So, you’ve exchanged contracts on the house of your dreams.
You’ve arranged all your ducks in a row ready for completion.
But, what if after exchange of contracts you fail to complete your purchase on the agreed completion date or time.
Could that dream turn into a nightmare?
Welcome to Day Welcome 24 of your Conveyancing questions answered – all in one place: Failure to Complete
After Exchange of Contracts
The phrase “we’re waiting to hear from our solicitor that we have exchanged contracts on our house” is a phrase every buyer and seller will know.
And the clue is in there: buying and selling a house is a contract and governed by the law of contract.
Once you exchange contracts on your sale or purchase you are entering into a legally binding contract.
The contract specifies a specific time for vacant possession of the house and for monies to be deposited from the Buyer’s Conveyancers client account into the Seller’s Conveyancers account.
What happens if the purchase monies are not received in time?
The Standard Conditions of Sale at Clause 6.1.2. (click here for more information) states
If the money due on completion is received after 2.00pm, completion is to be treated, for the purposes only of conditions 6.3 and 7.2, as taking place on the next working day as a result of the buyer's default.
This can happen where there is a long chain of linked sales and purchases.
It is not just one sided as the Seller can be penalised for not moving out of the property by the correct time.
The Standard Conditions of Sale at Clause 6.1.3
Condition 6.1.2 does not apply and the seller is treated as in default if
a. The sale is with vacant possession of the property or any part of it
b. And the buyer is ready, able and willing to complete but does not pay the money due on completion until after 2.00pm because the seller has not vacated the property or that part by that time
In practice, there may be a bit of leniency if it is known that the monies are on their way or in the system, or the Seller has had a slight run over but will be out shortly.
It is important to know that leniency is not guaranteed and will depend on the individual circumstances.
Why Is Paying a Deposit Is So Important?
When you enter into a legally binding contract for the sale or purchase of a property, the Buyer pays over a deposit.
The paying of a deposit is important it acts as a deterrent should any party decide to withdraw.
If you are a buyer and you fail to complete the deposit you have paid is forfeited. In certain circumstances, your liability to the Seller could be more ( see below) and the Seller would be entitled to damages.
For example, say you have agreed to buy a property at £400,000, the contractual sum paid on exchange of contracts should be 10% of the purchase price, i.e. £40,000 (although when you are in a chain of transactions the Seller may agree to accept a lesser sum to smooth the speed of exchange)
So, £40,000 at least down the swanee.
What Happens If You “Completely” Fail to Complete?
This is the nuclear option.
You not only fail to pay over the balance of purchase monies but cannot rectify the situation a day later or at all.
You will be in breach of your contract and as we have said you will forfeit your deposit.
But, the Seller may also be entitled to damages.
In a stable housing market, the damages, in our example above, may be restricted to the forfeiture of the deposit e.g. £40,000.
This would be on the basis that were the Seller able to resell fairly quickly and achieve the same or close to the original asking price for the property.
But what would be the penalty or damages where you failed to complete in a recession, where the value of the property subsequently dropped?
What Happens When You Fail To Complete and the Property Reduces Significantly in Value?
The Court of Appeal had to decide on such a case back in 2008.
A Buyer failed to complete on a house purchase for £605,000.
The Sellers were unable to sell the property again at that price and despite further price reductions, eventually (they had bought another property themselves) moved back into their house. At that time the house was worth £495,000.
The Court had to decide whether the claim for damages against the Buyer for his breach of contract should be measured by reference to the value of the property at the date of the breach of contract, or rather by reference to its value at a later date, after the Sellers had given up trying to sell the property.
The Court of Appeal held that the breach date is the right date for assessment of damage only where there is an immediately available market for the sale. This course of action was not available in this case.
If the property market has declined during that time, it is of no avail for the defaulting buyer to say that the resulting devaluation of the property should not be laid at his door. If the Buyer had completed the contract, he would have suffered that decline in value and it is for this loss the Seller needs to be compensated.
The Court upheld an award for damages against the Buyer in favour of the Seller of £110,000 (less the deposit already forfeited of £60,500) i.e. £49,500.
What Does This Mean For You?
Luckily, a Buyer who cannot complete is a rare event.
One of the complaints against the Conveyancing system in England and Wales is that it takes too long, but, one of the reasons, is to make absolutely sure that every Buyer and Seller in the chain is ready willing and able to proceed.
Buyers and Sellers should have all the time that is necessary for their finances to be put in place; buyers should still be able to pull out for adverse surveys; buyers can choose not to proceed where there are title defect and where a Buyer or Seller choose to pull out because they have changed their minds.
All this can take place before contracts are exchanged.
If such events happened after an exchange of contracts, the financial consequences, as well as the time and stress, could be huge.