Pulling the Rug Out From Underneath

Pulling the Rug Out From Underneath

Published: 29 October 2015

Property sales, notices to complete and rescission.

In a property sale, can a party who has both failed to complete a sale on the contractual completion date and failed to comply with a notice to complete, subsequently turn the tables and rescind a contract itself, thereby pulling the rug out from under the ‘innocent’ party’s feet? In the recent case of Hakimzay Ltd v Swailes the answer, as many would expect, was no. 

However, not necessarily for the reasons one might expect. The result is that both parties need to tread very carefully in these situations.

The case

The case involved a seller (the ‘defaulting party’) who was obliged to give vacant possession on completion. It did not do this by the contractual expiry date nor by the expiry of a notice to complete – because there was still a tenant in occupation. Accordingly, the defaulting party was not ready, willing and able to complete. As a result, this entitled the buyer (or ‘innocent party’) to bring the contract to an end.

However, on the expiry of the notice to complete, the buyer did not immediately end the contract and discussions continued (the buyer thinking it held all the cards). The seller then managed to remove the tenant a few days later and was therefore ready, willing and able to complete. It confirmed this to the buyer, but the buyer wanted to inspect to make sure and was not able to do this for about a week. The seller therefore attempted to turn the tables on the buyer and, assuming time was still of the essence, sought to immediately rescind the contract (and retain the 10% deposit). The buyer was unsurprisingly not prepared to accept this and proceedings were commenced.

The Court ultimately found in favour of the buyer. The attempted termination/rescission of the contract by the seller was ineffective and the court ordered that the sale should go through. This instinctively appears to be the correct decision as the buyer was originally not at fault. One might think that the innocent party would always be in a strong position, however, as is explained below, this is not necessarily the case.

After the seller failed to complete on the contractual expiry date, the buyer served a notice to complete. The effect of this is to make time of the essence – i.e. if completion does not occur by the expiry of that date, the contract can immediately be terminated. However, many people think that right is an open ended one and that the innocent party can bide its time (as indeed the buyer did here) and decide whether to terminate or proceed at its leisure. Many also think it the ability to terminate is open to the innocent party only. However, both of these things are not entirely true. Firstly, if the innocent party does wish to terminate, it needs to choose (or, in law, elect) to do so very quickly (or extend time for compliance with the notice to complete). If it does not do so it will soon lose the right to terminate as a result of the failure to complete (and so the right is not an open ended one).

Secondly, at the point the seller becomes ready willing and able to complete (in this case with the removal of the tenant), the other party may also be able to rescind the contract (and so it is not a right available to one party only). In this case, the seller duly attempted to do so. It failed. However, not because it could never do so, but because the short window of time to elect to rescind has passed. In order to seek to terminate once again, a fresh notice to make time of the essence (i.e. make a failure to complete a potentially terminal event) needed to be served. The seller’s failure to do this, prevented it from validly rescinding the contract.

Lessons

Whilst the result in this case accorded with what many people would assume to be right, the legal framework of delayed completions, notices to complete, time of the essence and so on are frequently misunderstood (and still really subject to some legal uncertainty). In situations where completion does not occur as scheduled, both buyers and sellers (and whether the original defaulting or innocent party) need to act very carefully, but also decisively. Whilst the original defaulting party here was unable to pull the rug from under the buyer in this case, on another day it might have been able to do so, pocket the 10% deposit and re-sell.

For more advice and detailed information contact Chris Hill, Partner in our Dispute ResolutionTeam on 020 7766 5260 or email him by clicking here.

Chris Hill

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.