How defaulting on a property purchase can cost

Avoid a costly mistake and look at the potential pitfalls when buying property

Arecent court ruling involving a judgment of $700,000 highlights the pitfalls of defaulting on a property settlement. Here we take a deeper look at the settlement process and what you need to be aware of.

What is a sale and purchase agreement?

A sale and purchase agreement sets out the terms and conditions of a property sale. It includes all the details of the transaction, including price, the settlement date and any other terms and conditions, such as chattels being sold with the property and whether the buyer needs to sell another property first.

The agreement provides clarity to the seller and buyer on what is to happen next and, perhaps most importantly, the consequences if things don’t progress as intended. When you sign a property sale and purchase agreement, you are entering into a legal contract.

What is a property settlement?

“Settlement” refers to the date when the buyer pays the purchase price and takes legal possession from the seller. Several steps must happen before the settlement is completed. These include things such as meeting any conditions under the agreement, conducting a final inspection, checking and signing transfer documents and meeting any lending requirements, such as signing bank documents.

Only lawyers or a registered conveyancer can legally register the transfer of a property.

What is the settlement payment?

When you buy a property, there are usually two stages to the process: a deposit (which is part of the purchase price) is paid either when the agreement is signed or when all the conditions of the agreement are met. The balance of the purchase price must be paid on the settlement day.

Failure to make this final payment means the buyer is in breach of their sale and purchase agreement and may mean they forfeit their deposit and are required to pay interest on the balance of the purchase price until settlement can take place.

A failure to pay the purchase price can occur for several reasons, including lending conditions changing and the buyer being unable to borrow all the money needed to complete the settlement. A strict process (as set out in the fine print of the agreement) must be followed when a buyer defaults on paying the settlement money.

Defaulting on a final payment

Let’s look at an example involving a $700,000 judgment against the buyer of a Herne Bay property that has recently been in the spotlight.

In March 2022, a buyer agreed to pay $5.7 million for the property and signed a sale and purchase agreement with the seller.

The buyer then failed to make the final payment on the settlement date. The seller issued a settlement notice, but the buyer defaulted.

The seller then relisted the property, sold it for $4.9m in January 2023 and then took legal action against the original buyer who had defaulted, to recover their losses.

This is an important part of the process whereby the seller is required to mitigate (or try to reduce) their losses by selling the property. The buyer remains liable for the shortfall between what they would have paid if they had completed the purchase and what the seller eventually received from a new buyer.

While the original buyer acknowledged breaching their obligations under the agreement, they argued that the seller could have obtained a higher price on the resale by keeping the property on the market for longer.

If they had done this, the amount payable by the original buyer would have been less.

In court, the judge confirmed it was up to the original buyer to prove the seller had acted unreasonably during the resale process.

The judge noted that property prices were declining in 2022 and that the anticipation of a weakening economy and property market justified the seller’s actions.

The original buyer was ordered to pay the seller $681,136.83, covering the loss on resale, interest on the unpaid purchase price between the original settlement date and the resale settlement date, costs for rates, water charges and insurance between those dates, and expenses associated with the resale process.

Additionally, they were ordered to pay 14 per cent annual interest on $230,000 from January 23, 2023, until the date of payment, along with $18,218.25 in court costs and disbursements.

What should I do if I can’t make the final payment on a property settlement?

If you are unable to pay the purchase price, you should immediately contact your lawyer. The more time spent trying to negotiate an outcome, the greater the chance of finding a solution.

Trying to negotiate on the settlement date rarely results in a favourable outcome for the buyer who cannot pay.

What does this all mean?

Defaulting on a final settlement payment can be a very costly mistake. Don’t get caught out. Always seek help from a lawyer with the sale and purchase process and make sure you fully understand the terms and conditions of any agreement before you sign anything.

It is always best to involve your lawyer early — we are here to help. ■

The agreement provides clarity to the seller and buyer on what is to happen next and, perhaps most importantly, the consequences if things don’t progress as intended.