Knowing your contract conditions will help to avoid a default.
When you are negotiating to buy a property, you are typically working with a contract that the Seller or Vendor's lawyer or their agent has prepared.
Throughout the negotiations you will be agreeing on the price, deposit, settlement date and other terms such as build and pest reports or finance clauses.
It is important to ensure that you understand the conditions of the contract and what your obligations are according to the contract. You can be easily swept up in the moment and emotion and forget to meet your contractual obligations when they are due.
So that you don't default on the contract it is important to get contract advice before you sign a contract. This will ensure that the terms and conditions in the contract are satisfactory, and you can meet your contractual obligations.
A default occurs when you don't comply with one of the terms or conditions. Either party to the contract (vendor and purchaser) can be in default if they don't fulfil their obligations under the contract.
The two most common reasons for default when buying or selling a house is for:
- Being late with deposit payments
- Not settling on the settlement date in the contract
A default is serious and it can lead to the contract to being terminated and/or penalty interest and other default costs to be incurred. In some cases, it could mean that you could lose your deposit monies and be exposed to paying for the other parties' loss as well.
If you anticipate you can't make one of your obligations the first thing you should do is get in touch with your conveyancer to request an extension of time from the other party. If the other party agrees you will avoid a default. However, most defaults aren't anticipated and are harder to manage.
Remedying A Default
There are a few different ways contract defaults are handled in the conveyancing process.
Generally, there are two ways that defaults are handled. In some cases, the other party may grant give you time to rectify the issue – even after the default. If you are late paying a deposit or settlement doesn't go through, they may not issue a default notice straight away and give you an opportunity to rectify (fix) the default without seeking a penalty. Typically, this opportunity is only available for a day or two.
The other course of action is that the other party could issue a rescission notice or notice of default.
This is serious and, in most circumstances, you instantly incur additional costs.
The default notice must be issued correctly and generally will have the following additional costs and elements:
Penalty Interest: The amount of Penalty interest charged is stated in the contract. Often special conditions increase the rate of penalty interest. This is often around 10 per cent or more. It can quickly amount to thousands of dollars. You will be charged for each day until you have rectified the default.
Costs for Service: You will have to pay additional legal costs if you are served with a Default or Rescission Notice. This fee can be anywhere from $600 to above $1,000. This is a fee payable to the otherside to prepare the notice. You will have to pay your own conveyancer to respond and advise you on this too.
Demand to rectify the default: This can be a demand for you to rectify the default i.e. settle or pay deposit etc.
Consequences if you fail to Rectify the Breach
In some states a default notice can immediately terminate the contract such as Queensland, whilst in Victoria you have 14 days to rectify the default.
If you don't rectify the default by the specified timeframe the contract can be terminated and you can lose your deposit monies.
Additionally, the seller can also seek costs for their loss i.e. if they had to resell the property and got a lower price you will have to pay the difference.
Most defaults are fixed within the timeframe. But It does happen that contracts are terminated, and purchasers have lost their deposit monies. As for a vendor pursuing a purchaser for their loss this is uncommon as house prices have been in a rising market for many years. The Vendor also must start a separate legal action to recover their loss from a purchaser or vice versa.
It is also very rare that a purchaser issues a default notice on a Vendor, but it can happen under certain circumstances.
It is important to understand the extent of your liability if you are in a situation where you have received a default notice. Proper planning, especially allowing for sufficient time for mortgage processing, will help you avoid any issues.
Legal Advice On Default Notices
A default notice has serious consequences. If you are issued with a default notice and don't think your conveyancer is giving you adequate advice, then you should seek advice from a lawyer quickly.
At PCL Lawyers our property lawyers have extensive experience in negotiating conveyancing disputes for clients.
Often a large sum of money is at risk and you should seek another opinion to check the default notice was issued correctly and negotiate on your behalf.
We have extensive experience and expertise and can help clients even in situations that seem quite dire. If you need help with conveyancing or on a contract default then contact one of our conveyancing lawyers today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.