Vendor’s options when purchaser fails to settle

Gagan Tangri, Partner

May 2017
Has your purchaser failed to settle?If a purchaser fails to settle on the day of settlement, what can a vendor do?

Under the standard form REINZ/ADLSI sale and purchase agreement, in the event of such a default, the vendor must first serve a settlement notice on the purchaser before turning to the remedies available under the agreement. Upon service of the settlement notice, the purchaser will have 12 working days to complete settlement. Should the purchaser fail to settle on the 12th working day, the vendor’s options are as follows.

Firstly, the vendor may sue the purchaser for specific performance (i.e. seek an order from the Court under which the purchaser is obliged to complete the purchase). The reality however is that if the purchaser fails to complete settlement due to a lack of funds, a Court order may not result in the purchase being completed swiftly (or at all). In addition, obtaining the Court order is likely to take some time, and will be an expensive exercise.

Secondly, the vendor may cancel the agreement and retain any deposit that has been paid by the purchaser (not exceeding 10% of the purchase price) and/or sue the purchaser for damages. This highlights the importance of receiving a deposit from purchasers.

The damages claimable include the loss incurred by the vendor on any bona fide resale of the property, if the resale contract is entered into within one year from the date on which the purchaser was required to settle under the settlement notice. 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 in relation to the property from the original settlement date to the settlement date of the resale.

It is important to bear in mind that the above remedies stem from the vendor’s contractual rights. If a purchaser fails to comply with a settlement notice, the vendor can also turn to remedies at law or in equity.

Thirdly, a provision of the agreement (often overlooked) allows the vendor to remarket the property to third parties without actually cancelling the existing agreement. If during the remarketing process the vendor enters into a subsequent agreement to sell the property to a third party, the original existing agreement is automatically cancelled. The vendor can then turn to the remedies identified in the second option above, against the original defaulting purchaser. This option is often overlooked, as there is a misconception that if the vendor enters into a subsequent agreement without first cancelling the existing agreement, the vendor will be left with two agreements for the one property.

Finally, although the options are (in principle) straight forward, great care must be exercised in opting for any of the above remedies/actions. Any shortcomings in this regard could result in the vendor being in default under the agreement.

The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation. Further information and assistance in relation to this article can be gained by contacting senior personal property lawyer Gagan Tangri.