaluated the law in other jurisdictions and considered Article 2-328 of the Uniform Commercial Court. Then stated: “Taken as a whole, it is clear that an auction is with reserve unless the advertisement or the auctioneer explicitly indicates that it is an absolute auction or an auction without reserve. No language in the advertisements would indicate the auction was absolute. Instead, Janson focused on the announcement before the auction. He argued that the announcement converted the auction to an absolute auction. The Court explained:

“We note, however, that only a small portion of Williams' pre-auction announcement actually related to the terms of the Auction; the majority of the announcement involved Williams' reading of the memorandum of sale, which he clearly indicated only applied to the ‘successful bidder.' In other words, the memorandum of sale was conditioned upon the completion of the auction and, therefore, would not ordinarily inform the terms of the auction itself. Thus, the only portion of Williams' pre-auction announcement that arguably could relate to the terms of the Auction is Williams' statement that ‘[t]he high bidder today will be required to pay a five thousand dollar deposit due today' and his description of the time frame for completing the sale.”

Fortunately for the auctioneer in this case, the announcement before the auction was insufficient to convert the sale to an absolute auction. The auctioneer never explicitly stated that the auction was absolute or without reserve. The auctioneer has yet to make any statement limiting his ability to withdraw the property from the sale, reject bids, or otherwise nullify the auction. It also indicated that the overwhelming authority states that a “statement indicating that the property will be sold to the high bidder is ‘a mere declaration of intention to hold an auction at which bids will be received.'”

An auction is with reserve unless the property is explicitly put up without reserve. In general, auctioneers are unlikely to unintentionally cross the boundary and say something that will make the auction

absolute. However, there have been cases in other jurisdictions where statements (other than “absolute auction” and “auction without reserve”) were found to be explicit enough to convert the auction to an absolute auction. To reduce the risk of litigation over this issue, auctioneers should exercise caution with their statements and have clear written terms and conditions.