Purchasers who do not complete a Contract for the Sale of Land not only risk losing their deposit but also paying the loss on resale of the property, if the loss exceeds the deposit.
In a falling real estate market, it is likely that more and more purchasers who purchase under a delayed completion contract, whether off-the-plan or otherwise, will be exposed to claims for loss on resale if they cannot obtain sufficient finance to pay the amount required to complete the purchase contract.
This was the situation in Cole v Raykir Holdings Pty Ltd  NSWSC 1017 (13 August 2019), a decision of Justice Darke in the Supreme Court of New South Wales.
The Facts in Cole v Raykir Holdings Pty Ltd
On 19 January 2018, Mr & Mrs Cole entered into a Contract for the sale of their home at 253 Kissing Point Road, South Turramurra to Raykir Holdings, a property developer. The price was $2.83 million. The purchaser paid a 5% deposit of $141,500. It was a delayed completion contract in that the completion period was 6 months.
On 20 July 2018, the vendors’ solicitor issued a Notice to Complete in accordance with the Contract. The Notice called for completion 14 days afterwards, on 3 August 2018, time of the essence.
The purchaser was unable to obtain sufficient finance to complete because the property valuation fell short by $510,000. The purchaser requested an extension until 24 August 2018.
On 2 August 2018, the vendors agreed to the extension of the Notice to Complete, on conditions which included the release of the deposit, payment of interest and legal costs.
On 27 August 2018, the vendors terminated the Contract because of the purchaser’s failure to comply with an essential obligation: i.e. to complete by 24 August 2018.
On 2 November 2018, the vendors commenced proceedings for damages.
On 15 April 2019, the vendors resold the property at a price of $2.23 million, $600,000 less than the price the purchaser had agreed to pay 15 months beforehand.
Was the Notice to Complete valid?
The Court found that the Notice to Complete was valid for these reasons:
- The Notice specified a date for completion ‘not less than 14 days after the date of service’. In this case, Additional Condition 36 of the Contract which provided that “For the purpose of calculating the Notice Period, the Notice Period commences at midnight on the day on which the notice period is served’ overcame the general rule that the date of service is not included and the notice period commences at the end of that day. Therefore the Notice expired on the 14th day – on 3 August 2018, as it stated. The Court said that even if this were not the case, an agreement to extend the time for completion could overcome this defect.
- The extension of time for the Notice to Complete was agreed before the Notice had expired. There was no need to withdraw the earlier Notice and issue a fresh Notice to Complete. The Notice to Complete was treated as altered to require completed by 3:00 pm on 24 August 2018, with time being of the essence.
- It did not matter that there was an inconsistency between the time specified in the Notice of 20 July of 12:30 pm as the time for completion, and the time for completion in the agreement to extend the time which was 3:00 pm.
The Court found that the vendors were entitled to terminate and did terminate the Contract based on the failure by the purchaser to comply with the Notice to Complete by completing on 24 August 2018 (an essential obligation).
The Court also found that the purchaser had repudiated the Contract by conduct ‘such as to convey to a reasonable person in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it’. The vendor was entitled to accept the repudiation and terminate the Contract.
The Court said that it was not necessary for the vendor’s solicitor to attend at the time and place appointed for settlement because they had been advised that the purchaser was unable to complete the purchase.
Was payment of the second instalment of the deposit a penalty?
The Contract contained an Additional Condition which permitted the 10% deposit of $283,000 (as stated on the cover page of the Contract), to be paid by two instalments.
The first instalment was 5% of the price - $141,500 which was paid on entry of the Contract.
The second instalment was “a further sum equivalent to 5% of the purchase price (“the Balance Deposit”)” which was payable “on or prior to completion of this contract” subject to the proviso that the Balance Deposit is due and payable if the purchaser was in default.
The Court considered that this provision for payment of the second instalment was penal in nature, and not enforceable, for these reasons:
the Balance Deposit lacks the character of a deposit. If the contract was performed in accordance with its terms, the Balance Deposit would not have to be paid before the actual completion of the contract. In those circumstances the Balance Deposit could not be characterised as an earnest of performance. Whilst no clear submission to that effect was developed, it seems to me that the Balance Deposit cannot be regarded as an earnest of performance and hence a payment truly in the nature of a deposit (see Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353;  NSWSC 1504 at , -,  and )
It is not necessary to express a concluded view on this point given that, on the conclusions I have reached, the plaintiffs are entitled to recover the deficiency on resale pursuant to cl 9.3.1 of the contract. Under that clause, the plaintiffs have to give credit for any amount of the deposit recovered.
Did the personal guarantee of the purchaser’s obligations cover the loss on resale?
The Contract contained an Additional Condition which contained a personal guarantee given by the sole director of the purchaser corporation, as follows:
- If the Purchaser under this Contract is or includes a corporation (other than a corporation listed on the Australian Stock Exchange) then each person who signs this Contract on behalf of that corporation will be personally liable for the due performance of the purchaser’s obligations under this Contract to the same extent as if that person was the Purchaser under this Contract.
(d) This guarantee is deemed to constitute a principal obligation between the guarantor and the vendor.
The Court found this condition was sufficient to make the director who signed as guarantor for the purchaser corporation personally liable for the loss on resale.
What damages were payable for loss on resale?
The purchaser and the personal guarantor were liable to pay $458,500 under clause 9.3.1 of the Contract, namely:
9 If the purchaser does not comply with this contract (or a notice under or relating to it) in an essential respect, the vendor can terminate by serving a notice. After the termination the vendor can-
9.3 sue the purchaser either-
9.3.1 where the vendor has resold the property under a contract made within 12 months after the termination, to recover-
the deficiency on resale (with credit for any of the deposit kept or recovered …); and
the reasonable costs and expenses arising out of the purchaser’s non-compliance with this contract or the notice and of resale …; or
9.3.2 to recover damages for breach of contract.
The value of the property was assessed at $2.23 million at the date of termination (being the sale price under the 15 April 2019 Contract), which was $600,000 less than the contract price of $2.83 million. Deducting the deposit paid of $141,500, the loss on resale was $458,500.
Although entitled to do so, the vendor did not claim any costs or expenses for non-compliance with the contract or the notice or of resale. Interest was payable from 15 April 2019 and the purchaser and personal guarantor were ordered to pay the vendor’s legal costs.
Note that cl 9.3.1 – the liquidated damages clause was relied upon to recover the loss in this case, as opposed to cl 9.3.2 – the general damages clause. For my case note on recovery of general damages see What losses can a purchaser recover if a vendor fails to complete a Contract for Sale of Land?
Inability to obtain (sufficient) finance is a real risk in delayed completion contracts, for these reasons:
- finance approval is available for a limited time (usually 90 days)
- unconditional loan approvals require a property valuation, which is valid for a limited time (usually 90 days) and can only be done when the building is completed (this is relevant to off-the-plan contracts)
- market values may fall during the delayed completion period
In this case, finance approval was available, but the amount was insufficient because the market value of the property had fallen since the date the contract was entered into.
Conveyancers can draw comfort from the fact that the Court upheld a relatively simple personal guarantee clause.
However, conveyancers should review and if appropriate revise their clause for payment of the deposit by instalments to ensure that the delayed instalment is not payable on completion. To be an ‘earnest for performance’, it needs to be payable on a specific date, independent of completion.