Many conveyancers have not encountered a situation in which the buyer fails to complete a property purchase in their entire careers. The recent fall in property prices, coupled with the demise of easily obtainable mortgage finance, has spawned several cases of this type.
In a rising market with readily available money the situation would simply not arise. Even if a buyer had second thoughts after exchanging contracts, they could reluctantly complete the purchase and then re-sell, possibly making a modest profit. Even if a buyer failed to complete there would not be litigation as the seller would simply forfeit the deposit and re-sell, maybe even achieving a better price into the bargain. The seller would actually benefit from the buyer’s breach and the buyer has no right to a return of the deposit.
In a falling market the situation is very different. If a buyer does not complete, the seller is left with an asset that is losing value. He can re-sell (or at least attempt to) but this will incur further cost and the price ultimately achieved will be less than that in the dishonoured contract. The estate agent will be entitled to its fee for both the aborted sale and the eventual sale. Conveyancing costs will also be incurred twice.
So what is the seller’s remedy? In summary, the seller will forfeit the deposit paid on exchange of contracts (usually 10% of the price). He will then sue the buyer for the difference between the agreed price and the market value of the property, making allowance for the deposit retained. In a case where the property has been re-sold, the courts will usually accept that the new price is the market value – provided the new sale was a genuine arm’s length transaction
The claim will also include the expenses of the second sale, such as agent’s and legal fees; interest on the principal sum; recovery of mortgage interest and other outgoings incurred as a result of the buyer’s failure to complete, e.g. council tax, insurance, interest on other debts that would have been repaid from the proceeds of sale.
The claim will of course be complicated further if the seller was in a chain and was unable to complete his onward purchase as a result of his buyer defaulting. The seller may be sued himself and would then seek to include those losses in the claim against his buyer. This may dramatically increase the claim made against the buyer who defaulted first.
The advice to buyers has to be to make absolutely sure that funding is in place before exchanging contracts. For sellers, it may be prudent in the current climate to avoid becoming involved in a lengthy chain. Although temporarily moving in to rented accommodation is an unwelcome expense, it could be viewed as insurance against the problems that might arise if the buyer defaulted. If the market continues to fall then it may even enable the acquisition of a new home at a reduced price.
