(This article was reviewed in October 2022.)
In brief - Buyers can terminate the contract, or complete it and sue the seller
When a seller fails to fulfil their contractual obligations prior to completion, the purchaser can either terminate the contract, or complete the contract and sue the seller after completion for failure to comply with the terms of the contract.
Buyer's response may be dictated by market conditions
A common dilemma facing purchasers of property is what to do when the seller fails to fulfil their contractual obligations prior to completion. For example, if the seller fails to carry out agreed minor works, can or should the purchaser terminate the contract or refuse to complete the purchase until the seller fulfils their obligations? Can the purchaser complete and then sue the seller for damages? The buyer's response will often be dictated by market conditions. For example, in a rising market buyers may be reluctant to terminate a contract, and instead prefer to sue the vendor post completion.
What happens when the seller decides to complete the acquisition of the property?
In this article we focus on the purchaser's rights in situations where they elect to complete the acquisition of the property. In this situation, the common law position is that the purchaser is entitled to sue the seller for the amount of money required to put the purchaser in the position that they would have been in, had the seller complied with their contractual obligations. The purchaser may be able to seek damages for loss of profit or value, loss of opportunity and cost of rectification of defective work.
Loss of profit or value
The purchaser may be entitled to damages for the loss of value in the property due to the seller's breach. The damages will be calculated as the difference between the contract price and the value of the property at the date the seller breached the contract.
Loss of opportunity
The purchaser may be entitled to damages for the loss of opportunity. This may include the opportunity to enter a new lease, acquire a property, renew an interest in a property or enter a further contract. The purchaser will have to establish, on the balance of probabilities, that the seller's breach of the contract caused the loss of opportunity.
Cost of rectification of defective work
The purchaser may be able to recover compensation for either the loss in value of the property or the cost of rectification of the defect occasioned by the seller's failure to fulfil their pre-completion obligations. This the most common form of damages awarded to a purchaser.
The court considers whether the rectification work is "necessary" and "reasonable". In deciding whether the work is "necessary" and "reasonable", the court will consider:
- the cost of rectification compared to the loss of value
- whether the work already completed was fit for its purpose
- whether the purchaser intends to undertake the rectification work
- whether the building will be sold prior to undertaking the rectification work
Reservation of rights
When a seller fails to fulfil their obligations under a contract and the purchaser knowingly elects to proceed to completion, it is important that the purchaser expressly reserves their legal right to sue the seller after the completion of the contract. Failure by a purchaser to do so gives the seller the opportunity to defend the claim against them on the basis that the purchaser waived their rights to sue by completing the acquisition.
Read the contract carefully
It is critical that the buyer gives careful consideration to the terms of the contract before deciding whether to complete the acquisition. The terms of the contract may purport to limit the purchaser's post-completion rights, including their right to seek damages for pre-completion breaches. It is recommended that you seek legal advice prior to deciding whether to complete a contract in circumstances where you know that the seller has not fulfilled their contractual obligations.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.