Failure to Complete Following Exchange of Contracts
At any time during Conveyancing transaction up to the point that contracts are exchanged both the buyer and the seller are free to withdraw from the transaction. They can do so without incurring any penalty and they do not need to give any reason.
The fact of the buyer verbally agreeing to buy or the seller agreeing to sell is not sufficient to create a binding contract. This is because land transactions are subject to special rules which do not apply to transactions involving other types of property. These rules are set out in paragraph 2 of the Law of Property (Miscellaneous Provisions) Act 1989 and they require that any contract for the sale of land must be in writing, must be signed by both buyer or seller and must contain all of the terms in one document.
However, once contracts are exchanged the penalties for failing to complete, or even completing later than the appointed day, can be severe. As the contract will be in writing and because only those terms which are expressly included can apply it usually fairly clear which party is at fault and to what extent. Failure to complete can happen for a number of reasons. In this article we will take a look at some of the more peculiar scenarios.
Death of the Seller
It is of course very unfortunate however occasionally the seller will die following exchange but before completion. If the impending death can be anticipated then the solicitors will often try to bring the completion date forward in an attempt to “beat the reaper” as it were but this will not always be possible.
The fact of the seller’s death does not however frustrate the contract. In contract law, a contract is said to be frustrated if due to events beyond the control of the parties it is no longer possible for it to be completed. In land transactions, the personal representatives of the deceased can be compelled by the buyer to sign the transfer deed. This is because, once contracts are exchanged the buyer acquires a beneficial interest in the property, the nature of that interest being a right to have the property transferred to him provided he performs his obligations under the contract (i.e. he pays the purchase monies to the seller or his personal representatives).
The difficulty that will often arise is that, although an executor named in a will is entitled to exercise his powers, one of which would be the power to sign a transfer, before probate is granted, the transfer could not be registered without producing a grant of probate, which can only be issued once the will has been proved. In practice therefore completion cannot take place until probate has been issued.
In terms of any claim for compensation by the buyer for late completion, a court would most likely take into account the fact that the delay was not something over which the deceased or his personal representatives had any control.
Death of the Buyer
The situation is different where it is the buyer who dies before completion. Although the buyer acquires a beneficial interest in the property once contracts are exchanged, there is no corresponding interest in the purchaser’s money which arises in favour of the seller.
Often it would be impossible from a practical point of view for the buyer’s personal representatives to complete the transaction. Generally for example a buyer will need to borrow money in the form of a mortgage to pay the purchase price and clearly that will facility will not be available to the personal representatives.
In addition it is not possible for a deceased person to be registered as proprietor of a property. A contract is personal and cannot impose an obligation on someone who is not a party to it. In the reverse situation, where the seller has died, he can still sell because he is acting by his personal representatives and the obligations under the contract are therefore still being fulfilled by the deceased.
A personal representative of the buyer could not be forced to become registered as proprietor of the property, which is the only way the transaction could complete. The contract is therefore frustrated by reason of the death of the buyer.
Bankruptcy of the Seller
If the seller is the sole proprietor and becomes bankrupt then the buyer must deal with the official receiver or, if one is appointed, the trustee in bankruptcy.
The trustee is entitled to, and may, have the property registered in his name but even if he does not the Land Registry should accept a transfer signed by him provided the necessary evidence of appointment is lodged.
As the trustee is stepping into the seller’s shoes he can be forced, via an action for specific performance, to sign the transfer.
Where there are joint proprietors then the legal title to the property does not pass to the trustee, only the bankrupt’s beneficial interest (any equity he is entitled to). The transfer can therefore still be signed by the proprietors however to avoid any threat of action by the trustee in future it is good practice to ask him to sign the transfer also by way of consent.
Bankruptcy of the Buyer
If a person becomes bankrupt then all of his assets belong to the Official Receiver or, if one is appointed, the Trustee in Bankruptcy. If he becomes bankrupt between exchange and completion therefore he cannot be compelled to complete since the funds he was to use to complete the purchase no longer belong to him.
The trustee is not obliged to complete the transaction on his behalf. Having said this, the seller is not under any duty to check that the buyer is not bankrupt provided the sale price represents a fair market value or is at undervalue, since the trustee (who will own the property from completion even though it may be registered in the purchaser’s name) will be receiving an asset which is of at least equivalent value to the cash paid. The seller may have a duty where the sale price is significantly more than the actual value of the property, since the trustee is losing out by the difference between the actual value of the property and the price paid.
Notice to Complete
Generally a fixed completion date will be included in the contract. Once this date is reached, if one party is ready, willing and able to complete and the other party is not then the party that is ready may serve a notice to complete on the defaulting party. Although the length of the notice can be varied prior to exchange by inserting a special condition in the contract, it is generally 10 working days from the date the notice is served.
Serving a notice to complete means that “time is of the essence” and the defaulting party must complete before expiry. If he does not then the non-defaulting party is entitled to rescind the contract. This means it will be brought to an end and if the seller has rescinded he is free to sell the property again or if the buyer has rescinded he is no longer obliged to buyer. The non-defaulting party is then entitled to claim compensation from the defaulting party.
It is important to note that the non-defaulting party does not have to rescind when the notice expires. He may allow the contract to remain in force and he may rescind at a later date without further notice. Furthermore, he does not have to serve the notice on the day of completion, however he cannot rescind until notice has been served and the notice period has expired.
The Deposit
Where contracts have been exchanged and the buyer subsequently fails to complete, other than in circumstances where the contract is deemed to be frustrated, the seller is entitled to retain the deposit (which should have been paid by the buyer’s solicitors to his solicitors following exchange) and to sell the property again at full market value.
Compensation for Loss
As well as interest under the contract from the date on which notice to complete is served up to the date of actual completion calculated at a daily rate of 4% above the Bank of England base rate (or such other rate as specified in the contract) of the purchase price less (if the seller is making the claim) any deposit actually paid, divided by 365, the defaulting party can claim losses for such things as removal costs, temporary accommodation, new clothes if they have had to be purchased because all of the claimant’s clothes have been packed away, loss of earnings, money spent on eating out and any damages paid to another part in the chain as a result of an action brought by them where the defaulting party’s failure to complete has led to the non-defaulting party being unable to complete on an onward transaction.
If contracts are rescinded then interest under the contract is not payable (because it is interest for late completion) however other losses, such as if the seller rescinds the difference between the sale price under the rescinded contract and if it is less, the eventual actual sale price together with additional marketing costs etc. If the buyer rescinds and has to buy a more expensive property because he cannot find a comparable property for the same price then he may be able to claim the additional cost.
All of these damages are subject to a test of reasonableness and this list is not exhaustive. A claimant must mitigate any costs he intends to claim so for example staying a five star hotel for hundreds of pounds per night will not be acceptable unless it is the only accommodation available in the vicinity.
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