What happens when you pull out after Exchange of Contracts?

10 min read
After reading our article, Can I pull out after exchange of contracts?, it is important to understand what the process for pulling out is. Most people are aware that as a buyer you lose your 10% deposit if you pull out after exchange, however what happens if you complete 1 to 2 days after the agreed completion date?

While it is not uncommon for people to fail to complete on the exact date agreed for completion, it is very rare for people not to go through to complete after they have exchanged contracts.

We'll set out below the process for what happens if you fail to complete on the day of completion including:

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It should be noted that the seller is entitled to the full 10% of the purchase price if the buyer fails to complete, even if the buyer has actually paid 5% on exchange. 5% deposits are very common, especially using the Help To Buy Equity Loan Scheme. If you have only paid a 5% deposit then the seller would request the balance of the 5% to be paid and if this wasn't paid then they would have legal rights to seek settlement though the County Court.

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What happens within the first 10 working days after breaching the Completion Date?

The contract is breached in legal terms if, on the day of completion, one side is "ready, willing and able" to complete, but the other is not. The solicitor acting for the side which is "ready, willing and able" to complete serves the other side a Notice to Complete, which orders the other side to complete the transaction within 10 working days after which the side serving the Notice can rescind the contracts.

What does a Notice to Complete do?

A Notice to Complete most importantly imposes a rate of compensation on the defaulting party, buyer or seller, calculated on a daily rate and equal to the Law Society's interest rate, which is 4 per cent above Barclays Bank base rate, (currently 0.5%) on the amount equal to the purchase price, less (where the buyer is the paying party) any deposit paid, for the period by which the paying party's default exceeds that of the receiving party, or, if shorter, the period between completion date and actual completion.

Used by conveyancers for residential property transactions only

Technically, a seller's conveyancing solicitor can claim that Completion has been delayed by a day - and hence serve a Notice to Complete if they receive the balance of the buyer's completion monies after 2.00pm (sometimes 1pm depending on what was agreed in your contract) of the day set for completion and this time is the 'cut-off' point whereby any penalties imposed roll on to another day.

For a working example, if a seller failed to complete their sale on a property being sold for £300,000, after the buyer's solicitor has served a Notice to Complete on them (normally on the close of play or at earliest after 2.00pm on Completion Day), that seller is liable to pay interest to the buyer, for every day of the next 10 days:

For example, the daily rate for the above would be (4.5% x £300,000)/365 days in the year = £40 per day interest

Additionally, the side serving the Notice can, under the terms of the Notice, claim for other costs which they can claim have arisen as a consequence of failure to complete on time.

What costs could be reclaimed?

  • Mortgage interest - if the buyer has mortgage funds drawn down in readiness for completion and the seller fails to complete, then the buyer would seek repayment from the seller for the interest charged by the mortgage lender on the mortgage for the period of time the seller fails to complete;
  • Removal Costs - removal companies often charge a fee for changing the date of the move;
  • Storage Costs - sellers may complete on their sell but have to move their possessions into storage over night as their seller fails to complete.
  • Accommodation - the costs for moving into a hotel should be covered by the breaching party.
  • Lost income - if the buyer intended to let out the property in question to tenants, any loss of income which would have occurred and any compensation which the buyer would have to pay out to prospective tenants who'd planned to move in on the day of completion.

How often are these costs incurred?

As stated previously, it's not uncommon for completion to be delayed by a few days and for the above costs to be claimed by the party at loss, however in most cases, completion goes through within the 10 day time-frame before the contract is rescinded.

What if the failure to complete on time is the fault of the conveyancing solicitor?

The failure to complete on the correct day can also be argued to be the fault of the conveyancing solicitor on the side of the party which has defaulted.

It's the conveyancing solicitor's job, in the normal course of events, to have allowed exchange of contracts to take place - and a completion day set - only if:

  • The money to exchange and more importantly, to complete, is sufficient and in place, and
  • The property is in vacant possession ready for completion day.

There have been cases where a property still has, for example, a tenant living within it and therefore is not in vacant possession on the day of completion. If the solicitor acting for the seller was aware there was a tenant still in the property on exchange, then the seller could look to seek compensation for allowing them to be contractually bound to complete when they can't give vacant possession. In cases like this, you'd need to first raise a formal complaint with the law firm, and then if you require further support you can seek support from the Legal Ombudsman.

What happens after 10 days?

The side which has served Notice to Complete can rescind the contracts

This is the point where, if it is the buyer who has defaulted, they stand to lose the full 10% of the selling price. So the seller can automatically take the whole of all the deposit paid over. This penalty is what makes this situation virtually unheard of 'in real life'.

If the buyer had presented less than 10% of the purchase price, as often happens in the case of a Help to Buy Equity Loan purchase (where the deposit is typically 5%), the seller can sue the buyer in County Court for the balance of the 10% of the purchase price.

In rescinding the contracts, then the side rescinding can also sue for all the costs which that were incurred in preparation for the failed sale.

For the buyer, these can include, among other things:

  • Costs of taking out any mortgage - if applicable - AND any early repayment charge which might be necessitated (this latter cost might be as much as 2% of the entire mortgage taken out so for a £250,000 mortgage, this could be £5,000
  • Costs of conveyancing
  • Costs of any home buyers survey
  • Costs of property searches
  • Costs of buildings insurance if a freehold property

A buyer rescinding contracts must not only be paid their deposit back in full but also any interest which the deposit money attracted from the date of exchange, when it was placed the seller's solicitor's account, to the date when it is paid back into the buyer's bank account.

For the seller, these can include, among other things:

  • Costs of estate agents fees and any others related directly to the marketing of the property
  • Costs of conveyancing
  • In principle, any additional costs which might be incurred because of any delays to an ongoing purchase contract which a seller rescinding had entered into.

Can a person rescinding a contract sue for a rapid change in a property's value?

As a final cautionary note, a court can award further damages when a contract to buy or sell is breached and the party suffering the breach can prove a clear loss attributable because the property rapidly changed value after the completion date and which they were unable to take advantage of or protect themselves against.

In one case, Hooper and Hooper vs. Oates, which went to the Court of Appeal in 2008, Oates failed to complete (buyer) on a house purchase for £605,000. The Hoopers (sellers) were unable to sell the property again at that price and despite further price reductions and eventually (they had bought another property themselves) moved back into their house. At that time the house was worth £495,000.

The Sellers sued the Buyer for damages and were successful, but the Buyer appealed. The point at issue for the Court of appeal to decide was whether the breach of contract was to be measured in reference to the property's value at the date of the breach or in reference to its value at a later date, after the Hoopers had given up trying to sell it.

Court rules in favour of sellers

The Court decided that the date of the breach was the right date for assessment only when there is an immediately available market for the sale but that there wasn't such an available market in the case.

The Court ruled that Oates could not argue that he had no liability for the resulting devaluation of the property because of declining prices in the property market which occurred during the period because if he had completed and kept true to his contract, he would in turn have suffered the decline in value and this is what he had ultimately to compensate the Hoopers for.

The Court award total damages of £110,000 to the Hoopers, minus the £60,500 which Oates had already paid over, therefore a net figure of £49,500.

It is therefore critical that buyers and sellers must be in a position to complete following exchange of contracts. Therefore there must be some time allowed for example, for a buyer to change their mind as a result of an adverse survey, title defects or even just a change of heart before they advance to exchange.

This possibility the among the most important reasons why the conveyancing process takes longer than most people might imagine it should - it allows for considerable buffers and lags to occur so that both sides can 'get their ducks in a row' and avoid potentially financially ruinous and stressful law suits.

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What might you do in a 'worst-case' scenario as a buyer?

You should naturally firstly consider whether pulling out is so important that you can take the loss of your deposit money at the very least. If you cannot afford to lose this money - and this means practically all first time buyers - but, for example, cannot stand living in your property for whatever reason you should consider - and this means practically all first time buyers - selling up immediately.

If you're very lucky and are fortunate with your marketing, you might even make a small profit. However you should also consider that prospective buyers may well probe you to find out why you are selling up so quickly and they may be able to take advantage of your situation once they know.

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