Contract of Sale and Breach

By March 21, 2017 Property Law No Comments

Any contract be it for the purchase of property or otherwise will create rights and obligations for the parties to that contract.

In the context of a Contract of Sale for property this essentially means that the seller must deliver the property to the buyer and the buyer must pay the seller the purchase price on the settlement date. But what happens if one or both parties can’t. For example what if the buyer is not in a position to settle by the due date and requires a few extra days to get their finances in order.

Such instances although relatively common, still technically amount to a breach of the Contract of Sale, albeit a minor one.

In these instances general condition 25 which is contained in every Contract of Sale provides that if the buyer cant settle on time, the buyer must pay to the seller compensation in the form of penalty interest on account of loss that the seller may suffer as a result of the delayed settlement.

General condition 26 of the Contract of Sale provides the rate of interest to be charged in these circumstances is to be 2% higher than the current penalty rate.

As a matter of practicality, once the buyer and seller agree on the amount of interest that is to be paid, which is purely a mathematical exercise, the additional penalty interest will be paid at settlement and the breach will be rectified.

In these circumstances the seller is also entitled to claim ‘reasonably foreseeable losses’ in addition to penalty interest. Traditionally the Dispute Panel has taken a very limited view of what actually constitutes a ‘reasonable foreseeable loss’.

In order to widen and make certain what constitutes a ‘reasonable foreseeable loss’ a special condition can be drafted and inserted into the Contract of Sale expressly specifying what is a ‘reasonable foreseeable loss’. Such items can include interest expense payable on an existing mortgage, the cost of obtaining bridging finance (if required), legal expenses in dealing with the breach and any consequential loss that may be suffered.

However it must be noted that more serious breaches can and do lead to the termination of the Contract of Sale. For the Buyer this will mean the loss of the deposit that has already been paid. Additionally the Seller will also have the right to sue the buyer for any loss that is incurred as a result of the Contract of Sale being terminated.

Like the buyer, the seller too has obligations and is required to do ‘all things necessary to enable the buyer to become the owner of the land’.

What happens if settlement is delayed by the seller’s actions. Potential delays could include such things as the seller’s inability to provide vacant possession of the property or errors in the documents that the seller has to provide the buyer.

Penalty interest is only payable on money that is overdue. Generally the seller will not be required to pay the buyer any money meaning there cannot be any overdue money. Thus the buyer is unlikely to be entitled to any penalty interest.

What the buyer may be entitled to is compensation for those losses that have reasonably been incurred. Again a very narrow view has been adopted of what is actually a reasonable foreseeable loss.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

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