Failure to settle

In the unfortunate event of such a default, under the standard form REINZ/ADLSI sale and purchase agreement, the vendor must first serve a settlement notice on the purchaser. Remedies available under the agreement can only be employed once this notice has been served.

The settlement notice gives the purchaser 12 working days to complete settlement. Should the purchaser fail to settle on the 12th working day, the vendor has the following options [clause 11.1]

Specific performance

Firstly, the vendor may sue the purchaser for specific performance (by seeking an order from the Court under which the purchaser is obliged to complete the purchase). [clause 11.4(1)(a)]

The reality, however, is that if the purchaser fails to complete settlement due to a lack of funds, a Court order will not be able to change a purchaser’s financial position. 

Further, obtaining the Court order can take some time (although you can request urgency) and will be expensive.  

Cancellation / damages

Secondly, the vendor may cancel the agreement, retaining any deposit paid by the purchaser (not exceeding 10% of the purchase price) and/or sue the purchaser for damages. [clause 11.4(1)(b)]

 It highlights the importance of receiving a deposit from purchasers, ideally of at least 10%.  

 Suing the purchaser for damages will also involve a court proceeding.

The damages claimable include the loss incurred by the vendor on any bona fide resale of the property. 

 It is worth noting that entry into the resale contract must be within one year from the date the purchaser was required to settle under the settlement notice. [clause 11.4(3)] 

In turn, the loss incurred may include:

• Penalty interest on the unpaid portion of the purchase price, from the original settlement date to the settlement date of the resale.
• All costs and expenses reasonably incurred in any resale (or attempted resale) of the property.
• All outgoings (except interest) and maintenance costs, incurred in relation to the property, from the original settlement date to the resale settlement date.

Resale and then cancellation

Thirdly, the vendor can remarket the property to third parties without cancelling the existing agreement. The original agreement cancels automatically, if the vendor enters a subsequent agreement to sell the property to a third party during the remarketing process. [clause 11.4(2)]

Purchaser company

If the purchaser is a company and it is still trading, an effective method of putting pressure on to settle the purchase is to issue a statutory demand. A purchaser not wanting to be liquidated will have no choice but to settle.

Recommendations for clients

Most vendors who have gone on to purchase other properties relying on their own unconditional sale and purchase agreement will be in a difficult position if the purchaser defaults and walks away from their deposit.  

Vendors could consider amending a sale and purchase agreement to increase the interest rate for late settlement or require only a 10% deposit or higher.

If selling to a company, it would be wise to include a guarantee as that presents a further option for the vendor if the purchaser defaults – suing a guarantor.