There are many reasons why a property transaction might not be completed by the agreed time. This can cause great frustration and anxiety for all parties and may also have unintended consequences.
There are many reasons why a property transaction may be completed late. This includes the following reasons:
- The property is not vacated on time by the seller.
- The buyer’s funds are not in place.
- Banks may not process the transfer of the funds in time.
- Alternatively, a party’s IT system may be attacked by hackers.
How is the compensation calculated?
Whenever a transaction is completed late, the issue of compensation is likely to arise. The innocent party (in this article, the party whose fault is less, as contrary to the defaulting party) can consider making claims under the standard conditions of sale (unless they are expressly excluded or amended) and/or common law.
Under clause 7.2 of the standard conditions, compensation is calculated at the contract rate on an amount equal to the purchase price (less any deposit paid in case of a defaulting buyer) for the period by which the defaulting party’s fault exceeds that of the innocent party. In most cases, it will be the days between the actual completion date and agreed completion date.
If parties have contracted to complete a purchase of £680,000 at 2pm on a Friday (with 10% deposit being paid), but the buyer is unable to transfer the completion funds to the seller’s solicitors’ bank account until 3:30pm, the seller is entitled to treat the completion as having not taking place until the following working day Monday. The completion is treated as being delayed for three days.
If the Law Society’s interest rate is 9%, the compensation will be calculated as follows: (£680000-£68000 (deposit paid)) x9%, which is £55,080 a year and £150.90 a day. The seller will be entitled to a compensation of £452.70.
Clearly a claim under the standard condition is for a fixed amount, based on purchase price, rather than on the actual losses the innocent party has suffered. He/she/it does not need to produce evidence to prove such losses at all. Furthermore, there is no duty on the innocent party to take steps to mitigate own losses.
Is the compensation a penalty?
This may apparently make the whole process of claim simpler; however, could it potentially lead to another question: can the compensation be regarded as a penalty and hence invalidate the contract?
Of course, in most cases like the above one, it might not be, as the compensation amount may not be large. However, if the purchase price increases to £6,800,000, rather than £680,000, the daily compensation will increase to £1509.00. If the buyer transfers the completion funds to the seller at 2:10 and is only 10 minutes late, what will happen? The seller is still entitled to the same amount of compensation after having suffered virtually no losses and inconvenience. Is it not a penalty? It appears that in some cases, the answer to this question may not be as a clear cut one as we have thought.
In addition to the above fixed sum claim, the innocent party may also be able to make a claim under the common law for breach of contract. To support such a claim, the claimant needs to produce evidence of losses and evidence that he (also includes she/it/they in this article) has taken reasonable steps to mitigate the relevant losses. If parties cannot negotiate a figure, the case may have to be resolved by litigation.
Our thoughts
It should be noted that any common law claim will eventually be reduced by compensation awarded under the standard conditions stated above. This is to prevent double claim for some of the same losses the innocent party may have suffered, which makes perfect sense.
In reality, this gives the innocent party a choice for how to proceed with his claim. If he has suffered less than the fixed sum, he will clearly want to claim under the standard conditions, as it is simple; otherwise, a claim under the common law may make more sense.
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