Absolute Auction Advertising Conflicting With a Secret Reserve
Tri-County Realty and Auction advertises a 120-acre Mississippi farm as an Absolute Auction, sells to the highest bidder regardless of price. The auction firm's principal holds both a Mississippi real estate broker license and an auctioneer license. The seller signed a listing agreement that secretly states a $600,000 reserve but tells the auctioneer at the last minute, do not sell below $600,000. The auctioneer does not change the advertising or announce a reserve. At the sale the high bid is $525,000. The auctioneer says sold and has the buyer sign a real estate purchase agreement. The seller refuses to close, saying the reserve controls. The buyer has a lender commitment, has paid $25,000 earnest money into the auction firm's escrow account, and demands specific performance. The auctioneer says the seller must honor the advertised absolute terms.
1. What is the legal difference between an absolute auction and a reserve auction, and which controls here?
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Definitions
- An absolute auction means the property sells to the highest bidder regardless of price. The seller has no reserve and cannot reject the high bid because it is too low.
- A reserve auction permits the seller to set a minimum and reject bids below it, but the reserve must be handled consistent with the advertised terms and applicable disclosure rules.
Which controls
- The public advertising said absolute. The buyer saw that term and bid in reliance on it. A secret reserve in the listing agreement does not change the public meaning of absolute.
- The auctioneer's failure to announce a reserve reinforces the absolute character. If the firm intended a reserve, it had to advertise and announce that clearly.
Conclusion
As between the buyer and seller, the advertised absolute terms are the starting point. The private reserve creates a conflict, but it does not automatically rewrite the public sale terms.
2. Did the auctioneer have authority to bind the seller at $525,000? Analyze actual, apparent, and disclosed authority.
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Actual authority
- The listing agreement gave the auctioneer authority to market the farm, but it also contained a $600,000 reserve. Actual authority to sell at $525,000 is therefore doubtful.
Apparent authority
- The seller allowed the firm to advertise absolute and did not correct the ads. A buyer reasonably believed the auctioneer could sell to the highest bidder. That can create apparent authority or estoppel against the seller.
- The auctioneer also had its own professional duty not to advertise absolute if it knew of a reserve.
Conclusion
The seller has a strong argument that the auctioneer exceeded actual authority. The buyer has a strong argument that the seller is bound by the advertised terms and the auctioneer's apparent authority. The auctioneer faces exposure to both sides for the inconsistent terms.
3. What remedies and risk-management steps follow?
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Buyer remedies
- The buyer may seek specific performance if there is a definite written contract, the buyer is ready and able to close, and the seller is bound. Otherwise the buyer may seek damages and return of earnest money.
- The $25,000 earnest money should stay in escrow until the dispute is resolved or a court orders otherwise.
Auctioneer response
- Do not release the escrow funds to the seller.
- Notify the errors-and-omissions insurer and counsel.
- Preserve the ads, listing agreement, purchase agreement, and communications about the reserve.
Prevention
- Put the reserve in writing and confirm it before advertising.
- Use a pre-auction checklist: advertised status, announcement script, seller confirmation, and broker review.
- Never let marketing say absolute unless the seller has waived any reserve in writing.