It is a sign of the times – but we have had a few clients recently struggling to settle under their purchase contracts. So, in this article, I will explore what happens when you default under a purchase contract. We will finish up with some suggestions about things you can do to try to minimise the cost and implications of default.
The Default Process
Every purchase contract should have a settlement date. This is a key term of the contract and settlement dates can become quite inflexible.
If you can’t settle on the scheduled settlement date you should try to identify this as early as possible and speak to your solicitor about your options. If you just need more time – you may be able to negotiate this – but, again, the more notice you give the vendor the more likely that you can negotiate a better outcome.
If you don’t believe you will be able to settle, it is usually best to advise the vendor of this as soon as possible. Again, by identifying the problem earlier you are more likely to negotiate a better outcome.
If you don’t settle on the due Settlement Date then the Vendor has three broad options:
- Do nothing – and allow you some extra time to settle. This is a common result where the purchaser needs a couple of extra days due to a bank or other delay;
- Ask for Default Interest – The Vendor can ask for default interest (typically calculated at 12.0% per annum on the overdue balance from the scheduled Settlement Date to the actual settlement date. In some cases the Vendor may allow this to continue for an extended period; or
- Issue a Default Notice – Once the settlement date passes, assuming you don’t settle, the Vendor is entitled to issue a Default Notice – previously known as a Rescission Notice. This specifies that you have 14 days to settle failing which the contract will terminate. In the interim, the Vendor will usually require default interest and their legal costs of the Default Notice (typically $500 to $750) to be paid.
If the Vendor does issue a Default Notice and you can’t settle then you face a number of consequences:
- Termination of the Contract – the contract will automatically terminate after 14 days. Whilst it may be possible still to negotiate – the vendor is entitled to act on the basis that the contract is at an end;
- Forfeiture of Deposit – any deposit you have paid (up to 10%) will likely be forfeited. In some contracts, the special conditions specify that where you pay a smaller deposit then you forfeit not only what you have paid – but the difference up to 10% as well; and
- Further Losses – You may also be exposed to further claims from the Vendor. If, when the property is re-sold, the deposit you have paid doesn’t cover any difference in sale price, agent fees, interest and other costs then the Vendor can claim the difference from you. In a falling market and where a small deposit has been paid this is a substantial risk.
We have seen cases in recent months where vendors have claimed hundreds of thousands of dollars.
So – having explored what can happen – let’s look at how you can try to minimise your risks of being in this very stressful situation.
Some Suggestions
If you are about to sign a purchase contract there are definitely some issues to consider before you sign to try to minimise your chances of finding yourself in a default situation.
Carefully consider the settlement date. Allow enough time for your finance application as well as some room for contingencies. There is no right time as everyone’s circumstances are a little different. Do have a chat with your finance broker or bank. As a general rule, if you have a later date you may be able to bring it forward / earlier. If you have an early date that you can’t meet you may be liable for default and the associated costs.
If your ability to settle relies on other events – such as finance approval, selling your existing home or getting permits – then you should look at including appropriate special conditions. Then, if things don’t pan out, you can terminate the contract with minimal damage.
Make sure that you work closely with your bank or finance broker before you sign a contract that relies on finance approval. Make sure that you understand how long the lender needs for approval, what the conditions will be and how long it will take for the lender to be ready for settlement. Bank lending policies are prone to sudden changes without notice – don’t get caught out.
If you do get into trouble – act quickly. A good advisor, be it your lawyer, finance broker or other professional should be able to explore alternative solutions for you. It may be that different lender can get you a loan or that there is another solution you haven’t thought of. Burying your head in the sand and hoping something turns up is very rarely the best strategy.
Concluding Thoughts
At Lewis O’Brien and Associates, we have been helping clients navigate trickly default situations for more than 25 years.
If you are an existing client and you may have a problem with a settlement let us know as soon as possible so that we can discuss alternatives and how to mitigate the losses you might face. If you aren’t an existing client – feel free to book a consultation with Lewis O’Brien and we can explore what alternatives you may have – click here.
Given the scale of the potential losses you may face this small investment could help reduce your stress and save you thousands of dollars!
Next week we will explore what options a purchaser has when they decide that they don’t want to proceed with an off-the-plan purchase of property.
If you know someone that is in a default situation and might benefit from this article feel free to share this with them.
Lewis O’Brien
Your Preferred Property Lawyer