Problems before settlement - what are the buyer's options?

28 November 2019

What can you do if you’re buying a property and find out there’s a problem before the settlement date - for example, there is a tenant in the property when the agreement says the property will be vacant, or the seller hasn’t done fencing work which they agreed to do? Are you able to refuse to settle until the issue is “sorted”? Are you able to insist on settlement at a reduced price? Are you able to threaten to cancel if the seller won’t reduce the price?

What are your options?

You must not sit on your hands and refuse to settle until the seller fixes the problem or agrees to reduce the price. As a judge in one case said, when a buyer comes to this fork in the road, there are only two options – cancellation (but only if the buyer is entitled to cancel) or settlement.

You are only entitled to cancel the agreement if the consequences of the seller’s breach are serious enough, or the seller is in breach of an essential term of the agreement. It’s not always clear whether you have the right to cancel. If you cancel when not entitled to do so, the tables will be turned and you’ll be committing a very serious breach.

If you do not have the right to cancel, or you elect not to exercise your right to cancel, then you must settle. This doesn’t necessarily mean that you must pay the whole of the purchase price. You may be entitled to claim compensation or set off your loss against the purchase price. However, you don’t always have the right to a set off. This is another area of uncertainty.

Claims for compensation or set off

The standard form of agreement sets out the procedure that a buyer must follow to claim compensation or a reduction of the price. The buyer must give the seller full details of the claim before the settlement date. The claim must be a genuine pre-estimate of loss. If the seller agrees with the claim, it is deducted on settlement. If the seller does not agree then there is a process in the agreement to determine an interim amount. The interim amount is paid to a stakeholder and held until the amount of compensation is determined.

Once the amount to be deducted or held by the stake holder is determined, settlement must happen. The actual amount of compensation or reduction is then decided after settlement by using any of the normal dispute resolution procedures – for example, negotiation, mediation or arbitration, or order of the disputes tribunal or court

Proceed with care

Whether you are a seller or a buyer, if there is a claim for compensation or deduction, you should proceed with care. There can be uncertainty about whether the buyer is entitled to claim compensation or a deduction. There can also be uncertainty about whether or not the buyer is entitled to cancel (if that’s what the buyer would like to do). If you get it wrong there can be serious consequences.

Barbara McDermott is part of our Private Client team at Norris Ward McKinnon.