Deposit not paid – a cautionary tale

Whenever you buy a property, you need to pay the purchase price on settlement. That is relatively straightforward when you are a first home buyer with a cash deposit and bank finance. But what about when you are relying on funds from selling an existing property?

It is fairly common to sell your existing property on the same day as you purchase your new property. The risk with that is that you need to pay for your new property even if the purchaser of your existing property does not pay you.

A recent High Court case highlights exactly this issue.[1] In the case, the agreement to sell the vendor’s existing property was cancelled for purchaser default after the vendor and her partner had already agreed to buy a new property. The vendor was successful in her claim against the defaulting purchaser but will now need to decide whether to take further action against her lawyer and real estate agent over their handling of the transactions.

Selling and buying on, or very close to, the same day can be beneficial in terms of reducing upheaval and costs, but can also bring increased risks. It is important that those risks are managed, and minimised, as far as possible. The following are some useful suggestions on how best to achieve that:

Sell your existing property first

  • The least risky approach is to sell your existing property before buying a new property. That way, you know that you have the money in the bank before buying your new property. However, selling your existing property before buying a new property is not always a realistic option, particularly in areas where there is a tight rental market, or if you do not want to move more than once.

Make sure to get the purchaser’s deposit first

  • If you are going to buy and sell on the same day, you should make sure that the purchaser of your existing property has paid a deposit before you agree to buy a new property. You will generally be able to retain a 10% deposit if the purchaser subsequently fails to settle, limiting your loss if you need to re-sell your existing property.

Engage with your bank

  • If there is any chance that you will need to buy before you sell, you should talk to your bank first. This will ensure that you are clear on whether the bank will give you bridging finance, and the potential cost of that bridging finance.

Our experts would be happy to answer any queries you may have to assist you with managing the selling and buying process in such a way as to minimise your risk.

The case decision in more detail

Ms Janes agreed to sell her existing property to Ms Benney

Ms Janes entered into a conditional agreement to sell her property to Ms Benney for $1.25 million. The agreement went unconditional on 5 November 2018 and settlement was set down for 5 December 2018.

Ms Janes and Mr Vatselias also agreed to buy a new property

In the meantime, Ms Janes and Mr Vatselias entered into a conditional agreement to buy a new property for $1.575 million. That agreement went unconditional on 9 November 2018 and settlement was also set down for 5 December 2018.

Ms Benney failed to pay the deposit, leading to cancellation of the sale contract

Things went wrong for Ms Janes when Ms Benney failed to pay the deposit of $125,000 when their agreement went unconditional on 5 November 2018. Ms Janes did not demand payment of the deposit from Ms Benney until 16 November 2018. Ms Benney still did not pay the deposit and Ms Janes cancelled the agreement on 30 November 2018.

Ms Janes incurred a significant loss on re-selling her existing property

At that point, Ms Janes and Mr Vatselias still had to buy their new property but did not have the proceeds of sale of Ms Jane’s property to put towards that purchase. Ms Janes relisted her property for sale and achieved a price of $985,000. Ms Janes and Mr Vatselias had to obtain bridging finance to cover the period between settlement of their purchase and the sale of Ms Janes’ property.

Ms Janes was successful in suing Ms Benney

Ms Janes sued Ms Benney on a number of grounds and was successful in obtaining summary judgment for damages of $268,000. Those damages were calculated by reference to the difference between the net sale prices of $1.25 million and $985,000 (taking into account costs and commission).

Ms Janes also sought summary judgment against the real estate salesperson, the real estate agency, and the lawyer acting on the sale of her existing property. The basis of Ms Janes’ claim was that:

  • The real estate agent did not do enough to collect the deposit or to communicate to her that the deposit had not been paid.
  • The lawyer downplayed the significance of non-payment of the deposit in light of knowing of Ms Janes’ and Mr Vatselias’ agreement to buy their new property.

The judge declined to decide on those claims at the summary judgment hearing. Ms Janes will now need to decide whether to proceed to a full hearing to decide these issues. It is possible that the parties (or, more likely, their insurers) will settle out of court before that happens.

Footnotes

[1]Janes v Benney [2019] NZHC 1911 [5 August 2019]

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