Buying or Selling a Property? Don’t Let This Happen to You
A recent sale of a property in South Turramurra went completely off the rails and the dispute ended up in the Supreme Court of NSW which made its decision in August 2019. There are some very valuable lessons to come out of it for both vendors and purchasers who often think, “What could possibly go wrong?”
The Facts
In the case of Cole v Raykir Holdings Pty Ltd [2019] NSWSC 2017 the vendors sold their home in January 2018 to a property developer for $2.83m with a 5% deposit and settlement to take place in 6 months. The director of the developer company also gave a personal guarantee to cover the obligations of the company under the Contract.
On the basis of this sale the vendors then purchased another home and arranged for settlement to take place on the same day as the sale of their property.
Shortly before settlement was due to take place the purchaser’s conveyancer informed the vendors’ solicitor that the purchaser could not complete on the required date (20 July 2018) as its lender had approved finance based on a valuation of the property at $510,000 less than the purchase price and it had insufficient funds to proceed.
After serving a Notice to Complete on the purchaser requiring settlement to take place 14 days later the vendors then terminated the Contract and claimed the remaining 5% of the deposit and interest. The vendors re-sold the property in April 2019 for only $2.23m and sued the purchaser and the guarantor for the
$600,000 deficiency.
The purchaser asserted that the Notice to Complete was invalid on a very narrow technical ground and defended the case on that basis.
The Decision
The purchaser and the guarantor were both liable for the deficiency less the 5% deposit already paid and were ordered to pay costs.
Lessons for Vendors
1. If you buy another property after you’ve sold yours, be aware of the risk that your purchaser could pull out which can affect your ability to proceed with your own purchase. In such a case, always tell the purchaser that youhave bought another property and that you may incur losses if the purchase does not go ahead;
2. Be aware of the risk involved in an extended settlement period such as 6 months. It increases the possibility that the purchaser’s lender may re-value the property at a lower price which may result in the purchaser having insufficient funds to complete;
3. Always ask for a 10% deposit in case the purchaser defaults under the Contract. Clauses in a Contract which allow a vendor to claim a further 5% later are often held to be void as penalties. Also, its a good test of the the purchaser’s financial means; and
4. If a company wants to purchase your property, always ask for a guarantee from the directors of that company. In case the company has little or no assets and defaults under the Contract, at least you can recover your losses from someone.
Lessons for Purchasers
1. You must be certain that you have sufficient funds to complete a purchase. If a lender is involved, make sure that the property valuation will support the loan required until the date of settlement;
2. If you need to borrow money for a purchase, avoid lengthy settlement periods as they increase the risk of something going wrong with your finance;
3. Be aware that if you cannot complete a purchase, you will lose your deposit and will be liable for the difference between the price you agreed to pay for the property and its re-sale price (less the deposit).
September 2019