The disclosure in recent weeks that a couple were left on the hook for €310,000 when they pulled out of a Foxrock house purchase has certainly caught the interest of many.
The couple initially lost their €75,000 deposit when they pulled out, but they were then pursued by the vendors for the shortfall between the offer they had agreed to pay for the €2.1 million house, and the amount that was eventually paid for it.
While some may have been surprised by the amount, others may think they were lucky they got away with just that. After all, they could have found themselves owing the full purchase price.
It’s an area where there seems to be some uncertainty – even though the law is quite clear. So, if you’re likely to be on either side of a house sale, what do you need to know to ensure you don’t find yourself in a legal quagmire?
Sale agreed
When you go sale agreed on a property, you will typically hand over a booking deposit (which may not be the full 10 per cent) to secure your home.
The estate agent will then likely put a “Sale agreed” sticker across its sign outside the house you’re buying, and you’ll start talking to your lender to turn your loan approval into a loan drawdown, and you’ll secure the services of a conveyancing solicitor.
When you ‘sale agree’ a property, there is, at best, a 75 per cent chance of that going ahead
— Michael Grehan, Sherry Fitzgerald Residential
What’s important to note here, however, is that going sale agreed is more of an indication of an intention to buy. It is not legally binding on either party. The vendor can pull out (and sometimes does if they get a higher offer, known as gazumping), or the buyer can withdraw their offer (and sometimes make a lower one instead, which is known as gazundering).
[ Buyer beware, especially when it comes to house purchasesOpens in new window ]
If the buyer pulls out at this stage, there are no penalties and they will be entitled to get their booking deposit back.
So, while it is issues around a contract that made the headlines in recent weeks, there can nevertheless be plenty of headaches and irritations at the sale agreed stage.
“That’s where the frustration is for a lot of people,” says Michael Grehan, chairman of Sherry Fitzgerald Residential, adding that as many as one in four transactions will collapse at the sale agreed stage.
“When you ‘sale agree’ a property, there is, at best, a 75 per cent chance of that going ahead,” he says.
A lack of penalties is one reason cited by Grehan for sales not getting past sale agreed to contract stage; there is “nothing to stop someone putting four offers on four separate properties and waiting to see what happens”. Grehan says they might even go so far as to agree on three of them, and then opt out of two, and they will still get their booking deposits back.
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“The momentum is lost, the owners will have lost three or four potential buyers, and there is no consequence to them pulling out,” he says.
Narrowing the time between going sale agreed and signing contracts is one way to mitigate against the risk of the buyer pulling out – of course, the seller can too at this stage, which will obviously cause problems for the buyer.
The Seller’s Legal Pack for Property Buyers Bill 2021, which is going through the legislative process, may help with this issue as it aims to speed up the conveyancing procedure.
Grehan thinks there should be consequences when you put an offer in, and pull out before contracts are signed, such as losing €1,000 or so of your booking deposit.
“Maybe it would stop people in their tracks about making offers casually,” he says.
Sign contracts
It is at the next stage – when contracts have been signed – that the Foxrock purchasers found themselves in difficulty.
Once both parties have their ducks in a row – surveys, loan offer documents, searches etc completed – they should be ready to sign contracts. At this point, a firm deposit, usually 10 per cent of the purchase price, is paid by the buyers, and both parties to the transaction sign a legally binding contract, which is in place under contract law.
If you do not deliver on that contract agreement, you are liable for the full amount of the purchase price
— Niall Geaney, Geaney Solicitors
But what does this mean? If you want to buy a house, and go ahead and sign contracts, but then decide to pull out, will you lose the deposit you have paid? Or could you be on the hook for the full cost of the property you had agreed to buy?
“Buyers should always be prudent when signing contracts and should be aware that it is not just the deposit that can be lost. They can be held liable under contract law for the entire value of the contract – the purchase price agreed,” says Niall Geaney, a partner with Geaney Solicitors, talking about buying a house in general, and not the specific Foxrock house sale.
As he explains, you may lose your deposit – but this may not be all.
“The rights for a vendor of a property are that they can now rely upon that contract as long as it is unconditional, and if the buyer fails to perform on that contact and close the house sale at the agreed price, then the vendor has a remedy under contract law to take legal action against the buyer for the full consideration noted in the contract.”
Yes, you read that right – full consideration equals the purchase price agreed for the property. As Geaney notes, “If you do not deliver on that contract agreement, you are liable for the full amount of the purchase price.”
So, it’s not just the deposit you could be on the hook for – you could be sued for the full amount of the agreed price for the property, or as was the case in the aforementioned Foxrock house sale, the difference between the agreed price and the lower price achieved in a subsequent sale.
But do retreating purchasers get sued for the full purchase price or for the shortfall in price ultimately achieved frequently?
No, says Grehan. “In my experience it rarely happens, but the remedies are there. There are very definite consequences if you sign an unconditional contract,” he says, adding that “very few sales fall apart” at this stage.
[ Couple sues neighbour alleging actions may scupper home saleOpens in new window ]
Those that do often have mitigating circumstances.
“There are very genuine reasons why contracts don’t go ahead,” he says. “I’ve seen scenarios where a contract has gone unconditional but then, close to closing, something catastrophic happens,” such as people losing their jobs, death, serious illness or other major problems.
There are some exceptions where you might be able to withdraw from a contract without incurring any penalties
In such circumstances, what will often happen, Geaney says, is that most vendors will accept the deposit and then attempt to sell the property to another buyer on the proviso that if the new price achieved in a sale is less than what has been agreed in the contract initially, they may pursue the first buyer for the difference.
This is outlined in the Law Society of Ireland 2019 general conditions of sale that all solicitors now use for property sales.
And what about the seller? What happens if a seller decides to pull out after contracts are signed?
According to Geaney, once the contract is binding on all parties, the vendor cannot sell to another buyer or increase the purchase price.
“The sale essentially has been agreed and is binding on both parties,” he says.
Exceptions
There are some exceptions where you might be able to withdraw from a contract without incurring any penalties.
First of all, a “subject to loan approval” clause can be inserted in a contract which offers protection to buyers in the event that they run into problems with their loan approval between signing a contract for a property and completing on it.
Geaney says that whenever a mortgage is involved in a property transaction, the sale contract should include such a condition “to protect the buyer should their lender for any reason no longer provide the required finance”.
This issue came to the fore a number of years ago when developers of new builds were excluding the clause, despite a recommendation from the Law Society that purchasing a home without this clause is “unsafe” for the buyer.
Of course, if you’re buying with cash, such a clause won’t be possible.
There are other contract clauses which can be inserted that allow the buyer to pull out of the purchase – for example, a clause making the sale conditional upon another contract in cases where the buyer of one property first needs to sell their own property.
And, as Geaney notes, if the closing documentation furnished by the vendor’s solicitor to the purchaser’s solicitors is incorrect, or legal searches on the closing date show issues with the vendor or the property (for example a planning search), there are options for the buyer to withdraw from the sale.
