By Brendan Leahy, Naked Real Estate
A delay is one thing. A refusal is another. When a buyer or seller makes clear they no longer intend to honour the contract, the situation moves out of the interest provisions and into default and termination, and this is where the money stops being calculable and starts being open-ended. It is also where the most dangerous assumptions live, because almost everything people believe about “just losing the deposit” is wrong.
This is one part of a bigger picture. For how a refusal differs from an ordinary delay or a finance problem, see the full guide, can a buyer or seller back out of a WA contract.
General information only, not legal advice. Do not draft or rely on a default notice without a property lawyer. Your special conditions can change all of this.
Nothing happens automatically
The most common misunderstanding is that a contract dies on its own once someone misses a date. It does not.
Neither party may terminate the contract because of the other’s default, and a seller may not forfeit money paid by the buyer or retake possession because of the buyer’s default, unless two things have happened: the non-defaulting party has given a Default Notice, and the defaulting party has failed to remedy the default within the time required by that notice. A Default Notice has to specify the default and require it to be remedied within ten business days after it is properly given, or a longer period if the notice says so.
There is one significant exception. If a party repudiates the contract, meaning they make clear they do not intend to be bound, the Default Notice requirement does not apply.
And there is a trap for sellers. A Default Notice only supports termination if the notice itself states that the contract may be terminated if the default is not remedied in time. A notice that leaves that out does not do the job, no matter how firmly it is worded. Do not draft one of these yourself. This is the point where a property lawyer stops being optional.
Specific performance is not what most people think
I hear this term used incorrectly more than almost any other. Specific performance does not mean putting the property back on the market and chasing the shortfall. That is a different remedy entirely. Specific performance means asking a court to order the defaulting party to actually perform the contract: to settle, to hand over the property, or to pay the money and complete the purchase. A seller who refuses to sell may face proceedings seeking an order that the sale proceed. A buyer who refuses to buy may face proceedings seeking completion. Which remedy fits a given case is a matter for lawyers and, ultimately, a court.
What a seller can do if the buyer defaults
Where the buyer has failed to comply with a Default Notice, or has repudiated, the seller has a menu of options, not a single automatic outcome. The seller may affirm the contract and sue the buyer for damages; affirm and sue for specific performance, with damages in addition to or instead of it; retake possession, subject to the notice requirements; or terminate by notice to the buyer. If the seller terminates, they may then elect to forfeit the deposit, sue for damages, and resell.
Note the word elect. These are choices with consequences, and choosing wrongly can cost a seller their position. That is a decision to make with a lawyer, not with a mate at a barbecue.
The deposit is not a cancellation fee
Some buyers assume the worst case is losing the deposit and walking away. That assumption is unsafe. After a valid termination, the seller may forfeit the deposit AND sue for damages AND resell. Those rights sit alongside each other. They are not alternatives.
There is one limit worth knowing. If the deposit exceeds 10 per cent of the purchase price, the seller may forfeit only the part that does not exceed 10 per cent, and anything above that is treated differently under the contract. That matters where a contract provides for a deposit greater than 10 per cent.
The resale mechanism
This is what people are usually reaching for when they say “specific performance,” and it is worth understanding properly. If the seller terminates and resells, the seller does not have to give the original buyer notice of the resale, and has the discretion, acting reasonably, to determine the manner and terms of the resale.
Where settlement of the resale happens within twelve months of termination, the standard conditions do the arithmetic. You take the resale proceeds, account for the costs and expenses of the resale and the amount of the deposit that has been forfeited, and compare
the total the seller holds against the original purchase price. If the seller holds less than the original purchase price, the original buyer must pay the difference as liquidated damages. If the seller holds more, the excess belongs to the seller. Read that second one again if you are a buyer thinking about walking away: there is no upside for you in the resale. A better result for the seller does not come back to you.
A simple illustration
Assume a buyer contracts to pay $1.2m, defaults, the contract is properly terminated, and the property is resold within twelve months for $1m. The original buyer may face a claim built from the shortfall against the original purchase price, the costs and expenses of the resale, legal costs relating to the termination, and other recoverable losses. The forfeited deposit is brought into that calculation, so the answer is not simply one price subtracted from the other. But the point stands: walking away from a $1.2m contract can create a liability many times the size of the deposit.
What a buyer can do if the seller defaults
The position is broadly mirrored, and sellers who think they can simply refuse to proceed should read it. Where the seller has failed to comply with a Default Notice or has repudiated, the buyer may affirm and sue for damages, affirm and sue for specific performance or damages, or terminate. If the buyer terminates, the deposit and any other money paid must be promptly repaid, the buyer is entitled to interest earned on the deposit, and the seller must pay interest at the prescribed rate on other money the buyer paid. Where the contract is terminated as a result of one party’s default or repudiation, the standard conditions also make the defaulting party liable for the other party’s legal costs relating to that termination.
Sometimes settling and reselling is the least damaging option
This sounds counterintuitive. I have dealt with buyers who no longer wanted to proceed even though finance was approved and there was no right to terminate. In one case the change was driven by family circumstances. My advice was to get legal advice, complete the purchase, and put the home straight back on the market. It resold quickly. They still carried costs, including the selling fee and the transfer duty already paid, but the resale covered a meaningful part of it, and it was over in weeks.
Compare that to a refusal to settle: a default notice, a termination, a resale controlled entirely by the seller, a claim for the shortfall, and legal costs, over months, with an uncertain number at the end. Nobody wants to buy a house in order to sell it, but the least expensive way out of a binding purchase is sometimes to honour it, take ownership, and move on quickly. The duty, tax, finance and legal consequences need working through with
your lawyer and financial adviser, but it is an option worth raising early, because it is often the one nobody has thought of.
If a delay or finance problem is your real situation
Not every stalled settlement is a refusal. If both sides still intend to complete and a bank is simply slow, that is a delay, and it is handled differently. See what happens when settlement is delayed. If the sticking point is a loan that has not come together, see the finance-clause trap, because that runs by its own rules and can leave a buyer bound in ways the default process does not.
Frequently asked questions
If I refuse to settle, do I just lose my deposit?
No. That assumption is unsafe. After a valid termination the seller can forfeit the deposit and sue for damages and resell, and if the resale within twelve months produces a shortfall you can be pursued for the difference. Walking away can cost far more than the deposit.
Does the contract end automatically if someone refuses to complete?
No. Ending it generally requires a valid Default Notice that states the contract may be terminated, and a failure to remedy within the time given. Repudiation is the exception. Do not rely on a contract lapsing on its own.
What is specific performance?
A court order requiring the defaulting party to actually perform the contract, to settle. It is not the resale mechanism, which is a separate remedy where the seller terminates and resells and claims any shortfall.
Can a seller keep a deposit larger than 10 per cent?
Generally not the whole of it. If the deposit exceeds 10 per cent of the purchase price, the seller may forfeit only the part up to 10 per cent, and the rest is treated differently under the contract.
The bottom line
A refusal to complete is the one situation where the numbers stop being predictable, so it is the one where doing it yourself is most dangerous. Nothing happens automatically, the notices have to be exactly right, the deposit is not a cancellation fee, and the resale
mechanism gives a walking-away buyer no upside and real downside. If you are anywhere near this, on either side, get a property lawyer involved before you issue a notice, refuse access, or withhold a deposit. The cost of that advice is almost always smaller than the cost of getting it wrong.
Truth. Strategy. Sold.
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About the author: Brendan Leahy has been selling homes throughout the Perth Hills and Foothills since 2002, with more than 1,500 personal sales.
General information only, not legal advice. If a default notice is being considered or received, get advice from a property lawyer immediately.
