Conveyancing Nightmares: What Happens If You Fail To Complete On Your Dream Home?

February 6, 2017 Paul Hajek

You may see the purchase of your house as a dream.

But, if after you exchange contracts you fail to complete your purchase on the agreed completion date, that dream could turn into a nightmare!

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.

Why Is Paying a Deposit Is So Important?

When you enter in to 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.

For example, say you have agreed to buy a property at £400000, the contractual sum paid on exchange would be 10% of the purchase price, i.e. £40,000  although in practice a Seller may agree to accept a lesser amount.

What Happens If You Fail to Complete?

If you fail to complete on the agreed completion date in the contract you will be in breach of your contract. The Seller will 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 the Seller were 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?

Well, the Court of Appeal had to decide on such a case recently.

In 2008, a Buyer failed to complete a house purchase for £605,000.

The Sellers were unable to sell the property again at that price and despite further price reductions and eventually (they had bought another property themselves) moved back into their house. At that time the house was worth £495,000.

The Sellers sued the Buyer for damages and were successful, but the Buyer appealed.

What The Court of Appeal Had to Decide

The issue was 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 £60500) i.e. £49500.

What Does This Judgment 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 defects 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. 

You can see the full transcript of the Court of Appeal decision here

Paul Hajek

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