PROPERTY CLINIC: Can a home buyer and seller sign an agreement for compensation if one backs out and stop gazundering?
- You’re concerned about losing a property for sale after an offer is agreed
- The competitive housing market is seeing more of a practice called gazumping
- Gazumping is when a seller backs out on sale after a higher offer from elsewhere
I have heard about people being ‘gazumped’ and losing out on a property after their seller backs out due to a higher offer from elsewhere.
Can a buyer and seller enter into an agreement before the sale of a property to compensate for the costs if the other side withdraws? JS
Can a seller and buyer enter into an agreement before a property sale to compensate for costs if the other side backs out? (Scroll down for a template agreement)
MailOnline Property expert Myra Butterworth replies: Competition for properties has been fierce this year.
It follows measures to boost the housing market during the pandemic, including a stamp duty holiday (that ended at the beginning of this month).
But the buying boom brought out an ugly side of the market, and that is a practice known as ‘gazumping’. This sees the seller back out of an agreed sale due to a higher offer from elsewhere, and either take it or ask for more money from the original buyers.
Gazumping was the leading cause of property deals not going ahead in the past 12 months, according to research from comparison site Comparethemarket.com.
In Scotland, gazumping is much rarer because an agreement becomes binding the moment a written offer is accepted. However, the practice remains legal in England and Wales.
But there is an agreement that both parties can sign to help mitigate the risks of it happening – or at least be able to recoup your costs if it does.
Stephen Gold, a retired judge and author, explains: Yes, a vendor and buyer can enter into an agreement before the sale of a property to compensate for the costs if the other withdraws the offer.
Unless a property has been sold at auction or two undesirables have done a deal in a saloon bar (cash handed over and specifics of deal written down and signed on a beer mat) the agreement to sell and buy will have been made ‘subject to contract’.
It means that at some later stage, a formal document will be drawn up in duplicate setting out the detail of the transaction, including the date for completion. Each side will have signed their copy and the two copies will be swapped round.
That is what ‘exchange of contracts’ is all about. Once that happens both sides are legally committed.
And until then the usual position is that either side can drop out without having to pay one new pence of compensation to the other or offering a single lie as an excuse for their action.
There is more sharp practice in home deals than in an open prison of white collar fraudsters.
Sellers may be secretly negotiating with a host of other would-be buyers and buyers may be secretly negotiating with a host of other would-be sellers.
Of course, there is likely to be a problem for both sides in legally committing themselves at the outset.
The sale will probably be dependent on the purchase of another property with the two transactions needing to be dovetailed.
As for the buyer, they may well need to dovetail with their own sale and, anyway, the chances are that they will have to fix up a mortgage offer.
There is also the matter of a survey on the property or some inspection report from a surveyor through the mortgage lender or privately (or both) just to ensure that the property is not sinking by the day or have someone to sue if the surveyor was blindfolded.
Checks too will be vital to ensure that a public lavatory or fish and chip shop is not due to open soon next door.
It is inevitable that both sides will incur expense before ‘exchange of contracts’ – and, no, I hadn’t forgotten the charges of the conveyancing solicitor or licensed conveyancer.
The way to discourage ‘gazumping’ (putting up the price) or ‘gazundering’ (putting down the offer) and for each side to protect against the other’s lies or bad faith which leads to them suffering financial loss is to have a lock out agreement: a little binding agreement ahead, hopefully, of a big binding agreement.
For a specific period – perhaps six weeks but it could be longer or shorter – the seller agrees not to market the property or negotiate with anyone else and to get on with the paperwork.
The buyer, for their part, agrees to use their best endeavours to obtain their mortgage and instruct their conveyancer. If either side withdraws before time is up or fails to ‘exchange contracts’ in time, they have to compensate the other for the money they have spent out.
Those are the bare bones of it. I penned an agreement along these lines in my book (scroll down to see that agreement).
The paragraphs of the template may be mixed and matched. It can even be varied to cover each side paying over a deposit, which could be any percentage of the purchase price.
The payment by each side would be held by a third party. Should either side drop out or break the agreement, the other would be entitled to take the entire amount held by the third party.
There is more than a teeny-weeny prospect that faced with the suggestion of a lock-out agreement, the seller will say ‘on your bike’ and the seller’s estate agent will say ‘you’ve got to be joking’.
Or that ‘this property is highly desirable and I have someone on the phone right now willing to pay five grand more than you and exchange contracts yesterday’.
It’s worth a try, if only to see how enraged the seller becomes and how much blood drains from their face at the suggestion. You can then draw your own inference about whether they can be trusted.
But there is an alternative to the lock-out agreement that is more likely to be appropriate where, for example, the seller must move, has yet to find another property but wants to know he has a good chance of a sale being close to being in the bag. Or where the buyer has sorted out everything except finance but is confident all will be well. This is an agreement for an ‘option to purchase’.
The buyer agrees to hand over a sum of money for the right to buy the property within a specified period and at a specified price. If they do not buy in time, they lose that money. If they do buy in time, the money paid is credited against the purchase price.
The agreement would need to be registered at the Land Registry or Land Charges Registry.
- Stephen Gold, ex-judge and author of ‘The Return of Breaking Law’ published by Bath Publishing
TEMPLATE LEGAL AGREEMENT
*THIS AGREEMENT is made on 14 July 2021 BETWEEN ARNOLD TRUSTWORTHY of 20 St Mary’s Courtyard Twickenham Middlesex KT42 1LA (‘the house’) (‘the seller’) and CLIVE TROUBLESORE of 149 Magnolia Crescent Twickenham Middlesex KT40 1LA (‘the buyer’)
(1) The seller owns the house.
(2) The parties have agreed ‘subject to contract’ that the seller will sell and the buyer will buy the house at the price of £600,000.00 (‘the price’).
(3) The buyer has paid a holding deposit as a demonstration of his good faith to Grabapound (Homes for the Discerning) (Estate Agency) Ltd of £250.00 as stakeholder.
(4) The buyer requires a mortgage advance on the security of the house of £425,000.00 and intends to make application for such an advance, to arrange for the house to be surveyed as part of the application and to instruct a solicitor or licensed conveyancer to act on his behalf in connection with his intended purchase.
IT IS HEREBY AGREED THAT in consideration of the above matters and the parties entering into the obligations provided for by this agreement and specified below:
(1) If and so long as the buyer complies with his obligations under this agreement the seller and no person or company acting on behalf of the seller will until the expiration of 42 days from the date of this agreement –
(1.1) seek another buyer for the house;
(1.2) advertise the house as available for sale;
(1.3) negotiate or agree with any person other than the buyer for the sale or the terms of the sale of the house whether on a ‘subject to contract’ or otherwise basis; or
(1.4) issue a draft contract or other documentation relating to the proposed sale of the house to anyone other than the buyer.
(2) If and so long as the buyer complies with his obligations under this agreement the seller will –
(2.1) cause his solicitors to deliver to the solicitor or licensed conveyancer for the buyer a draft contract and other usual documentation for the proposed sale of the house to the buyer within 7 days of the date of this agreement and reply to all reasonable enquiries about the house raised by them with reasonable promptness; and
(2.2) until the expiration of 42 days from the date of this agreement, provide facilities to the surveyor or valuer for the buyer’s prospective lender and for any surveyor or valuer directly instructed by the buyer to inspect the house subject to reasonable notice of their proposed visit.
(3) The buyer will use his reasonable endeavours to –
(3.1) procure an offer of a mortgage advance on the security of the house for no more than £425,000.00 as soon as possible;
(3.2) instruct a solicitor or licensed conveyancer to act for him on the proposed purchase of the house and to approve the draft contract with reasonable promptness; and
(3.3) be ready, willing and able to exchange contracts with the seller as soon as possible and in any event no later than the expiration of 42 days from the date of this agreement.
(4) The buyer will answer in an expeditious manner and in any event within two working days of their receipt such questions as shall be put to him by or on behalf of the seller as to his compliance with his obligations under this agreement and, in particular, as to the identity of the solicitor or licensed conveyance instructed by him to act on his proposed purchase of the house and the progress of his application for a mortgage advance.
(5) If before the expiration of 42 days from the date of this agreement the buyer decides to withdraw from his proposed purchase of the house from the seller, he shall forthwith give written notice of such withdrawal to the seller and shall pay to the seller the seller’s reasonable conveyancing costs and disbursements relating to the proposed sale to the buyer [not to exceed the sum of £x] but shall otherwise be under no further liability to the seller under this agreement or otherwise.
(6) If at the expiration of 42 days from the date of this agreement the buyer is not ready, willing and able to exchange contracts with the seller, he shall make the same payments to the seller as provided for by paragraph 5 of this agreement but neither party shall be under any further liability to the other party under this agreement.
(7) If before the expiration of 42 days from the date of this agreement the seller decides to withdraw from his proposed sale of the house to the buyer, he shall forthwith give written notice of such withdrawal to the buyer and shall pay to the buyer the seller’s reasonable conveyancing costs and disbursements relating to the proposed sale to the buyer [not to exceed the sum of £x] and the mortgage application survey or valuation fee and any privately instructed survey or valuation fee incurred by the buyer [not to exceed in the aggregate the sum of £y] but shall otherwise be under no further liability to the buyer under this agreement or otherwise.
(8) If before the expiration of 42 days from the date of this agreement the buyer shall give the seller written notice to the seller that he is ready, willing and able to exchange contracts with him at the price and with completion to take place no later than [insert date] and the seller does not exchange contracts within 28 days of the receipt of such notice, the seller shall make the same payments to the buyer as provided for by paragraph 7 of this agreement but shall otherwise be under no further liability to the buyer under this agreement.
(9) For the avoidance of any doubt, this agreement does not commit the seller to the sale or the buyer to the purchase and does not form part of any other contract.
SIGNED Arnold Trustworthy Clive Troublesore
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