The Coronavirus pandemic has made many people re-think their living requirements over the past year. This in turn has led to a wildly changing housing market, for both buyers and renters.

Individuals who were in the process of buying a property when the pandemic hit us, or during the course of it, may have suffered unprecedented financial difficulties and are then no longer in a position to complete the purchase, for varying reasons. But what are the implications of this?

Before exchange of contracts

Generally speaking, either party is usually able to walk away from a transaction at any time prior to the exchange of contracts with limited consequences. However. there might be some fees payable to solicitors, surveyors and possibly estate agents.

After exchange of contracts

It is entirely possible that, after the contracts have been exchanged, the buyer is no longer able to go through with the purchase. In that case, the seller’s solicitor will give the buyer (usually via their solicitor) a 'notice to complete'. This usually requires the buyer to complete the transaction within 10 working days of the service of the notice. The standard terms and conditions that usually apply to residential sales entitle the seller to receive from the buyer an automatic top-up of the deposit to 10% of the purchase price on service of the notice, if the deposit paid was less than 10%.

If a buyer fails to complete the transaction in accordance with a validly served notice to complete, the seller may rescind (treat as terminated) the contract and keep the deposit paid and any accrued interest. The seller can then put the property back on the market.

What are the seller's options after service of a valid notice to complete?

The seller could apply to the court for an order for specific performance requiring the buyer to complete the transaction. This has the additional benefit that the seller can also sue for damages at the court’s discretion.  

A seller might also seek to negotiate a resolution of some kind with the buyer. This would have the benefit of providing certainty and not incurring further solicitors' or estate agents' fees.

In the current market, the decision to walk away from the contract or seek to enforce it will depend on how likely it is that the buyer can afford to pay the purchase price or secure finance. While a seller can also make an application for the buyer to pay their costs of a claim for specific performance, if the buyer is without funds they are unlikely to be able to recover anything substantial.

What can the buyer do?

There are limited circumstances in which the buyer can attempt to recover the deposit.

Firstly, he or she may be able to demonstrate that the notice to complete is invalid, or was invalidly served.  The seller may also not have been "ready, able and willing" to complete when the notice was served. There is much debate about the meaning of this phrase and while it does not mean that the seller must be ready to complete at the drop of a hat, it is interpreted to mean that the seller is ready to complete subject to administrative matters such as arranging for final signature of the documents and being ready to issue them to the buyer.

If the notice to complete is invalid, that could potentially give the buyer the option to terminate the contract and seek the return of the deposit.

Secondly, the buyer could make an application to court for an order that the deposit ought to be repaid under section 49(2) of the Law of Property Act 1925. It is important to note that there must be "something more, or special or exceptional" to override the contractual expectation that the seller can retain the deposit in the event of the buyer's failure to complete. It remains to be seen whether the pandemic, and its impact on the ability of buyers to obtain mortgage finance, would constitute such a circumstance.

A seller is entitled to retain the deposit even if the same property is later sold to a new buyer at a higher purchase price. While generally speaking the deposit should reflect the seller’s loss, a principle has developed that a 10% deposit is inherently reasonable and will generally be considered to be an acceptable price for the buyer to pay for their failure to complete the purchase. But we are increasingly seeing much larger deposits, particularly with new build properties. It could well be argued that such a deposit is disproportionate and should not be retained by the seller.

Future transactions

Buyers should evidently consider their financial positions very carefully before making the decision to proceed to the exchange of contracts. A buyer may be prepared to lose some or all of a deposit paid before exchange if the alternative is being forced to complete the purchase, either by specific performance or a notice to complete.

For sellers, if a buyer fails to complete, then it is essential that steps are taken quickly to serve the notice to complete and to mitigate any risk of waiving the seller's rights on that basis.

This briefing is a summary of the current applicable law and is no substitute for legal advice. Please contact the Russell-Cooke property litigation team for further information.