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Basic Rules in Tennessee Regarding Auction Sales of Real Estate

When real estate is sold at auction in Tennessee, what rights do the seller and highest bidder have after the hammer falls? Can the seller back out of the sale?  What are the chances that the highest bidder can win a case for specific performance if the seller tries to back out of the sale?

An excellent case to read to gain a basic understanding of real estate auction law in Tennessee is Cunningham v. Lester (Tenn. Ct. App. 2003). Here are the basic facts of that case:

  • The Lester’s were a husband and wife who owned some real estate jointly
  • the Lester’s signed a contract with an auction company to sell their property at auction
  • the brochures prepared by the auction company to advertise the auction sale did not state that the sale was being made with reserve
  • prior to the commencement of the auction sale, the auctioneer announced that the land offered was “with reserve” and that the Lester’s had to confirm any bids
  • Mr. Cunningham was the highest bidder for tracts 4 and 5
  • Mr. Neal was the highest bidder for tract 3
  • After the fall of the hammer, a written contract for the sale of tracts 4 and 5 to Mr. Cunningham was signed by Mr. Lester, the auctioneer, and Mr. Cunningham, but not by Mrs. Lester
  • Mr. Cunningham agreed to take over Mr. Neal’s bid for tract 3
  • a contract for the sale of tract 3 was signed by Mr. Cunningham, and Mr. Lester, but not by Mrs. Lester or the auctioneer
  • Mr. Cunningham paid the required earnest money for all three tracts
  • Prior to the closing, the auctioneer told Mr. Cunningham that the Lester’s would not close on any of the tracts
  • Mr. Cunningham filed a lawsuit for specific performance requesting that the court order the Lester’s to convey all three tracts under the terms in the written contracts

The trial court, which was affirmed in all respects by the Court of Appeals of Tennessee, held that the Lester’s were required to convey tracts 4 and 5 to Mr. Cunningham, but that they were not required to convey tract 3.

The first point of law to know in order to understand the court’s decision in the case is that an auctioneer with whom a seller has signed a contract basically becomes an agent of the seller. The court in the Cunningham case held that the Lester’s did have the right, which they had reserved, to refuse a bid.   However, when the auctioneer signed the contract for tracts 4 and 5, since he was the agent of the Lester’s, the Lester’s were bound by his signature.  It did not matter that Mrs. Lester never signed that contract.

With respect to tract 3, the court held that Mr. Cunningham was not entitled to specific performance as neither Mrs. Lester, nor her agent, the auctioneer, had signed the contract for tract 3. In its analysis of the tract 3 situation, the court made an important point about auction sales.   In Tennessee breach of contract law (which applies to auction sales), offer and acceptance are crucial parts in the process of contracting (and, often, in the resolution of breach of contract cases).  When tract 3 was offered for sale at the auction, the court reasoned, that was not an offer under Tennessee contract law.  No offer occurred, held the court, until Mr. Cunningham submitted his bid for tract 3.  That bid, the court held, was an offer to purchase which was subject to acceptance by the Lester’s.

A couple of other points about Tennessee auction law. First, even if the brochures and notices do not state that the auction is with reserve or subject to approval of the seller, if the auctioneer makes an announcement at the auction, before beginning the bidding, that the sale is with reserve, the seller can reject the bid. See, Moore v. Berry (Tenn. Ct. App. 1955)

Second, if the seller puts a provision in its contract with the auctioneer that the sale is to be with reserve, but that condition is not made known in the brochures or other sales materials and is not announced before the auction, the seller is not allowed to reject a bid. In other words, the failure to do those things makes the auction a no reserve auction.  See Johnson v. Haynes (Tenn. Ct. App. 1975)