Defaulting Auction Buyer Boxes On In Court

Posted on September 8, 2013 by | 0 Comments

Tim O’Dwyer

by Tim O’Dwyer M.A., LL.B
Consumer Advocate

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When the purchaser of an up-market home unexpectedly says settlement won’t take place, does the vendor still have to move out before terminating and claiming damages?

Donna Kelly-Corbett was pleased when she sold her home at auction for $1.2 million. Although she already had a finance-approved contract to purchase her next home, her purchase contract was not conditional on the prior sale.

Because both contracts were due to settle the same day, and her sale proceeds would be sufficient to complete her purchase, Donna no longer needed finance for that purchase.

But when her sale crashed at the eleventh hour, Donna was distraught yet exceedingly pragmatic.  She quickly secured an extension from her seller then arranged bridging finance to safely complete her purchase.

Some months after settling on her new home Donna resold her old home, albeit at a lower price of $1.13 million.  She was, of course, significantly out-of-pocket for interest on her bridging loan which she paid out when her second sale finally settled.

Donna’s unconditional and seemingly solid first sale had gone pear-shaped the day before settlement.  The buyer’s solicitors emailed Donna’s solicitors that their client’s financier would “not be in a position to settle tomorrow”.  In an email response to this anticipatory breach, Donna’s solicitors affirmed the contract by requiring the buyer to settle as Donna would be “ready, willing and able” to complete at 4 p.m. at the Titles Office.  The email warned that, because time was “of the essence” of the contract, failure to settle on time would result in termination of the contract.  Donna would, the email concluded, hold her defaulting buyer liable for all of her damages and any re-sale shortfall. (Unlike in some other jurisdictions around Australia, no further “notice to complete” was necessary.)

A week later Donna’s solicitors gave notice that the contract  was terminated, that the buyer’s deposit was forfeited and that Donna reserved her rights to recover her losses.

Once her resale settled, Donna sued for breach of contract.  She claimed damages comprising her additional legal costs, her re-sale loss and bridging loan interest.   The buyer’s lawyers defended this suit by novelly arguing that Donna had not validly terminated because she had not been “ready, willing and able” to give vacant possession.   Some 200 boxes of effects remained in the house that day.  Donna had apparently not intended removing them until  after settlement.

A District Court Judge rejected this argument, found Donna had validly terminated and upheld her damages claim.

On appeal the buyer’s lawyers argued again that Donna had, despite the buyer’s repudiation of the contract and her on-going contractual obligations, not been able to give vacant possession– because of the un-removed boxes.  The Court dismissed this appeal ground before summarising the law:  “an intimation of non-performance of an essential term of a contract amounts to a repudiation and dispenses a party who acts upon it from performance of a dependent obligation”.

Consequently, because Donna’s vacant possession obligation was “concurrent” with her buyer’s settlement obligation, the buyer’s “clear and unequivocal intimation” that the contract would not settle relieved Donna of having to completely empty her home.

The Court noted that, had the buyer proceeded to settlement, Donna still had until 5.00 p.m. to complete her removal.  It was unlikely, the Court remarked, that a “diminishing and unascertained number of boxes” would interfere substantially with any buyer’s post-settlement “enjoyment of the right of possession”.

A further ground of appeal was that the costs and damages relating to Donna’s purchase were too remote.

After noting how the contract default clause clearly and simply entitled the seller to damages for “any loss suffered as a result of the buyer’s default”, the Court followed well-established precedents that a defaulting buyer will be liable for damages reasonably in the contemplation of both parties at the time of contracting as “the probable result of the breach.”   Defaulting buyers (and their sellers) need not have contemplated the degree, extent or precise details of any losses.  The buyer here need not even have been aware of Donna’s financial and contractual arrangements.

The Court explained that a reasonable buyer should realise a home-seller would likely purchase a replacement home, sale proceeds would go towards that purchase and “a necessity to obtain bridging finance” to complete that purchase could follow the buyer’s failure to settle.  Because these “possibilities” should have been “reasonably” contemplated as the “probable” result of the breach here, the Court dismissed the buyer’s damages appeal.

The moral for successful auction bidders is to ensure your finance arrangements are rock solid. (Case citation:  Mullis v. Kelly-Corbett [2010] QCA 354)

(A version of this article first ran in Australian Property Investor magazine.)
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