Property Contracts – Remedies for Breach
June 25, 2020
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The property market has been hit hard by Covid-19, with both residential and commercial transactions being affected. Whether due to funding issues, the inability to secure planning permission or vacant possession or simply a change of mind or circumstances by one of the parties, there is an increase in the number of transactions not completing and that is set to continue.
If a party is no longer willing or able to complete a sale or purchase, or is otherwise in breach of the contract, there are a number of remedies that may be open to the innocent party.
In cases where a deposit has been paid, a failure to complete the transaction amounts to a breach of contract and the rules regarding deposits take effect. Usually deposits are governed by standard terms and conditions which anticipate 10% of the purchase price being paid and provide that, if the buyer is in breach, it can expect to forfeit its 10% which the seller can keep. If the seller is in breach, the deposit must ordinarily be returned. However, the parties may have agreed different terms regarding the forfeiture of deposits, so it is crucial to review the relevant contract to be clear what provisions apply.
In certain circumstances, and even if the buyer is in breach of contract by failing to complete, there is an option to apply to Court for the full deposit to be returned to the buyer. Such an application is generally only worth considering if the deposit paid exceeds 10% of the purchase price but it will depend on the situation. In those cases, the Court does have a discretion to order the return of the full deposit, which may be viewed as an excessive amount when taking into account the extent of loss suffered by the seller.
Where one party is in repudiatory breach of the contract, the other may chose to rescind the contract, thereby extinguishing it. For rescission to be an option, the breach must go to the root of the contract. Breach of a minor provision of the contract will not entitle the innocent party to rescind. What constitutes a repudiatory breach depends on the terms of the contract. The general rule is that time is not of the essence. Therefore, a delay in complying with an obligation under the contract by one party does not automatically give rise to the right for the other party to treat the contract as extinguished. It is no surprise that parties are currently experiencing many delays in their transactions because of Covid-19 which, ordinarily, do not trigger the right of rescission. If, however, time is expressly stated in the contract to be of the essence, or is made of the essence, for a example, with the service of a notice to complete, the failure to comply with those obligations on time would enable the innocent party to exercise its right of rescission.
It is worth noting that the right to rescind is simply that, a right. It does not have to be exercised and the contract is not automatically rescinded when there has been a breach. The innocent party may prefer to keep the contract alive and give the other party the opportunity to comply with its obligations rather than exercise its right of rescission, particularly in a difficult market.
If the innocent party does choose to rescind, it must communicate that decision to the other party. Delay in communicating the decision may result in the right being lost. Once rescinded, the innocent party still has the right to recover damages to cover its losses.
An innocent party is entitled to recover damages from the party in breach to put it in the position it would have been in had the contract been properly performed. Where a party delays completion or fails to complete entirely, the other is entitled to be compensated for its losses. How damages are calculated will depend on the circumstances and may not be limited simply to any difference in the value of the property as a result of the breach. For example, it may be possible to recover lost profits or consequential losses, but this will depend on the facts of each case.
In limited circumstances, it may be possible to force a party in breach of contract to complete a transaction. In cases involving property, this remedy is rarely available as the innocent party can usually be adequately compensated for its loss with damages. There are cases, however, where the Court may order specific performance, for example, where a particular property is unique and there is nothing similar an innocent buyer could purchase instead. However, the remedy is granted at the Court’s discretion and, even if damages would not be an adequate remedy, there are a number of other reasons why the Court would be unwilling to order specific performance, including where it would require ongoing supervision by the Court or where a third party in a property chain was now unable to proceed in any case.
Whether you are unable to proceed with a property transaction or you are facing a breach by the other party, we can advise you as to your rights and remedies. For further information please contact Clairefirstname.lastname@example.org