Terminating a commercial contract

When the recession hit the UK in 2008, it caused many problems for property developers and buyers. As the funding for construction of buildings was barely existent, projects were being delayed until there was new financial support. These setbacks had a significant effect on buyers who had purchased a property off plan as no one knew how long these delays would last. 

Buyers, who bought the property before it was built, would have been contracted to pay a specific price with an estimated completion date. However, with the lack of funding, the completion date kept being pushed further back. Delays in the building could last for months; and therefore, by the time the property was completed, the price of the property was worth less than what the purchaser had paid for it.

As a result, purchasers struggled to finance the property, and many of the mortgages that they had obtained no longer supported the value of the newly completed properties. The buyer would then often refuse to continue with the purchase that ultimately caused financial difficulties for the seller.

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For the buyer...

On what grounds can the buyer terminate a contract?

1) "Unreasonable delay"- When a seller buys a property off plan, the completion date is usually linked to the practical competition of the property, as the developer will not know the exact date the completion will take place. Therefore, when delays occur in the construction, the completion date gets pushed further back. This may cause significant complications for the buyers who may want to remove themselves from the contract.

For a buyer to free themselves from an open contract, they will have to show that the setback has "deprived it of substantially the whole benefit of the contract". However these grounds are not easy to prove and the courts would look at each case individually.

2) "Misrepresentation" - When a buyer enters into an open contract the seller will usually give an estimated completion date. If the developer fails to complete within this time frame, the buyer may use the defence that the estimated date was a misrepresentation. However many contracts now include a 'non-reliance clause' that excludes the buyer from using the ground of misrepresentation.

3) "Loss of mortgage" - The delays sometimes may cause a buyer to lose their mortgage. If a buyer agrees on a mortgage at the buildings initial price, when the building has finally completed following delays and the sale price has significantly decreased, the buyer's mortgage offer may be abolished. However these grounds will only be successful if the buyer's mortgage has actually been refused.

When can a contract not be terminated?

A contract cannot be terminated, even if the delay has caused a loss of mortgage or money for the buyer, if the buyer has 'affirmed' the contract. The buyer can affirm (validate) a contract by completing an act that bound the contract, such as paying the deposit. For the buyer to validate the contract with such acts, they must understand the legal implications of the contract (that it can either be affirmed or terminated). Once the purchaser has affirmed a contract it can not be reversed.

For the seller...

What must the seller do if a buyer refuses to pay?

Before entering into a contract, the seller must look into the financial situations of the buyer, such as if they can actually afford the property. If the seller does not look into these situations before signing the papers, the court will not order specific performance (requiring the buyer to perform an act stated in a contract). The seller should dispute the buyer to provide verification of their income and their attempts to obtain a mortgage.

It is also up to the seller to determine how much value the property has lost since the original completion date. If the decrease is significant and the seller still wishes to claim specific performance, legal advice must be obtained. However, if the loss is not considerable, the court is not likely to agree with the seller's claim.

For the seller to make a claim for a specific performance, they must ensure that all of the contractual terms have been completed. If the purchaser has failed to complete before the completion date, the seller can serve a notice to require the buyer to complete within the next 10 days. If these 10 days are up, and the purchaser still hasn't completed the contract, the seller can begin to acquire specific performance. 

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