When you sign an agreement to buy a property you are signing a contract. Not an option, a contract. The vendor and purchaser both have rights and obligations, and most of the time you can’t just walk away.
Okay if the agreement is subject to due diligence and something - almost anything – emerges under due diligence you will probably get away with it. Spray and walk away.
Apart from Due Diligence, which is the closest you will get to a “get out of jail” card, even cancelling because of some other condition is not that easy. You can’t do it easily under a LIM. If it’s a Builder’s report you have to spell out exactly what the issues are, so that’s not a cakewalk by any stretch. Finance, you actually need to show some effort if asked. So cancelling just because you don’t want to any more is not something you can take for granted. You signed a contract.
I’ll just put a due diligence clause in there then.
Good luck with that if the market is roaring and there are 2 other buyers the vendor could sell to.
So when it comes to an unconditional contract, or one that was conditional but now you’ve confirmed so the next stop is settlement, why would anyone think they can just walk away?!
I’d hazard a guess that one reason some people try to get away with that is because they know that, for the vendor, having to chase someone down can be all too hard. Lets just find another buyer. So when it becomes clear that the purchaser is not going to settle or can’t settle, some vendors will try for a while and if its not going anywhere they’ll move on.
But that’s where it gets messy. What if the vendor needs money from his sale to buy another property? There could be a whole chain of settlements relying on settlement of the one before. And if someone breaks the chain, for example a purchaser who either didn’t get organised in time or simply thought they could walk away, well you can picture the fallout down the line. Suddenly the vendor is facing penalty interest on his purchase contract through no real fault of his own.
But does his purchaser care about that? Maybe not. Maybe he hasn’t even thought through how bad it could be.
Maybe he though penalty interest was bad. What about this for a case in point from two years ago:
A purchaser signed an agreement to buy a property for $1.16 million and failed to settle. No reason given. He’d even paid a deposit of $58,000.
The purchaser then annoyed the vendor by trying, one month before settlement, to have the vendor shave over $200,000.00 off the purchase price. That didn’t go down well.
On the settlement date itself the purchaser tried again. This time he wanted a price reduction and another six months to settle. Again the vendor said no to the price reduction but a begrudging okay to the extension but only if the purchaser paid a further deposit. The purchaser couldn’t or wouldn’t, nothing else worked and so ultimately the vendors cancelled the contract. Maybe the purchaser felt that walking away from his $58,000 deposit was a high enough price to pay. How wrong he was.
Because the purchaser’s default had placed them in a “very precarious” financial position the vendors were forced to sell the property to someone else for a much lower amount. They sued the purchaser.
The purchaser tried to argue that the vendors had not tried hard enough to mitigate their loss. But the court disagreed.
How much did it cost the purchaser?
$58,000 loss of deposit paid
$320,500 to cover the loss that the vendors suffered on the resale of the property
$72,000 penalty interest
$36,000 costs relating to the resale
$1,200 rates
Ouch!
Where did it all go wrong?
To me the first red flag was letting the purchaser get away with paying only a 5% deposit. Maybe the purchaser had read too many “how to make millions with no money down” books. Or maybe he’d convinced the agent that he would have no problem settling. After all a 5% deposit might cover the agent’s commission but there is not much left for the vendor after that. Is the vendor upset with the agent? Probably. Part of the agent’s job is to “qualify” the purchaser to establish that he is good for the money.
Why did the purchaser get to the point where the contract was unconditional before he started negotiating the price? Surely that is the discussion you should be having either before you’ve signed the agreement or, at the very least, before you’ve confirmed (if it was a conditional contract). You don’t wait until settlement date and then spring it on the vendor.
Yes, sometimes your situation can change through no fault of your own – maybe you lose your job and the bank won’t lend to you. But unless its something like that you would have to conclude that the purchaser here was either naïve, overconfident and disrespectful, or simply didn’t listen to advice.
The vendor on the other hand – he really needs to be sure that the purchaser is good for the money. Particularly for vendors who are relying on funds from their sale in order to buy another property, the risk that the purchaser won’t settle is not something you want to face. You should make sure your purchase contract is conditional on the sale of your existing property if that is where the money is coming from. But that won’t help you if the purchaser confirms but is still not good for the money.
It can be catch 22 because most of the time clients want to move out of the old house and into the new one on the same day. That is a problem if your purchaser can’t settle and can also leave you at risk of unscrupulous buyers (they are out there) who raise issues at that point which might result in you having to drop your sale price to settle. Which is why you need to make sure your property is squeaky clean and there are no issues that the purchaser can raise.
Obviously if you get an uneasy feeling along the way you might even need a back up plan such as bridging finance.
Its all doom and gloom this article, I know. Sorry. But things don’t always go swimmingly and you need to pay attention. That’s where we come in.
Contact Queenstown Law on 03-450 0000 (Kelsi), russell@queenstownlaw.co.nz or claire@queenstownlaw.co.nz
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