In a recent article, we explored the significant rights that accrue to a Vendor when the Purchaser defaults – click here to view this article. In this article, we will explore the relatively limited rights that are afforded to a purchaser when the Vendor defaults.
The most common General Conditions are Condition 25 of the 2008 standard General Conditions and Condition 32 of the current Law Institute / Real Estate Institute approved General Conditions. Both provide:
25. Breach
A party who breaches this contract must pay to the other party on demand:
(a) compensation for any reasonably foreseeable loss to the other party resulting from the breach; and
(b) any interest due under this contract as a result of the breach. This suggests that the Purchaser may have a right to all sorts of foreseeable losses. However, this is not often the case.
This suggests that the Purchaser may have a right to all sorts of foreseeable losses. However, this is not often the case.
Purchaser Rights on Vendor Default.
The Vendor’s principal obligation is to deliver title to the Property at settlement.
The Vendor may also have obligations to provide vacant possession (which means that there isn’t a tenant in the property), remove their goods and belongings and leave the property in the condition that it was in on the Date of Sale with an allowance for fair wear and tear.
If the Vendor does not settle or is not in a position to settle then the Purchaser can issue a Notice of Default. In essence, this allows the Purchaser to terminate the contract if the Vendor does not settle within 14 days.
However, there are two problems with this:
- Firstly, the Purchaser may want to settle – and terminating the contract may not be what the Purchaser wants; and
- Secondly, if the Vendor’s default relates to a failure to remove all their belongings or leave the property in the right condition then the Purchaser may not want to run the risk of not settling and facing a potential default claim themselves.
If the Vendor’s failure is relatively minor, there are General Conditions that might allow the Purchaser to withhold up to $5,000 at settlement (with a matching $5,000 from the Purchaser). Vendor’s representatives often delete these General Conditions….
Often, this leaves a Purchaser trying to make a claim for losses incurred as a result of delayed settlement.
Foreseeable Losses
It seems reasonably logical that if the vendor doesn’t settle on the due date, then the Purchaser is likely to incur a number of losses:
- Removalist and storage fees;
- Re-settlement and other loan fees;
- Increased expenses if renovations are planned after settlement; and
- Losses to tenants or other occupiers.
However, in 1992 the Supreme Court rejected a claim by a purchaser for removalist and storage charges. Other claims for increased loan fees and loss of profits have also been rejected by presiding authorities.
Why Are Purchaser Rights Limited?
The first and most obvious explanation is that the Vendor’s representative prepares the contract. It isn’t unusual to see special conditions that include quite extensive lists of potential expenses and losses that the Vendor can claim if the Purchaser defaults.
However, Vendor representatives are unlikely to include extensive lists of expenses that the Purchasers can claim. In addition, too many Purchasers sign the contract offered to them without having it reviewed – or in many cases without really reading the contract carefully. If you would like us to review your contract before you sign it – click here.
The second and less obvious explanation is that the Purchaser’s obligation to mitigate their losses is interpreted in a way that tends to favour the Vendor. This means that:
- the Purchaser is obliged to try to reduce their loss by investing surplus funds at interest for the duration of the delay;
- The Purchaser needs to acknowledge that typically interest is charged by their lender on undrawn funds; and
- The Vendor is obliged to seek alternative accommodation.
The clear contrast is with the Vendor’s right to retain possession (and potentially claim rent for a rented property) and also claim default interest for the duration of the delay – which seems to amount to double counting….
Purchaser Responses
In response, there are a few things that Purchasers can do:
- Seek to insert special conditions that clarify the Vendor’s obligation to ensure that chattels and rubbish are removed before settlement and the property left clean and tidy;
- Where possible, try to make provision for a possible settlement delay.
At Lewis O’Brien & Associates we strive to ensure that both sale and purchase settlements proceed on the due date. We try to anticipate potential issues and try to proactively address them in the hope that the issues can be resolved and settlement can proceed on the due date.
Where this is not possible we strive to keep our clients informed of the situation and their rights and also work towards minimising delays and complications.
Lewis O’Brien
Your Preferred Property Lawyer