When your buyer fails to complete

This case study demonstrates the expertise of our Residential Conveyancing team who recently acted for a client whose property sale did not proceed to completion after contracts have been exchanged.

Thankfully, it is rare that sales and purchases do not proceed to completion after contracts have been exchanged. However, it does happen occasionally.

In this particular instance, our client had sold a substantial property to a developer and, relying on this contract, had purchased another smaller property. Contracts were exchanged at the height of a strong market with a delayed completion date six months later.

In this case, it was a good deal for our client and was not conditional on planning so he was happy to agree the delayed date as his own seller was also agreeable.

Importantly, the contract was with the developer personally, and not his company. However, was the deal too good to be true? It was in an area of the country where there was considerable demand amongst developers for quality building plots. The contract was exchanged before the meltdown of the banks was even contemplated. However, a falling market is a danger time and this is exactly what happened in this case. Not only could the developer see a potential fall in his likely re-sale value, so could his lenders.

When the contract was first negotiated, our client had agreed to accept a reduced deposit from the developer. In normal circumstances, a buyer is expected to pay a deposit on exchange of contracts of at least 10% but this is always negotiable. If the sale falls through the seller can forfeit this deposit. He does at least, therefore, have his hands on some money. Any other losses have to be pursued by taking legal proceedings.

In these circumstances, we negotiated an unusually beneficial contract on our client’s purchase (from another developer as it happened). It contained a clause, limiting losses on the purchase if the sale fell through. It was this that particularly helped our client’s negotiation going forward.

The seller’s worst nightmare occurred. The developer buyer was unable to complete on the purchase. However, he did not want legal proceedings served upon him personally, at a time when his relationship with his bank was fragile. This would clearly have affected his credit status and his standing as a developer in the area.

Careful negotiation resulted in the developer increasing his deposit by a further £100,000. He also agreed to pay interest immediately on the outstanding amount on a monthly basis at the penalty rate in the contract (a figure of over £10,000 per month). As a condition of this, the contract was varied and a revised extended completion date was then agreed. This was to give the buyer time to sell other developments or secure additional lending.

Having negotiated this new deal on his sale, our client was then also able to agree an extended completion date on his purchase, albeit that he did have to agree to increase the limit of the damages claim if it failed to complete on the newly extended date.

The limitation of damages negotiated was, of course, not known to our developer buyer. He feared a substantial claim against him, not only in relation to his default on the purchase of our client’s property, but also the damages that would flow from our client defaulting on his own purchase.

In fact, although the completion date was extended twice the deal never did complete.

The developer selling to us found another buyer. He brought the contract with our client to an end with damages from our client limited to £75,000. We subsequently brought the sale contract to an end and then resold at a considerably lower price. However, we obtained a £200,000 deposit and over £100,000 of compensating interest. Our client was also able to purchase at a lower price as the market had changed.

Although the original and indeed, possibly over inflated sale price, had not been obtained, our client felt that the net outcome was a good one, given all the circumstances.

Astute thinking had limited the damages on his purchase. The result achieved was undoubtedly better than it might have been if legal proceedings for breach of contract had been instigated immediately. The likely outcome then would have been a bankrupt developer and our client fighting for a limited share with other creditors. Creative thinking and careful negotiation helped to avoid the possibility of tortuous and expensive action in the courts.

Thankfully, 99.99% of transactions proceed without such problems!