In a previous blog KR Peters Director Peter Nicolls walked us through one of the most important documents in the real estate sales process - the Contract of Sale (COS).
The COS sets out the obligations that each parties is required to perform (including the dates and times for performance) in order for the successful completion of a transaction. But problems will occur when a party fails to perform.
The issue was highlighted late last year when it was reported that the buyer of the winning property on the 2020 version of Channel 9 reality programme “The Block” failed to settle on the due date for settlement under the COS.
Contestants Jimmy and Tam sold their winning property by auction which was broadcast on the show’s season finale in November for $4.2 million, smashing the reserve by $966,000.
However, in December Channel 9 confirmed that the sale had fallen through after both the deposit and the final settlement payment failed to materialise.
Channel 9 is now hoping to sell the property to a new buyer, however the saga has salient lessons for all vendors and buyers warns Mr Nicolls.
As stated in an earlier article, the COS sets out dates for the payment of the initial and full deposit; the date that the finance, building and pest reports need to be approved; and the date for the final payment of the residue on the settlement.
Missing these dates can leave the buyer tens of thousands of dollars or more out of pocket.
"When buyers fail to make the final payment vendors may exercise their options and rescind the COS. This effectively gives the buyer 14 days to settle," Mr Nicolls explained.
"The vendor is entitled to charge a penalty rate of interest, normally 2% above the standard rate or as determined in the contract. The vendor is also able to charge the legal costs involved in preparing and issuing the rescission notice.
"If the purchaser does not settle within the 14 day period, the vendor may then relist the property for public auction and sell it to the highest bidder. The purchaser will immediately forfeit the deposit paid.
"The vendor will incur additional agent's selling, marketing and interest fees however, the cost of these will be borne by the buyer."
Mr Nicolls said that when the property is sold the buyer will be liable for the shortfall in the sale price, interest and the cost of all the additional fees mentioned above.
"This figure could easily amount to tens of thousands of dollars, even hundreds of thousands," he warned.
However, if the property is sold for a price above the previous sale price and additional fees then the only loss the buyer will incur is the loss of their deposit.
Mr Nicolls warns the vendor could also be disadvantaged in such circumstances, particularly if the purchaser has no assets and the property is sold for a lower price than the original sale price.
"In this case the vendor will be substantially at a loss as they will be unable to reclaim the losses," he said.
"Sometimes a vendor may allow penalty interest to accrue at a higher interest rate before deciding to take the necessary action against a defaulting purchaser which would have a catastrophic affect on the purchaser as the debt will grow exponentially."