–
Delay and Default on
Contracts
Huonville: 8/16 Main St, Huonville 7109 | DX 70754, Huonville | PO Box 239, Huonville 7109 | Ph: 03 6264 2967
Hobart: Level 1, 18 Elizabeth St, Hobart 7000 | DX 231, Hobart | GPO Box 16, Hobart 7001 | Ph: 03 6220 2777
www.tlaw.com.au | ABN 919 6524 1772 | Fax: 03 6264 2688
Contents
What are settlement dates? .................................................................... 3
What happens if someone is late? .......................................................... 3
Can the innocent party call the deal off? ................................................ 3
How much time needs to be given in a Notice to Complete? .................... 4
What if the innocent party wants the deal to go ahead? .......................... 4
Does a deal have to be called off if a Notice to Complete is not met? ....... 5
How do you choose whether to enforce or call off a deal? ........................ 5
What if a deal is called off because a Notice to Complete is not met? ...... 6
Is the vendor’s right to the deposit unqualified? ..................................... 6
Is there any precondition to sending a Notice to Complete? .................... 7
What happens to the property if the vendor shuts down the contract? ... 7
What if the vendor resells at a profit? ..................................................... 7
What if the vendor resells at a loss? ....................................................... 7
Are there any exceptions? ...................................................................... 7
What is to stop the vendor reselling at a deliberately low price? .............. 7
How do I recover my losses?................................................................... 8
Can a party rescind for grounds other than delay? ................................. 8
Can I insist on payment of my damages on settlement? ......................... 9
What if the delay holds up a related transaction? ................................... 9
−2−
What are settlement dates?
Settlement dates are the agreed day under the contract for the parties to
exchange possession, title and funds.
The standard contract provides for the settlement date. The date may be
specified by reference to the satisfaction of the finance or sale clause or an
exact date might be stated.
What happens if someone is late?
The parties bind themselves to settle on the agreed date.
A party who wrongfully fails to settle on the agreed date is answerable to the
innocent party for any losses the innocent party suffers.
In the case of a purchaser who is late, the vendor may lose the chance to
earn interest or may have other losses because funds are not available.
Conceivably a vendor could lose substantial sums if the delay of the
purchaser prejudices commitments the vendor has made relying on the
purchaser being ready on time.
If a vendor is late, the failure to deliver the property on time to the purchaser
may cause the purchaser to incur significant alternate accommodation costs
or other expenses.
Any losses resulting from a delay are offset by benefits that may also result
from the delay. A vendor can claim lost interest but must reduce the claim
by any additional rent received. A purchaser can claim for the extra
accommodation cost but must take account of the interest that was earned
on the purchase funds pending the delayed settlement.
The person suffering the delay has an obligation to make reasonable efforts
to minimise the loss. It would be unreasonable for the purchaser of a
suburban house to claim the cost of temporary accommodation at the
penthouse suite of a 5 star hotel when accommodation more akin to the
property is available elsewhere at a much cheaper cost. The Vendor who has
a tenant who can stay on during the delay cannot recklessly send the tenant
away in reliance on the responsibility of a delaying purchaser.
Can the innocent party call the deal off?
−3−
It is rare for settlement dates under Tasmanian contracts to be sudden
death. Usually time is not so critical that a breach allows the innocent party
to cancel the deal.
Typically the law says that although a breach as to time gives rise to
damages, it is not so serious a breach as to entitle the innocent party to call
the transaction off.
It is possible to say in a contract that any delay on settlement is critical and
justifies calling off the deal. This is called “making time of the essence”.
If the contract itself does not make time of the essence an innocent party can
make time of the essence, by giving notice to the guilty party. This notice is
called a “Notice to Complete”. This sets a deadline for settlement.
The effect of the notice is to say “if you continue breaching the contract
beyond a nominated reasonable deadline, your breach will be regarded by
me as so serious as giving me the right to call the deal off”.
How much time needs to be given in a Notice to Complete?
A contract may specify what time needs to be given for a Notice to Complete.
The Standard Form Contract for Sale of Real Estate in Tasmania by
Standard Condition 17.1 specifies 14 days as the time needed to be given for
a Notice to Complete.
In the absence of some provision in the contract, a reasonable time must be
given usually somewhere between 14 and 30 days depending on the
circumstances
What if the innocent party wants the deal to go ahead?
The innocent party need not serve a Notice to Complete if they wish the
transaction to proceed. They can proceed immediately to take Court action
to enforce the contract.
−4−
Does a deal have to be called off if a Notice to Complete is not met?
If a settlement deadline that is of the essence is not met, the innocent party
is not bound to call the transaction off. The innocent party has the right to
choose.
The innocent party must make that choice within a reasonable time. Once
made there is not a right to go back on the choice.
How do you choose whether to enforce or call off a deal?
Carefully and strategically review your situation.
Your own needs are paramount.
The commercial fate of the contract may depend on the many legally
extraneous issues that determine what is in your commercial best interest.
The key variables that will determine whether it is better for you to shut
down the contract or keep it going are:
• the state of the market,
• the likely resale price,
• whether a deposit has been paid and the size of the deposit.
• the urgency of the transaction for the parties,
• is a resolution of the contract time critical?
• can the parties sustain the losses?
• what are the chances of recovering funds from the party in breach and
the relative costs?
• whether the other party is easy to sue and is worth suing,
• the urgency with which the parties need the funds.
• are court proceedings needed? Court proceedings are always risky and
not all costs are recoverable. Will court proceedings work? Will court
proceedings be cost effective?
• is the other party likely to fulfil the postponed obligations?
A purchaser will usually prefer to avoid the uncertainty, trouble and cost of
buying and reselling a property that the purchaser no longer wants. The loss
of the deposit is dead money on the failed deal, but so too is the cost of
stamp duty and other purchase expenses and the agent’s commission and
other expenses on a resale.
−5−
If a purchaser does not settle on the contract and leaves the vendor to deal
with the resale, the purchaser's stamp duty on purchase and other purchase
taxes will be saved.
The down side for the purchaser of abandoning the contract is the loss of
control of what happens on resale.
To keep control, the purchaser may pay the vendor to extend the deadline on
the vendor's right to terminate the contract; this maybe by way of a promise
to cover the vendor’s lost interest pending the resale by the vendor.
What if a deal is called off because a Notice to Complete is not met?
If a settlement deadline “of the essence” is not met and the innocent party
calls the transaction off, the guilty party will have to answer to the innocent
party for his or her losses.
A guilty purchaser will also lose the deposit automatically and may have to
answer to the innocent vendor for losses that exceed the deposit. The
purchaser’s liability is not limited to the deposit. If the vendor loses more
than the amount of the deposit, the vendor can claim the extra loss from the
purchaser.
Is the vendor’s right to the deposit unqualified?
The purchaser may apply to the court for relief against loss of the deposit.
In some circumstances, over-riding grounds of fairness or “equity” may
persuade the court to allow the purchaser a refund of some, or in rare cases
all, of the deposit.
−6−
Is there any precondition to sending a Notice to Complete?
Even if the other side is guilty of the delay, the innocent party can only give a
Notice to Complete if they are ready to settle or will be ready to settle at the
nominated time.
If there are delays on both sides, neither party can serve a notice on the
other.
What happens to the property if the vendor shuts down the
contract?
If the vendor properly shuts down the contract, the vendor can resell the
property free of any obligations to the purchaser.
What if the vendor resells at a profit?
The vendor can keep any profit on resale. The vendor does not need to return
any of the profit regardless of any deposit retained.
What if the vendor resells at a loss?
The purchaser is answerable for the losses of the vendor, not just the
deposit. The vendor can claim from the purchaser any loss beyond the
deposit
Are there any exceptions?
The courts sometimes have the power to vary the enforcement options if
general concepts of fairness so demand.
What is to stop the vendor reselling at a deliberately low price?
The vendor must do what is reasonable to minimise losses.
The vendor must make a reasonable effort to properly market the property.
The vendor carries the risks of being unable to successfully chase the
purchaser for any loss beyond the deposit. The purchaser may not have
−7−
means available to meet obligations. Vendors would usually prefer to get
their money on resale to avoid the risk of chasing a defaulting purchaser.
How do I recover my losses?
Start by keeping a careful record of the losses that flow from the delay. Keep
documents and receipts that will show your losses. Prepare a summary of
them. Document how you took action to minimise your losses.
If you cannot negotiate recovery of your losses from the other party, you will
need to prove those losses in court proceedings.
Be careful that the dispute does not take on a life of its own and generate
extra costs.
The Small Claims Division of the Magistrates Court can arbitrate losses
below $5,000 with simplified proceedings where there are no lawyers. This is
a cost effective way of resolving small damages claims.
Can a party rescind for grounds other than delay?
If there are other fundamental breaches of the contract the innocent party
may rescind, for example:
•
The failure to pay the deposit on time, or,
•
If the property is misrepresented to the purchaser in a way fundamental
to the contract.
If the breach is not fundamental the suffering party’s rights are to damages
for loss arising from that misrepresentation but the suffering party will be
bound to proceed to settle.
If the breach is fundamental, the suffering party may exercise the right to
rescind the contract by immediate written notice. A Notice to Complete may
be required where the breach is as to time. The suffering party may exercise
the right to rescind without a Notice to Complete if there is already some
other fundamental breach.
−8−
Can I insist on payment of my damages on settlement?
If the contract specifically gives you a right to damages and sets out how
they are calculated, you can insist on full compliance with the agreed terms
on settlement.
Otherwise, you must settle the principal parts of the contract and argue
about the damages claim separately.
What if the delay holds up a related transaction?
Carefully monitor any related transaction that may be delayed. Keep the
other parties informed.
If the other parties will permit delay on the related transaction, pressure will
be off from the hold up. If they lose patience and enforce timetables on the
related transaction, that will increase the pressure on you.
Consider alternatives to allow you to buy more time or create options for
yourself to fulfil the related transaction.
This booklet is not a complete statement of the law. It does not deal comprehensively with your particular situation.
This booklet is to provide general information to supplement our specific advice to you.
Do not act in reliance on this booklet without our specific advice.
We are responsible only if you give us specific instructions and for the specific advice we give.
This booklet was originally prepared in 2005 and has been updated as at the 18th September 2012. It does not reflect changes to
the law after that date.
You need to take specific advice on the possibility or effect of any such changes.
−9−