A recent court ruling involving a judgment of $700,000 highlights the pitfalls of defaulting on a property settlement. Here we take a deeper look at the settlement process and what you need to be aware of.
What is a sale and purchase agreement?
A sale and purchase agreement sets out the terms and conditions of a property sale. It includes all of the details of the transaction including price, the settlement date and any other terms and conditions such as chattels being sold with the property and whether the buyer needs to sell another property first. The Agreement it provides clarity to both the seller and buyer on what is intended to happen and, perhaps most importantly, the consequences if things don’t progress as intended. When you sign a property sale and purchase agreement, you are entering into a legal contract.
What is a property settlement?
“Settlement” refers to the date that the buyer pays the purchase price and takes legal possession of the property from the seller. There are a number of steps in the settlement process that must happen before the settlement is completed. This includes things like meeting any conditions under the agreement, conducting a final inspection, checking and signing transfer documents, and meeting any lending requirements such as signing banks documents. Only lawyers or a registered conveyancer can legally register the transfer of a property.
What is the settlement payment?
When you purchase a property there are usually two stages to the process – a deposit (which is part of the purchase price) is paid either when the agreement is signed or when all of the conditions of the Agreement are met. The balance of the purchase price must be paid on the settlement day.
Failure to make this final payment means the buyer is in breach of their sale and purchase agreement and may mean they forfeit their deposit and are required to pay interest on the balance of the purchase price until settlement can take place.
A failure to pay the purchase price can occur for a number of reasons, including if lending conditions have changed and the buyer can no longer borrow all of the money needed to complete the settlement. A strict process 9as set out in the fine print of the Agreement) must be followed when a buyer defaults on paying the settlement money.
Defaulting on a final payment – in action
Let’s look at an example case involving a $700,000 judgment against the buyer of a Herne Bay, property which has recently been in the spotlight.
In March 2022 a buyer agreed to pay $5.7 million for a Herne Bay property and signed a sale and purchase agreement with the seller.
The buyer then failed to make the final payment on the settlement date. The seller issued a settlement notice, however the buyer defaulted.
The seller then relisted the property, sold it for $4.9 million in January 2023 and then took legal action against the original buyer who had defaulted to recover their losses. This is an important part of the process whereby the seller was required to mitigate (or try and reduce) their losses by selling the property. The buyer remains liable for the shortfall between what they would have paid if they had completed the purchase and what the seller eventually received from a new buyer.
While the original buyer acknowledged that they had breached their obligations under the agreement, they argued that the seller could have obtained a higher price on the resale by keeping the property on the market for a longer period of time. If they had done this, the amount payable by the original buyer would have been less.
In court, the judge confirmed that it is up to the original buyer to prove that the seller had acted unreasonably during the resale process.
The judge noted that property prices were declining in 2022, and that the anticipation of a weakening economy and property market justified the sellers actions in selling the property .
The judge ordered the original buyer to pay the seller $681,136.83, covering the loss on resale, interest on the unpaid purchase price between the original settlement date and the resale settlement date, costs for rates, water charges, and insurance between those dates, as well as the expenses associated with the resale process.
Additionally, they were ordered to pay 14% interest per annum on $230,000 from January 23, 2023, until the date of payment, along with $18,218.25 in court costs and disbursements.
What should I do if I can’t make the final payment on a property settlement?
If you are unable to pay the purchase price, you should immediately contact your lawyer. The more time that we have to try and negotiate an outcome, the greater the chance that a solution can be found. Trying to negotiate on the settlement date rarely results in a favourable outcome for the buyer who can not pay the purchase price.
What does this all mean for you?
Defaulting on a final settlement payment can be a very costly mistake. Don’t get caught out. Always seek help from a lawyer to assist you with the the sale and purchase process, and make sure you fully understand the terms and conditions of any agreement before you sign anything.
It is always best to involve your Lawyer early – we are here to help. Get in touch with the team today.