Failure to complete settlement: Don't bet against the House!
You’ve found your dream home, and you’re ready to make it yours. But what happens if, for one reason or another, you can’t complete settlement? The consequences of failing to settle are significant, and the repercussions can be more than you expect. In this article, we explore the risks of failing to complete settlement and offer practical advice to navigate the process.
What happens when you fail to settle?
Failing to complete settlement isn’t just a case of walking away from a deal. If you’re the buyer, you can lose your deposit—and that’s just the start. The vendor has the right to sue for further damages, including the difference in price if they’re forced to re-sell the property at a loss.
One recent case that illustrates the financial fallout is Whakaruru v Bath [2023] NZHC 2474. Bath, the purchaser, failed to settle on a $1.16 million property after his financial situation changed. Not only did he lose his deposit, but the vendors sued for further damages when they had to sell the property for $781,500 — $378,500 less than the original sale price. Bath was ordered to pay that loss, plus penalty interest, resale costs, and other expenses, bringing his total liability to nearly $500,000.
Unconditional offers are risky business
Unconditional offers can seem appealing, especially in a competitive market. By making an offer without conditions, you’re signaling to the vendor that you’re serious and ready to move quickly. However, while you might think this fast-tracks you to owning the property, it can also put you in a risky position if something goes wrong.
When you make an unconditional offer, you are committing to complete the purchase no matter what. That means if your finance falls through or your current home doesn’t sell, you’re still legally required to settle on the new property. Failing to do so leaves you open to legal action.
Doing your homework
It’s essential to do your due diligence before making an unconditional offer or confirming conditions in an agreement. Consult with your lawyer, mortgage broker, and insurer to ensure you have a solid plan in place. If you’re relying on selling your current home to fund the purchase, strongly consider making the offer conditional on that sale.
Buying and selling: avoiding the domino effect
The settlement process becomes even more complicated when you’re both buying and selling properties. Many people aim to settle both deals on the same day to avoid moving twice, but what happens if the buyer of your current home can’t settle? Suddenly, you’re stuck needing to complete the purchase of your new property without the funds from your sale.
While the buyer of your home is ultimately liable for damages if they fail to settle, that doesn’t help you if they can’t come up with the money. Doing some background research on your buyer and having alternative finance options in place—such as bridging finance—can help mitigate the risks.
What to do if you can’t complete settlement
As soon as you suspect you might not be able to complete settlement, notify your lawyer and your financier.
If the issue is insufficient funds, consider all available financing avenues. This might involve seeking bridging finance. Another option could be to on-sell the property you are buying before the original settlement date.
Your lawyer will deal with the vendor’s lawyer on your behalf and try to negotiate a positive outcome. In some cases, vendors may be willing to grant a short extension if it allows you to secure the necessary financing or sell your existing property.
Open communication is key, as parties are more likely to be cooperative if they know about the problem early. The longer you wait, the fewer options you’ll have to resolve the issue.
Need some help?
We love to help people. Contact Sarah Churstain or Maggie Knowles for more information.
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