Imagine this. You’re in the middle of a property chain, selling your current property and buying a bigger home. The most stressful bit is over - or so you think. Everyone in the chain has found a buyer, exchanged contracts and is due to complete on the same day.
What could go wrong at this stage? Everything’s sure to go ahead once you’ve actually signed and exchanged contracts - right? After all, you’ve both committed huge amounts of money, in the form of your deposit, to the purchase. If the other party doesn’t go ahead, you each get to keep your buyer’s deposit, which is typically 10% of the total purchase price. So surely no one in their right mind would pull out at that late stage?
That’s certainly what I thought, until no less than two friends recently found themselves facing huge financial losses through no fault of their own at exactly this stage in their individual property chains.
In both cases, everything was going well, until the day before completion. Both then got a phone-call from their solicitor explaining that, for various unforeseeable reasons, their buyers were not going to be able to complete on time. This meant that neither of my friends would have enough money to complete on their own purchase in the chain.
Suddenly, my friends were in breach of contract with the parties they were buying from. In other words, they stood to lose their deposits. And remember, they were both moving up the property ladder. Their deposits - at 10% of the value of the properties they were buying - were far bigger than the deposits their unreliable buyers had put down.
Can you imagine how they felt at that moment? Without warning, each not only stood to lose the dream home they were buying the next day.... they also stood to lose several tens of thousands of pounds!
What could you do next, if this were you? What are your rights? And most importantly, what precautionary steps can you take to ensure this never actually happens to you?
A cautionary tale
First of all, despite this cautionary tale, it’s important to note that it is very rare for British property transactions to encounter problems at the completion stage. The chairman of the National Association of Estate Agents, Peter Bolton King, told me he had only seen two transactions fail at this stage in 38 years - once was because the owner dropped dead.
Both my friends were selling flats in London to cash buyers who were willing to pay the asking price. In hindsight, perhaps this should have rung alarm bells - but how many of us would have had the strength to resist such offers? After all, cash buyers are supposed to be the easiest to deal with!
Why did these transactions go wrong?
It difficult to say with certainty why both my friends encountered problems. Perhaps they were just unlucky. But I don’t think it’s a coincidence that both of their too-good-to-be-true buyers were ‘turning over’ the properties; selling my friends’ homes onto other purchasers, before the property transactions with my friends had actually completed.
In both cases, this led to delays as the buyers struggled to get their purchases signed off between exchange and completion with my friends. In one case, my friend discovered his cash buyer was actually from Hong Kong and was trying to peddle the property at a premium to someone else in China who didn’t want to navigate the British property market and legal system himself.
Unfortunately, it looks as if this practice may start to become more common in future years. China has recently introduced a new tax disincentive to discourage its citizens from buying second or third properties at home. According to Peter Bolton King, this means many Chinese investors are looking abroad, often to the UK, for property investments.
What happens next?
If, like my friends, you fail to pay your seller on your completion date, then the seller’s solicitor will usually serve you with a legal ‘Notice to Complete’. This will formally give you a short period of time - typically 10 working days - to get the rest of the money together or you will legally forfeit your deposit.
In one case, this enabled my friend’s buyer to come through in time. But in the other case, unfortunately, the buyer had sneakily written into his contract that if he didn’t complete on time, he had a further month to get the money together. And my friend’s lawyer didn’t spot this beforehand.
So there my friend was, with a Notice to Complete within 10 days served upon him by the person he was buying from, but unable to serve an identical Notice to Complete on his own buyer.
One option he had was to sue his lawyer for negligence but this would be hard to prove and was not a route he particularly wanted to go down. But according to the Conveyancing Association, 50% of professional indemnity insurance claims by solicitors are with regard to conveyancing cases - so clearly, mistakes do happen and it pays to be aware of this.
In the end, my friend managed to negotiate with his seller where he offered him thousands of pounds extra to go ahead with the sale, which his strongly motivated lawyer then managed to get back from his own Chinese buyer in turn, plus a bit extra to compensate my friend for his troubles.
And so the tale ends happily. Apart, of course, from all the stress....
Key ways to protect yourself
1) Hire a good lawyer - but not a family friend, someone you could sue if you had to.
2) If you are due to complete on the same day, make sure your contract with the person you are buying from is exactly the same as the contract with the person you are selling to, particularly with regard to the date the completion funds are due by.
3) If your buyer looks too good to be true, he or she probably is. Use your judgment and if you’re worried, ask your lawyer to insert clauses which protect your deposit regardless of whether the sale gets to completion.
Tell us your horror stories!
Got a similar property horror story you think tops this one? If so, please share it with other lovemoney.com readers using the comments box below!
More: These cheap mortgages won’t be around for long | Rates fall again on buy-to-let mortgages