How to walk away from a deal

Buying real estate can be costly and not to be entered into lightly unless the buyer is sure about the purchase. Otherwise, getting out of the deal can be tedious and expensive.

Aborting a deal is not just about forfeiting 10 per cent of the purchase price. There have been instances where a prudent seller has held out for more compensation and cautious buyer negotiated for a lower forfeiture package.

It is up to the individual parties to the sale to ensure these are clearly stipulated in the sale and purchase agreement (SPA).

Contractual remedies available to either party in the event of a breach of the SPA include specific performance of the SPA by the breaching party; the innocent party may accept the other party's repudiatory breach as discharging the innocent party from future obligations; rescission by the innocent party; an action for damages; and any other remedies expressly provided for in the SPA.

Contracts for the sale of property are specifically enforceable as each property is considered to be unique. Thus, specific performance is available where on party fails to complete by the agreed date.

However, this remedy is available only where the innocent party is able to fulfill his own obligations under the SPA. It is an equitable remedy which is only available at the court's discretion. But it can be expressly included in the SPA.

Where one party commits a repudiatory breach of contract, the innocent party may consider the repudiation as discharging him from his contractual obligations and also seek damages from the repudiating party.

The converse of this is rescission where mistake, undue influence or fraud affected at least one party during negotiations leading to the formation of a contract.

To affect rescission, it is essential that the parties can be put back in the same position they were in prior to the making of the contract. As parties are put back in the position they were in before the contract came into being, there is no damage and thus there will be no award of damages.

Damages may be awarded for breach of contract independently of any other remedy; in lieu of or in addition to an order for specific performance; or upon acceptance of the repudiation of the contract by the innocent party.

Upon the wrongful repudiation by one party, the innocent party may choose to accept the repudiation, rescind the contract and sue for damages. This might be the only remedy available for the injured party if, for whatever reason, specific performance is unavailable.

Should a purchaser fail to complete, the vendor will be able to obtain damages calculated as the difference between the contract price and the market price at the time of the property's resale less any forfeited deposit.

Hence, if property market values fall in the interim, damages may be considerable. If the market rises, damages, if any, will be nominal.

The actual sale price is often the best evidence of the market price. The vendor can also recover any costs of the resale. Repair expenses or reinstatement expenses may be recoverable where the purchaser was allowed early occupation and damaged the property.

The vendor cannot recover legal costs paid in respect of the abortive transaction or the estate agent's fees paid.

The purchaser may rescind the agreement and seek damages where a vendor commits a breach of the contract, other than by failing to give good title.

A purchaser's damages would be the difference between the agreed purchase price contained in the contract and the costs of purchasing a similar property on the open market, that is, the market value.

The court will admit the sale/purchase prices of comparable property in order to assist in ascertaining the market value. The purchaser may also recover as damages, any deposit paid and costs involved in the new purchase.

Damages are usually determined or assessed as the date of the breach. For a vendor, this application will determine the vendor's damages by ascertaining the property's market price at the date of the purchaser's breach.

The exception is where, at the court's discretion, justice requires the amount of damages to be assessed at another time. The date of assessment is important where the property market is experiencing wide fluctuations.

Where a purchaser is in breach and the market is falling, damages may be awarded in favour of the vendor as the date of the actual resale of the property, provided the vendor doesn't unreasonably delay the sale.

Where the vendor fails to mitigate his loss, the court may decline to award the difference between the contract price and actual sale price eventually obtained.

Courts will also look to a later date that the date of the breach for the assessment of damages where the innocent party attempts, although unsuccessfully, to obtain specific performance of the contract.

The parties may make express provisions for the remedies available to them in SPA. If properly worded, these remedies in the event of breach may be exclusive in that other remedies or damages available to the innocent party are excluded.

The following terms are commonly found in such agreements:
• Forfeiture of deposit - a deposit 10 per cent or less of the agreed purchase price will usually be treated as a genuine pre-estimate of loss;
• Liquidated damages - an SPA may contain an agreed stipulation that the purchaser may cancel the agreement by paying double the preliminary deposit; and
• Exclusion of common law remedies - similar to the rules governing exclusion of the remedy of specific performance, common law remedies, for example damages, can be excluded by the insertion of an express and clear provision in the SPA.

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