It is fair to say that a house purchase is the biggest single investment that many people will make.
An established part of the house buying process is the payment of the 10% deposit on exchange of contracts.
In the majority of cases, the period of time between instructing your solicitor to carry out the conveyancing and exchange of contracts is the time when you can withdraw from the transaction without financial penalty to the other party. You might incur legal fees and search fees, but you will not owe the other party in the transaction any money. This is because the contract does not become legally binding until exchange. Typically, this is about 4 to 6 weeks into the transaction.
If you are buying a house, your solicitor will have carried out searches, checked the title and raised enquiries and reported to you. Your financing will be in place and you will be ready to commit to the purchase. Your solicitor will ask you for the deposit which is usually 10% of the purchase price. On exchange this money is paid to the seller's solicitor.
The vast majority of residential purchase transactions complete, so many people do not consider what would happen to the deposit in the event that the matter did not proceed to completion.
If completion is delayed, but takes place in the end, typically the party at fault will pay some interest (and possibly losses) to the other party, but the financial loss will be fairly modest.
This must be contrasted with the situation where the transaction does not complete at all due to the default of the buyer. In this instance, the seller will be entitled to keep the full 10% deposit under the terms of the contract.
A recent case reminds us that this is well established law and the courts are likely to take a tough line.
In the case of Rock v Reddy [2016 EWHC 3043 (Ch), the buyer informed the seller just before completion that there would be a delay in obtaining their purchase money and they would not be able to complete on the contractually agreed date. The seller offered to put back the date for completion in return for a small price increase, but the buyer rejected these offers. The buyer duly failed to complete so the seller served a notice to complete under the terms of the contract. This gave the buyer a further 10 days to complete. They missed the deadline so the seller kept the buyer's deposit of £430,000 and went on to re-sell the property elsewhere for a profit.
The buyers tried to persuade the court to exercise its discretion and order the return of the deposit to them. The court declined to do this. The fact that the seller had sold the property elsewhere and had not suffered any loss was not sufficient for the court to order the return of the deposit. The parties entered into a binding contract which was breached so the seller was entitled to pursue their contractual remedies.
This case is a timely reminder that you should take specialist conveyancing advice when buying your house. Your solicitor should discuss the timing of the funding with you to try to minimise the risk of you being in breach of contract if the funds do not arrive in time for completion.
To discuss this or any property related issue, contact us.