Articles
What can I do if a property purchaser defaults on settlement?
The sale and purchase of residential property is an elaborate process involving the exchange of undertakings, payments and property titles. Despite the many moving parts, most transactions proceed without issue. In some cases, however, something goes wrong during the process and settlement does not take place.
This article looks at the specific situation of a vendor who is faced with a default by the purchaser on settlement. The consequences of a failure by a purchaser to settle can be far-reaching. For example, a vendor may be relying on the proceeds of sale of their home to fund the purchase of a new home. Without the funds from the sale of their property, they might be unable to settle on their purchase, and could themselves be exposed to legal liability.
Settlement notice
Most property transactions in New Zealand take place on the standard form ADLS/REINZ Agreement for Sale and Purchase of Real Estate. Where a purchaser has failed to settle, the ADLS/REINZ agreement provides that the vendor may serve a formal settlement notice requiring the purchaser to fix their default and complete settlement within 12 working days. Settlement within that period requires the purchaser to pay the full amount of the outstanding purchase price, together with interest for late settlement calculated at the rate that is specified in the agreement.
Failure to comply with settlement notice
If the purchaser fails to complete settlement by the expiry of the settlement notice, the vendor will need to decide whether to try to compel the purchaser through the courts to complete their purchase (known as an order for specific performance) or to alternatively give up on the transaction and instead pursue the failed purchaser for damages.
Specific performance
Specific performance is a remedy available through the courts that requires a party to complete performance of their contractual obligations. It is available to both vendors and buyers in the event of a default by the other, although it is fair to say that it is more commonly sought by buyers against vendors than the other way around.
The idea of forcing a defaulting purchaser to complete the transaction by way of a court order is often attractive at first glance. Where the purchaser has the means to settle and is simply being stubborn and uncooperative, then specific performance can be a realistic option even with the expense and delay that is incurred with issuing court proceedings.
A court order cannot however force a purchaser to complete settlement if they genuinely do not have the funds to do so. As the adage goes, “you can’t get blood from a stone”. If the purchaser is able to demonstrate that they simply cannot raise finance and do not otherwise have assets to complete the deal, then pursuing specific performance is likely to be a costly exercise in futility.
Cancellation and damages
Instead of pursuing specific performance, the vendor can instead cancel the agreement, forfeit and retain any deposit up to 10% of the total purchase price, and sue the purchaser in court for damages.
Under the standard ADLS/REINZ agreement, the damages claimable against the purchaser include any loss incurred by the vendor on any bona fide resale of the property, as long as the resale was contracted within one year of the date the purchaser should have settled in compliance with the settlement notice.
Through court action, the vendor can recover losses from the defaulting purchaser including, but not limited to:
- Any loss of value on resale (i.e. the difference between the original contract price and the price on resale).
- All costs and expenses reasonably incurred in any resale or attempted resale (including the agent’s commission on the resale, lawyers’ costs associated with conveyancing on the resale).
- Interest on the unpaid portion of the original contract price from the original settlement date through to the settlement date of the resale.
Depending on the particular circumstances, other losses can sometimes also be recovered, such as the cost of bridging finance if it was necessary for the vendor to take that out following the failure to settle.
Remarketing prior to cancellation
A further option generally available to a vendor in the case of a default under the ADLS/REINZ agreement is to relist and remarket the property without first cancelling the agreement. The agreement provides that in such circumstances, the entry by the vendor into a new agreement for sale and purchase (whether conditional or unconditional) will automatically cancel the original agreement.
This allows the vendor to keep their original agreement alive while remarketing the property and preserve their ability to sue the purchaser for specific performance while doing so. If a new agreement is signed, the vendor will still be able to pursue any losses from the original purchaser as outlined above.
Conclusion
Situations involving a default by a purchaser can be incredibly stressful for vendors, particularly where they have already signed a contract to purchase a new home and are relying on the sale proceeds to fund their purchase. Time is of the essence in such situations, and it is important to receive expert advice around the steps that can and should be taken to minimise losses.
The above is a general guide only and not an exhaustive list of all the relevant legal considerations in these types of situations. If a purchaser has defaulted on purchasing your property, contact our litigation team to discuss your options.