Falling residential property values turned into a serious problem for both the seller and buyer of a Sydney property last year. A court has ruled that when the sale fell through because the buyer could not get finance, the buyer was then liable for the shortfall on the resale. A delayed settlement was at the heart of the problem.
In January last year, Mitchell and Katherine Cole entered into a contract for the sale of their home in the Sydney suburb of South Turramurra. The buyer was a property developer, Raykir Holdings.
The sole director of the buyer, Ekaterina Charonova, was guarantor of the buyer’s obligations.
The price was $2.83 million. The buyer paid a 5 per cent deposit of $141,500, with completion to be in six months.
In July the vendors’ solicitor issued a notice to complete in accordance with the contract.
The buyer could not obtain sufficient finance because by the time it applied for a loan, the valuation was about $500,000 below the sale price. The developer asked for an extension, which was granted.
By the end of August, the buyer had still not raised the finance and the contract was terminated.
In April this year, the house was sold for $2.23 million – $600,000 less than the price agreed the previous year.
The matter ended up in the Supreme Court of New South Wales, where the Coles asked the court to order Raykir to make up the $600,000 difference. The defendant argued that the notice to complete was invalid and that the termination of the contract was a wrongful repudiation of the contract.
One of the issues the court had to decide was whether a claim for the $600,000 deficiency fell within the scope of the guarantee.
The court found that the sale contract and the notice to complete were valid, and that the vendors were entitled to terminate the contract based on the buyer’s failure to comply with the notice to complete. It said there was no dispute that the contract entitled the vendors to “recover a deficiency on resale”.
The contract included a condition that contained a personal guarantee given by the director of Raykir Holdings. It said that each person who signed the contract on behalf of the corporation “will be personally liable for the due performance of the purchaser’s obligations under this contract to the same extent as if that person was the purchaser under the contract.”
The court found that this condition was sufficient to make the director who signed as guarantor for the purchaser corporation personally liable for the loss on resale.
As a result, the purchaser and the personal guarantor were liable to pay $458,500 (the $600,000 shortfall less than deposit paid).
The court also found that the vendors were entitled to claim costs related to non-compliance with the contract, although they did not do so. The court ordered the guarantor to pay the vendors’ legal costs.
In a note to clients on the case, law firm Cordato says: “Inability to obtain sufficient finance is a real risk in delayed completion contracts.
“Loan approvals require a property valuation, which is valid for a limited time. Market values may fall during the completion period.”