What happens when you default on an agreement for sale and purchase?

Typically, it is the purchaser that defaults because they are suddenly unable to settle on the settlement date, often due to funding issues:

Settlement notice: The vendor must serve a settlement notice. This gives the purchaser 12 working days to settle.

Costs: The vendor can claim all legal and other and penalty interests (typically 14% or 16% of the balance payable).

Deposit: If the purchaser still cannot settle after 12 working days, then the vendor can cancel the agreement and take the deposit.

Specific Performance: The vendor can get a court order ordering you to complete the settlement. This is an uncommon remedy by a vendor to a defaulting purchaser and is more common by a purchaser to defaulting vendor.

Claim For Damages: Depending on the market, if the vendor is at a loss even after taking the deposit (typically 10%) and re-selling the property, they can claim for all costs and losses suffered due to the purchaser’s default.  So, a defaulting purchaser may find that even after losing the deposit, the vendor can still come after you for further losses. 

Therefore. if you are likely to default, it is best to try to reach a settlement agreement with the other party as soon as possible, to ensure you are not faced with further losses from the failure. If your lawyer is good, they will help you negotiate a settlement.

If you are a vendor, you must be careful of 3 things:

Settlement Notice: The settlement notice must be served after 5pm on settlement date, failure to do that will invalidate the settlement notice. You do want to serve this as soon as possible, so the 12 working days timeframe starts running, even if the purchaser tells you they should be able to settle in a few days.

Ready To Settle: A vendor must be ‘ready, willing, and able’ to settle on the settlement date to be eligible to raise any claims.  Courts will be looking for this if you claim. Care is needed by you and your lawyers to ensure your rights are preserved.

Mitigating Costs: any parties bringing a claim in court has a duty to mitigate costs. You cannot sit around saying the property could not be re-sold or that the re-sale price of the property was the 1 offer from your friend causing a great loss.  

Vendor default is rare, but it does happen. In these cases, the purchaser can claim against the vendor issuing a settlement notice and can claim all costs and penalty interests against the vendor. The purchaser can also claim for costs of alternative accommodation and costs incurred due to the default by the vendor.

We highly recommend getting proper legal advice from competent advisers before things potentially turn sour. The Property Team at Queen City Law is here to help. Get in touch by contacting us here: property@qcl.co.nz

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.