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26th June 2020

Pulling out of a House Purchase Before Exchange

One of the questions many buyers and sellers ask is, at what point can I pull out of a transaction? First, understand that many times, buyers look to purchase homes with the intention of selling their current properties; unless they are first-time buyers. This process is referred to as a property chain. Should one link of this chain face a glitch, the rest of it is likely to fall apart. Pulling out of a house purchase before exchange is possible, but it can make things complicated.

Pulling out of a House Purchase Before Exchange

To buy or sell a property quickly, they need the whole chain to remain intact. The reason many buyers, however, back out of a purchase deal may vary from a mortgage offer to developing cold feet. However, all of this results in a costly process. So, to avoid unfavourable consequences, what should be done?

Withdrawal Before the Exchange of Contracts

Until the exchange of contracts in England and Wales, both the buyer and seller of the home can pull out of the deal without incurring serious costs. However we look into this further to provide the full picture.

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Should you decide to pull out of a house puchase before exchanging contracts, you may face charges. A seller, for instance, must check the existing terms with an estate agent. If the estate agent discovers that the potential buyer has the capacity and the willingness to purchase the property you wish to withdraw from, they will charge you a certain fee. The buyer and the seller should also check with the conveyancer about the terms of the retainer.

The primary stage in the process of conveyancing is the exchange of contracts between the buyer and seller. It acts as a contractual agreement to the completion of the transfer of the title on a certain future date, which is known as completion. During this exchange, the buyer is expected to pay a 10 percent deposit of the purchase price. The 90 percent fee is paid on the day of completion agreed upon prior to the exchange.

Before the date of completion, a lot happens. Huge sums of money are spent and a considerable amount of time spent in finding out if any party has any reason to back out of the deal. Understand that if the conveyancers have also started working on the transaction and it fails to complete, you will be charged on an hourly basis. If the conveyancer has incurred any disbursements, they will also be subject to recompense. Buyers who back out of the deal do not recover both the lender valuation fees and mortgage consultant fees.

When do Buyers Withdraw their Offers?

Before selling a property, sellers begin by looking for an estate agent, a solicitor and listing their property for sale. A potential buyer then views the property and puts an offer. As soon as the seller accepts the offer, the buyer’s solicitor then investigates potential problems with the home before making a purchase. The mortgage company then does valuation and a survey on the property.

At the end of this investigation and before the signing of the contract, most buyers back out due to genuine reasons. Two main reasons lead to this decision, including:

  • The finances of the buyer being inadequate
  • The buyer finding another property or changing their mind

Issues highlighted in the survey may also influence the decision. For instance, if the property is found to have leaking issues or a roof that needs to be replaced, the buyer may need to renegotiate the price. Should the seller be unwilling to alter their offer, the buyer may choose to pull out of purchasing the house before exchange.

Note, if the buyer and the seller come into terms and the buyer decides to back out, the seller may choose to go to court and claim that the property buyer is in breach of contract. This could include paying for the seller’s expenses. The seller could ask for compensation for finding another buyer. Before putting an offer on any property, it is advisable to be 100 percent sure that you will afford the property and are willing to make a purchase.

Withdrawal After Contracts are Exchanged

Although pulling out of a house purchase before exchange is acceptable in most situations. Should a buyer or a seller choose to back out of a contract after it has been completed, the consequence will be treated as a breach of the terms of the legally-binding contract. In such instances, the party not at fault may choose to issue a Notice to Complete.

This notice gives the other side a period of 10 days to complete. The party is expected to pay a daily interest rate. Understand that both parties must complete regardless of who is at fault. This is because even if you are not at fault, you could still be in default. If you fail to complete, the following are some of the consequences to expect:

  • The property seller could re-sell it alongside all contents within the contract
  • When the buyer fails to complete, the seller will have the right to end the contract and keep the 10 percent deposit of the sale price
  • The seller may claim damages
  • Should the seller fail to complete, the buyer will be entitled to end the contract, leaving the seller liable to compensate the buyer with the daily interest within the period of the Notice to Complete
  • The party in default has the right to sue the defaulting side for breach of contract and demand recompense of losses
  • If the buyer is at fault, the seller may claim market depreciation losses

What Could Go Wrong on the Completion Day?

Several things could go wrong on the completion day and lead to delay in moving in or a complete fail. On this day, three things happen:

  1. The mortgage lender hands the mortgage to the buyer’s solicitor
  2. The solicitor then organises the transfer of the money to the seller
  3. The seller hands over the keys

This may seem like not too much, but several issues could develop on this day, some of which could lead to the breach of the contract. If on this day, for instance, one party is willing to complete, but the other is not, legally, the contract would face a breach. The Notice to Complete imposes a compensation fee on the party that defaults.

In some cases, the conveyancer could claim that the completion was delayed by at least a day. For instance, if they receive the completion after 2:00 PM or 1:00 PM according to the agreement of the contact, it could be rolled over to the next day. More so, the party serving the notice could claim other fees and argue that they arose from the failure of the completion or delay.

The following costs could be claimed:
  • Storage costs: Most sellers have to move their items to a storage facility
  • Mortgage interest: Should, the buyer have their mortgage fees halted as they ready themselves for the completion and the seller fails to complete; the buyer may ask for a reimbursement fee to cover the interest charged
  • Lost income: If the buyer would have rent out their property and the buyer fails to complete, the seller may demand for compensation
  • Accommodation: The breaching party will be required to cover any hotel fees

What if the conveyancing solicitor is at fault? You might ask. The breaching party could argue that the solicitor was at fault for their failure to complete. Usually, the conveyancer solicitor is responsible for allowing the exchange of contracts. The completion day is then set only when:

  • There are sufficient funds for the exchange
  • The property is ready on the day of completion

In some occasions, the house on sale is usually occupied by a tenant, meaning it is not in a position to be re-occupied. If the seller’s solicitor was aware of the situation before the completion, the seller may then seek compensation from the solicitor for causing them to be contractually bound. At such a point, the seller will need to raise a complaint with the law firm.

The buyer could also claim:
  • Conveyancing costs
  • Costs of taking out a mortgage
  • Price of property survey
  • Charges from searches
  • Building insurance costs

The buyer should not just receive their deposit but recompense for any interests attracted by the deposit from the date of the exchange. If you are a buyer considering to pull out an exchange, decide if the deposit is worth losing. For a seller considering to sell quickly, notice that potential buyers will be curious to find out why you are in so much hurry to sell to take advantage of the benefits that come with pulling out of an exchange.

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How can you Reduce the Risk?

There are certain things you can do to protect yourself from the pain of losses experienced when pulling out of a house purchase before exchange. Whether it is a change of heart, circumstance or the fault of your solicitor, it can be tough to protect yourself from a failed completion. Below, we tell you what you can do,

Reduce the Exchange and the Completion Time

The longer the time taken between an exchange and completion, the higher the chances of either side pulling out. The solution is to limit the time to the minimum period. If possible, you could exchange and complete on the same day.

Evict Tenants Before the Exchange

Before the completion takes place, ensure that your property is vacant. Should you fail to evict your tenant before the day of completion, you would be breaching the contract. If you still have your property occupied, halt the completion.

Have an In-Date Mortgage Offer Before the Exchange

Before the exchange, as a buyer, ensure that you have the capacity to pay for the property. It is for this reason that most solicitors do not allow buyers to buy a property before getting a mortgage offer. A mortgage offer is necessary for contracts lasting up to 6 months and could expire before the property is built. If you do not have a mortgage offer, you run the risk of needing to get one when served with the notice of completion. Understand that the notice of completion has a grace period of only 10 days, failure to which you could end up losing your deposit fee.

Limit Losses

After the exchange of the contract, the risk of the transaction failing to complete is minimal. However, there are things you could do to limit potential risk. For instance, it is advisable to have some legal cover, in case a transaction falls through. Also, look for insurance providers who can protect you when a transaction fails. The cost of losing your 10 percent deposit may not be covered by the insurance policy, but you could insure your conveyancer search costs and mortgage valuation. If at the point of getting your insurance cover you have incurred several costs, check if the policy could reclaim any of it.

Both the buyer and the seller can pull out of the house purchase before the exchange of contracts without having to incur major costs. However, if the party that did not pull out sustains other losses within this period such as the conveyancing fee, mortgage costs, survey costs, rental charges, among others, nothing could stop them from suing for breach of contract.

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The content of this article is intended to be used as general information only and should not be used or deemed to be legal advice. We do not accept responsibility for any loss sustained as a result of acts or omissions taken in respect of this article. You should always seek legal advice.