Purchaser Failure to Settle on a Property Purchase: Rights and Remedies

The recent fall in property values across New Zealand has led to numerous purchasers being unable to obtain finance and complete settlement. This leaves both vendor and purchaser in an awful position, with lawyers scrambling to minimise the losses suffered on each side.

A Sale and Purchase Agreement ("SPA") to purchase property is a contract like any other, and if the purchaser can't settle on the due date they will most likely be liable to pay damages to the vendor. If late settlement is possible, these damages may be restricted to penalty interest. However, if the purchaser is unable to settle at all (or fails to settle within the time frame permitted by a vendor settlement notice), the purchaser will likely forfeit their deposit and also be liable for consequential damages suffered by the vendor.

Until recently, a purchaser in default was usually only liable for vendor damages "reasonably contemplated by the parties to be recoverable". This created a high threshold and placed the evidential burden on the vendor to prove (a) their losses, and (b) that the purchaser was aware they would suffer them. The decision of Yu v Bradley changes this position. The Court of Appeal has now determined that "losses arising out of the failure to settle are the natural or probable consequence of the wrong". This is a much lower threshold for vendors to satisfy; effectively all they need to prove now is the extent of their consequential loss.  

Yu v Bradley

The facts of Yu v Bradley describe a common scenario. Mr Yu was purchasing the Bradleys' house and was unable to settle. As a result, the Bradleys could not settle on their own house purchase. The Bradleys sued Mr Yu for damages.

In the High Court, the Bradleys were awarded $575,672.99 in total damages. That figure was then reduced by the forfeited deposit ($230,000.00), so the Bradleys received $345,672.99. The damages awarded included:

(a) $320,000.00 for the loss of the property’s value on resale;

(b) $55,085.00 for the additional commission on the resale;

(c) $4,024.11 penalty interest the Bradleys had to pay to the vendor of the property they had agreed to buy;

(d) $66,122.79 for interest and bank charges incurred between settlement date and the date the property was on-sold;

(e) $104,013.49 for interest and bank charges to service bridging finance on the property the Bradleys had agreed to purchase;

(f) $2,389.85 for transport and storage costs of furniture while awaiting settlement on the property they agreed to purchase;

(g) $5,589.38 for rates on the property before on-sale;

(h) $2,161.06 for insurance on the property before on-sale;

(i) $16,287.31 for additional conveyancing, solicitors’ fees and disbursements.

This entire award was upheld by the Court of Appeal in August 2022, and the Supreme Court subsequently found in December 2022 that there was 'no obvious error' in the way damages were decided in this case.

The precedent set therefore is that a vendor is entitled to "losses arising naturally from a breach of a contract for the sale and purchase of land". The Court of Appeal used many quotes and examples to support their decision that damages arising out of a failure to settle are natural and ordinary consequences of the breach.

"In other cases, though the losses are special to that contractual situation and the particular parties, they are such as were in the contemplation of both parties without any need for communication by one to the other. In these cases, actual contemplation by the parties is not required; it is enough that a reasonable person in the position of the defendants would have realised that the damages being claimed were not an unlikely consequence of the breach. A purchaser, for example, could be taken to contemplate that the vendor would be using the proceeds of the sale to purchase another home, and would likely have entered into an agreement to purchase in reliance on the sale already concluded."

The Court of Appeal also cited a recent decision of the High Court of England and Wales in Conway v Eze, in which 15 months of bridging finance pending a likely resale was held recoverable because it ought reasonably to have been within the contemplation of the parties.

"… very common that persons selling their home will need to look to the proceeds of sale to pay the purchase price of a new property and will need recourse to bridging finance if their own sale falls through."

This decision provides more certainty to both vendors and purchasers, but must be considered against the unique facts of each scenario. Both sides should take professional advice from the outset, with a view to minimising the losses suffered, and the costs of litigation. Purchasers in particular need to be very aware of the consequences of failing to settle; they are more severe than ever before!

For more details, please contact:

Brandon Cullen (Partner) on (09) 966 3609 (bcullen@mcveaghfleming.co.nz)

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Land & Property Disputes

Residential Property - Buying & Selling

Written by Brandon Cullen