Seller’s remedies for a buyer’s failure to complete
Recent falls in property values and a reduction in the availability of bank funding are leading to an increasing number of buyers failing to complete contracts for the sale of property which were entered into prior to the economic downturn.
In particular, we are seeing a number of situations similar to the scenarios set out below:
Scenario 1
Before securing a suitable mortgage offer, the buyer exchanges contracts in 2007, paying 5% of the purchase price as deposit, with a view to obtaining a 95% mortgage of the purchase price prior to completion. Due to changes in lending conditions and falling property prices, the buyer is no longer able to secure a 95% mortgage for the value of the property and therefore does not have the funds required to complete in 2009.
Scenario 2
A buyer exchanges contracts in 2007 and development of the property is due to be completed at the start of 2009. During the intervening months, whilst the property is being constructed, changes in the economic market and a fall in property values results in the buyer being tied to a contract to purchase a property which is worth less than he agreed to pay for it. The buyer no longer wishes to proceed and delays completing due to the reduction in the value of the investment.
The seller’s remedies
The seller’s main remedies for breach of a contract for the sale of land at common law are either to terminate the contract or to pursue a claim for specific performance, although whether either of those remedies is available in a particular case depends upon the facts of that case. In both cases, the seller is also able to sue the buyer for damages.
Most contracts for the sale of property are subject to the Standard Conditions of Sale (4th Edition) (“SCS”) or the Standard Commercial Property Conditions (2nd Edition) (“SCPC”). These provide an additional mechanism which can be used by the seller in attempt to compel the buyer to complete the purchase where this does not take place by the completion date set out in the contract. This involves the seller serving a Notice to Complete on the buyer which requires completion to take place within ten working days after service. In order to serve a Notice to Complete the seller must ensure that it is “ready, willing and able” to complete when he serves the Notice otherwise it may be invalid. This requirement has been taken to mean that the seller must be ready to set in motion any necessary administrative arrangements to enable it to complete within the time period specified in the Notice.
On receipt of the Notice to Complete, where the contract incorporates the SCS (not the SCPC) and the buyer has not paid a deposit representing 10% of the purchase price (as in Scenario 1) then the buyer becomes liable to make immediate payment of the balance of the 10% deposit, and the seller is entitled to interest on such amount applied at a daily rate following service of the Notice to Complete until payment.
In the event that the buyer fails to complete within ten working days following service of a Notice to Complete, the seller can:
A claim for damages may be significant in circumstances such as those set out in Scenario 2 where there has been a fall in property values in the intervening months between exchange and anticipated completion. In those circumstances, the price achieved on any resale of the property may be lower than the original price, therefore entitling the seller to claim the difference from the buyer.
Alternatively, in cases where the seller is keen to proceed to completion, the following remedies are available:
The seller may seek an order for specific performance in the courts after the contractual completion date has passed, and is entitled to pursue this remedy even if it has not served a Notice to Complete. Where the remedy of specific performance is sought, the seller may also claim damages arising from the buyer’s delay in completing, but credit will be given for any compensation interest paid under the SCS or SCPC.
Whether or not specific performance is granted is a matter for the courts’ discretion, and depends upon the facts of the particular case. There are instances, however, where the courts will not order specific performance; for example, where the seller unduly delays in seeking specific performance or where real hardship would be caused to the buyer if he was ordered to complete the purchase. In circumstances such as those in Scenario 2, where the seller is keen to complete the original transaction rather than suffer a potential loss of profit on resale, it may prove beneficial to pursue an order for specific performance. However, it is unlikely that specific performance would be granted in circumstances such as those in Scenario 1 where compelling the completion of the contract by the buyer is simply impossible because he does not have the necessary funds.
Even where the courts refuse to grant specific performance of the contract, the seller is entitled at common law to keep the deposit paid by the buyer. Although the courts have discretion under section 49(2) of the Law of Property Act 1925 to order that a deposit be repaid, they have generally taken the view that such an order should not normally be made unless there are exceptional reasons for doing so. In addition, the seller may also be able to claim further damages in relation to related sales and legal costs resulting from the buyer’s failure to complete.
The buyer’s defences
The availability of the remedies mentioned above does, however, depend upon whether the buyer is able to mount a successful defence. The two most commonly cited defences are misdescription (on the basis that the seller is unable to transfer the property exactly as described in the contract) and misrepresentation (on the basis that the seller made a false statement of fact to the buyer which induced the buyer to enter into the contract). The law surrounding these defences is complex.
Misdescription
If the seller cannot transfer the property as described in the contract, then there is likely to be a breach of contract. In those circumstances, the buyer may have a defence to the seller’s claim and, in particular, caselaw suggests that:
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where the misdescription is substantial, the seller will be unable to enforce the contract and any Notice to Complete that it has served will be ineffective; but
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where the misdescription is not substantial and was made innocently, the seller may enforce the contract provided that it makes a reasonable reduction in the purchase price by way of compensation.
For contracts which incorporate SCS or SCPC, there are express provisions dealing with the consequences of a misdescription. The basic position is that the seller may not enforce the contract where misdescription resulted from fraud or recklessness or in circumstances where the buyer would be obliged to accept property which differed substantially from that which he had been led to expect. Otherwise the seller may enforce the contract but the buyer is entitled to claim damages where there is a material difference between the description or value of the property and that which was represented to him by the seller.
Misrepresentation
A misrepresentation may, depending on the situation in which it arises, be a breach of contract, but it need not be. Most contracts include provisions which exclude liability for misrepresentation, therefore, the buyer could only seek to rely upon a defence of misrepresentation where it could be shown that such exclusion of liability was unreasonable. However, where misrepresentation is proven, the buyer may terminate the contract, subject in the case of innocent misrepresentation to the court’s discretion to award damages to the buyer and allow the seller to enforce the contract.
For further information contact:
Rachel Cherry
Tel: 0845 165 5144
E-mail: rachel.cherry@cobbetts.com
The content of this article is for information only and should not be relied upon as a substitute for legal advice.
Copyright 2009 Cobbetts – All rights reserved – April 2009
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