Sealed bidding involves parties submitting secret bids without knowing what others are bidding. This process can break deadlocks in family law disputes over real estate as it promotes fairness and maximizes property value.
In family law, figuring out who keeps specific real estate can be challenging. Both parties are often emotionally attached to the property and may be willing to fight for it, even when doing so doesn’t make economic sense. Common examples include family homes where the parties raised their children, cabins they envisioned as retirement retreats with grandchildren, or farmland that has become central to both their livelihoods.
To resolve these disputes and avoid costly litigation, sealed bidding processes are becoming more popular. This approach helps break deadlocks, ensures the property is sold at the highest market price, and promotes fairness among all interested parties.
This article explores the sealed bidding process, its potential to maximize property value, and the essential steps to maintain fairness and equity for all participants.
What is sealed bidding?
Sealed bidding is when people submit independent, self-contained bids without knowing their competitors’ bids. This process can produce a result that is fair to all involved parties. To win, a bidder must submit the highest price they’re willing to pay before the bid deadline expires.
In situations where two well-resourced individuals are determined to buy the property, sealed bidding may result in a higher sale price than traditional methods like open market sales or auctions. This is because each bidder understands that failing to offer their maximum could mean losing the property to the other party.
What is NOT sealed bidding?
Sealed bidding is not the same as an auction. Auctions rely on referential bids – offers made with knowledge of competing bids. In an auction, each participant bids slightly more than the last. The winner pays just enough to outbid others, not necessarily the maximum they’re willing to pay. While auctions can drive prices up when there is strong competition, they don’t guarantee the highest possible price if interest is limited.
Why use sealed bidding over an auction
Auctions are usually a poor way to decide which spouse or partner should keep real property. In an auction, the individual with greater financial resources has an unfair advantage. They only need to bid slightly higher than their ex to win the property. This can result in the winner acquiring the property for significantly less than what they were willing to pay.
Sealed bidding is well-suited to family law disputes because it gives each party time to secure financial resources – such as loans or financing – to even the playing field. All bidders submit offers based on the maximum amount they are genuinely willing and able to pay, rather than being limited by what cash they can access immediately. This flexibility is rarely available in fast-paced auction environments.
Sealed bidding also helps prevent situations where a financially stronger bidder inflates the price – not because they believe the property is worth that amount, but solely to prevent the other party from acquiring it. In such cases, a party can use the bidding process as a tool to inflict emotional or psychological distress on the other spouse, rather than serving its intended purpose of maximizing price through a fair process.
The problem with referential bids in the sealed bidding process
Both the Ontario Superior Court of Justice in Fifth Third Bank v MPI Packaging Inc (2010) and the British Columbia Court of Appeal in Bank of Nova Scotia v Yoshikuni Lumber Ltd (1992) addressed the complications that arise when referential bidding is improperly introduced into sealed bidding. Drawing on the House of Lords’ 1985 decision in Harvela Investments Ltd v Royal Trust Co (CI) (“Harvela”), these courts identified several risks:
- The sale is aborted: If all parties submit referential bids – offers made by referencing other bids – there is no definitive price. This can result in the sale being aborted. For example, there is no clear winner if Bidder A offers $10 more than Bidder B, and Bidder B offers $10 more than Bidder A.
- One bidder will not have an opportunity to buy: A bidder unaware that referential bids are allowed unknowingly sets the price for another bidder who submits a referential bid. This can result in the uninformed bidder never having a realistic chance of winning. For example, if Bidder A offers $500 and Bidder B offers $10 more than Bidder A.
- Value is not maximized: Referential bids often reflect only marginal increases over competing offers, rather than the bidder’s true maximum willingness to pay. This undermines the goal of achieving the highest possible price for the property.
- Illogical outcomes: Without restrictions, referential bids can lead to irrational results. For example, Bidder A can offer $100 or $10 more than the next highest bid, while Bidder B can offer $95 or $7 more than the next highest bid. Although Bidder A has the higher fixed bid and appears willing to pay more, the structure of the referential bids could result in Bidder B winning, which is illogical and unfair.
When referential bids should be allowed in sealed bidding
In Harvela, the House of Lords concluded that referential bids should only be allowed if they include a clearly defined maximum price the bidder is willing to pay. This safeguard:
- establishes a fixed price,
- gives all bidders a fair and realistic opportunity to win,
- forces each party to submit their best offer, and
- avoids illogical and unfair outcomes.
For example: Bidder A offers $100 or $10 more than the next highest bid, up to a maximum of $120. Bidder B offers $95 or $20 more than the next highest bid, up to a maximum of $115.
In this example, both bidders incrementally bid against each other until they reach their respective maximums. Bidder A would then buy the property at $120, as it is the highest capped bid. This approach preserves the integrity of the sealed bidding process while allowing limited referential bidding in a controlled and equitable manner.
A few best practices
To ensure sealed bidding remains a fair and equitable process, whoever oversees the bids should follow these best practices:
- Use clear language in the bidding instructions: Clearly define the rules, procedures, and expectations in the invitation to bid to avoid confusion or disputes.
- Prohibit referential bids: Explicitly disallow bids that reference other offers, as they undermine the integrity of the sealed bidding process.
- If referential bids are allowed, require a maximum price: Any referential bid must include a clearly defined cap on the amount the bidder is willing to pay. This practice establishes a fixed price, gives all bidders a fair opportunity to win, and avoids irrational outcomes.
Incorporating these safeguards allows parties to preserve the fairness of the sealed bidding process and ensure the property is sold at its highest fair market value, while minimizing conflict and promoting equitable outcomes.
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DISCLAIMER The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
About Mathieu Maillet
