Ten-minute topic: what happens when you fail to complete?

What happens if a party exchanges contracts to buy a property, but then fails to complete? Most of us would hazard a guess that the buyer would lose the deposit they paid on exchange of contracts, but in reality the implications for the buyer can be far more extensive – and expensive. The seller can also end up significantly out of pocket. The recent case of Conway v Prince Eze [2018] EWHC 29 (Ch); [2018] PLSCS 10 affords a particularly good demonstration of the implications for both parties. Soap opera How did a contract for the purchase of a residential property in north London end up with a six-day hearing in the High Court and result in a judgment running to 66 pages? It is a case that has everything. A Nigerian prince who hadn’t seen the property he contracted to buy, a charismatic “acquisition agent” with a penchant for exaggeration, and allegations of bribery and secret commissions. Ultimately, it’s the story of a buyer who exchanged contracts in August 2015 to buy 86 Uphill Road, Barnet, for £5m and then failed to complete on the contractual completion date in November 2015, having paid a deposit of £500,000 on exchange. Many people do not realise that time is not of the essence when it comes to the completion date of a property sale and purchase contract. The contract will inevitably require compensation for late completion (usually in the form of interest), but to obtain more serious remedies such as rescission the innocent party must serve “notice to complete”, making time of the essence. In this case, when the buyer, Prince Eze, failed to complete on the due date, Richard and Deborah Conway served notice to complete pursuant to the contract, requiring completion within 14 days. And when Prince Eze failed to complete the purchase on the date required by the notice to complete, the Conways started the search for another buyer. That was not an easy process, but eventually a buyer was found at the reduced price of £4.2m, with contracts exchanged in May 2016 and a deferred completion date in July 2017. In order not to lose their new home in Cambridge, the Conways completed their related purchase using bridging finance until their London house could be sold. In due course, the Conways commenced legal proceedings against Prince Eze for breach of contract. Damages Prince Eze realised that he would lose his deposit, but the Conways claimed significantly more. The High Court had to decide how much they were entitled to, according to the principles of contractual damages (see below). Had Prince Eze performed, the Conways would have sold their London home for £5m, had no further expense in connection with it and wouldn’t have needed bridging finance. Prince Eze claimed that it was not reasonably foreseeable that the Conways would use bridging finance to complete their related purchase. Also, that by agreeing a deferred completion date with the ultimate purchaser, they had not sufficiently mitigated their loss. The High Court considered the various aspects of the Conways’ claim: ■ The court agreed that £4.2m reflected the true value of the property at the time of the resale, so that the Conways had suffered a loss of £800,000 as a result of Prince Eze’s failure to complete at £5m. ■ The Conways could also recover their costs arising from the failed sale of the London property and the consequent delay to the completion of the purchase of the Cambridge property. These included additional legal costs, together with the interest paid to the seller of the Cambridge property and abortive removal costs. ■ The Conways could also recover a contribution towards their additional costs of maintaining the London property after Prince Eze should have bought it. ■ The Conways could also recover their legal costs and surveyors’ fees relating to the resale of the London property. ■ The court considered that the costs of bridging finance should have been in the reasonable contemplation of the parties and were not too remote. After all, few of us could afford to purchase a new home without the sale proceeds from our existing one. ■ However, the court considered that the Conways could reasonably have been expected to conclude a sale at £4.2m by October 2016, so that they could claim their costs of bridging finance only up to that date, rather than up to the actual sale date of July 2017. ■ Similarly, the court allowed the Conways to recover their additional costs of insuring the London property only up to October 2016. Having established the principles of what losses the Conways could recover, and for what periods, the parties were left to agree the precise sum due. If they couldn’t, they would face another trip to court for a judge to determine the precise sum in pounds and pence. The sum ultimately due to the Conways will certainly be at least two or three times the amount of the deposit. Contractual damages The purpose of damages for breach of contract is to put the innocent party, so far as possible, into the position it would have been in if the defaulting party had performed their part of the bargain. However, the innocent party is not given a blank cheque and they will be unable to recover losses that are too remote. The test famously expounded by the Court of Exchequer in Hadley v Baxendale (1854) 9 Exch 341 is now interpreted as limiting recoverable losses to those that are foreseeable as a “not unlikely” consequence of the breach. The innocent party is also under a duty to act reasonably to mitigate their loss. In a case such as this, they are expected to resell the property as soon as reasonably possible for the highest price reasonably obtainable. Buyer beware This case illustrates how the buyer’s liability for failure to complete a purchase contract can far outstrip the deposit paid on exchange. While the seller can usually forfeit the full amount of the deposit (see above), the deposit does not limit the buyer’s liability under the contract. A disappointed seller can sue for more if their recoverable losses are greater than the amount of the deposit. Buyers should therefore regard the deposit paid on exchange of contracts as the minimum they have at stake, rather than their maximum exposure. Seller beware The case also demonstrates the many heads of loss and expense that a seller may suffer if a buyer fails to complete. If the seller has a related purchase, with a significant deposit at stake under that contract, they will have some difficult decisions to make. The risk for the seller is that the court, with the benefit of hindsight, may take a different view as to how quickly they could reasonably have resold the property and at what price. In this case, the court agreed that it was reasonable for the Conways to use bridging finance to complete their related purchase, and that the resale price of £4.2m was appropriate. However, the conclusion that the Conways could have sold the London property by the end of October 2016 leaves them facing the unenviable prospect of being unable to recover the costs of the bridging finance in respect of a period of nearly nine months. We haven’t seen the end of this particular case quite yet. An appeal is due to be heard in December 2018, so watch this space. Deposits It is traditional for a buyer to pay a deposit on exchange of contracts, typically 10% of the purchase price. The contract will invariably allow the seller to retain the deposit if the buyer does not complete the purchase, even if it exceeds the amount of the seller’s actual loss. The deposit is “earnest money”, demonstrating the buyer’s good faith and offering an easy remedy to a disappointed seller if the buyer defaults. However, sellers must avoid the temptation to seek large deposits. A deposit that exceeds 10% may be considered a penalty, so that the seller may not be able to keep any of it. The court also has a general discretion under section 49(2) of the Law of Property Act 1925 to award the return of the deposit, although this discretion is rarely exercised in practice. Bill Chandler is a professional support lawyer at Hill Dickinson LLP