In the current market, there are likely to be more buyers who have exchanged on a purchase and then fail to complete.
Partner, Stephen Clarke focuses on the options which are available to the seller after a notice to complete is served.
Notice to complete
The notice to complete is generally served by the seller’s solicitor. The commercial standard conditions (usually automatically incorporated in commercial contracts) require the buyer to complete within ten working days of a notice to complete and make time of the essence once a notice has been served. The residential standard conditions also entitle the seller to an automatic top-up of the deposit to 10% of the purchase price. This means that if the deposit held is 5%, upon service of the notice to complete, the buyer must top this up with a further 5%. The standard conditions provide that if the buyer fails to complete after a notice to complete has been served, the seller may rescind the contract, and, if the seller does so, it may forfeit and keep the deposit and accrued interest.
Return of deposit
However, the buyer can obtain the return of the deposit on two grounds:
1. The buyer may be able to show that the notice to complete is invalid. The notice may not have been drafted or served correctly or the seller may not have satisfied the precondition that it is ready, able and willing to complete. There has been much debate over this pre-condition. Recent case law has confirmed that a distinction is made between being ready to complete immediately (which is not required) and being ready to complete subject to minor administrative matters. A seller who serves a notice to complete need not be ready to complete at a moment’s notice and is entitled to a sufficient period within which to set up the necessary administrative arrangements for completion.
If the notice to complete is invalid, the contract will have been wrongly terminated by the seller and the buyer will be entitled to the return of the deposit.
It is also important for a seller to appreciate that making time of the essence by serving a notice to complete is a double-edged sword. If a seller himself fails to complete before the notice expires and the buyer is ready, then the buyer will be able to rescind.
2. The buyer may also apply to the court for the repayment of the deposit under section 49(2) of the Law of Property Act 1925. It is not possible to contract out of this provision. There have not been many reported court cases on repayment of deposits, but it seems clear that there needs to be 'something more, or special or exceptional' to justify overriding the ordinary contractual expectation that the deposit can be retained if the buyer defaults. The deposit can still be retained even if the seller subsequently sells the property to a third party at a higher price.
What is regarded as a penalty?
A deposit of more than 10% is vulnerable as it may be regarded by the court as a penalty. A penalty would have to be refunded to the buyer in full. Even a payment by instalments is treated as payment of a larger deposit and will not get round the penalty point.
What can the seller do?
As well as forfeiting the deposit, a seller can also sue for damages (loss on the subsequent re-sale plus wasted costs). Credit is given for the deposit so the seller does not recover his loss twice. If a seller wishes to rescind and forfeit the deposit then the service of a notice to complete is vital. It is important that in this situation, the seller does not delay after the notice is served. Any delay could be treated as a waiver of the notice, particularly if continuing discussions are going on with the buyer about completion. The best thing for a seller to do may be to rescind the contract and then enter into without prejudice discussions with the buyer about rescuing the situation.
Of course, a seller does not have to serve a notice to complete, rescind the contract and forfeit the deposit. As an alternative, if the buyer has funds, the seller may wish to apply to the court for an order for specific performance. The buyer will also be liable for damages for any delay in completion. Most buyers default because of lack of funds and so we are likely to see more forfeited deposits than actions for specific performance in the current economic climate.
Either way, it is important to consider the situation carefully before deciding how to proceed when a buyer does not complete. The temptation is to act quickly but it could backfire and let the buyer off the hook. In the present climate, a buyer may even be prepared to risk losing their deposit to get out of the purchase as the deposit may be a smaller sum to lose than the reduction in value of the property since exchange due to the falling market.