The recent case of Conway and another v Eze  EWHC 29 (Ch) highlights the potential financial impact on any purchaser considering withdrawing from a purchase following exchange of contracts.
In April 2015, Mr and Mrs Conway ("the Vendors"), agreed to the sale of 86 Uphill Road, London, NW7 4QE ("the Property") at a price of GBP 5 million ("the Purchase Price"). Mr Richard Obahor ("Mr Obahor"), a UK-based Nigerian property developer and property manager, negotiated the price on behalf of Prince Eze ("the Purchaser"). Mr Obahor told the Vendors that he required payment for his assistance in locating a purchaser so a finder's fee of GBP 75,000, 1.5% of the Purchase Price, was reluctantly agreed to and promised by the Vendors.
Having found a suitable purchaser for their Property, the Vendors also reached an agreement to purchase a property in Cambridge ("the New Property") for GBP 2.9 million.
Following a series of delays, on 25 June 2015 the Purchaser signed his part of the contract for the purchase of the Property and the transfer form TR1. A delayed completion date of 30 November was agreed. Intending to use the proceeds from the sale of the Property to pay the purchase price of their New Property, the Vendors simultaneously exchanged both contracts on 7 August 2015.
However, the Purchaser's willingness to purchase grew cold and on 23 September 2015 he informed the Vendors, via Mr Obahor, that he no longer wished to purchase the Property. In response, the Vendors served a Notice to Complete on 9 October 2015 and a further Notice to Complete on the contractual completion date. The Purchaser never completed.
The Vendors, not wishing to default on their contract for the New Property, sought bridging finance, secured on the Property with a view to discharging existing charges on it and paying the purchase price of the New Property. The purchase of the New Property was completed in December 2015.
An alternative purchaser was sought for the Property, who negotiated a reduced purchase price of GBP 4.2 million, with completion taking place in July 2017.
Quantum of damages
The issue for the court was what was the quantum of damages to which the Vendors were entitled for Prince Eze's breach of contract. The losses for which the Vendors were seeking damages fell under three broad heads:
- Losses in respect of the loss of the sale of the Property and the need to market it and sell it again. This included the difference between the original sale price agreed with the Purchaser and the price agreed on the re-sale
- Losses in respect of the cost of obtaining bridging finance to enable the Vendors to proceed with the purchase of the New Property
- Miscellaneous losses
The Judge held that the Vendors were entitled to damages for breach of contract, though not to the full extent of their claim.
In terms of the first head of loss, the Vendors were entitled to:
- The difference between the original sale price agreed with the Purchaser and the re-sale price (GBP 800,000);
- Additional legal fees incurred in respect of the New Property;
- Estate agent fees in respect of the re-sale, and;
- Legal fees in respect of the re-sale. However, in respect of "holding costs", i.e. the cost to the Vendors of maintaining the Property from the contractual completion date to the eventual sale, the Judge ordered that these would only be partly recoverable because damages could not be awarded on a speculative basis. Further, the Judge indicated that the re-sale ought reasonably to have been achieved by October 2016 and thus the Vendors had not acted reasonably in securing the re-sale. For this reason, the costs of insuring the Property up until the re-sale were only recoverable up until October 2016.
As to the second head of loss, the Judge ruled that the losses in relation to the cost of bridging finance or of trying to arrange it were not too remote and thus were recoverable in principle. The Judge stated that it ought to have been in the reasonable contemplation of the parties that the Vendor would have to seek bridging finance if Prince Eze failed to complete. It was a foreseeable consequence of the failure to complete. However, for the same reasons already outlined, the interest payments to the bank that provided the bridging finance were only recoverable up until October 2016.
Damages are designed to compensate the vendor's loss arising out of the purchaser's non-performance. As this case demonstrates, the courts inquiry into the facts surrounding the loss is likely to be exacting. As well as the diminution in value of the property and any continued liabilities in relation to the property, any wasted expenditure on the transaction is likely to be recoverable. The recovery of the bridging loan in this case is illustrative of this principle.
Whilst, the claimant will have a duty to mitigate its loss the burden will rest on the defendant to show that the claimant has failed to act reasonably in doing so. Thus, a prolonged delay in re-selling the property could reduce the recovery of any vendor claiming damages.
Nonetheless, this case serves as a stark warning as to the potential financial consequences of a failure to complete.
It should also be borne in mind, as highlighted by Armel Elaudais (Senior Associate) at our seminar in autumn 2017, that there are other options available to both vendors and purchasers upon a failure to complete, with varying prospects of success, dependent upon the facts. These include specific performance, rescission and forfeiture of the deposit.