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This article was first published in Estates Gazette on 27 February 2016 and is reproduced with permission.
Naomi Campbell examines the role of notices to complete in property transactions and discusses how they should and should not be deployed against a party in breach of its contractual obligations.
In most contractual disputes, where one party is in breach of its obligations under the contract, the “innocent” party will wish to claim damages for the loss it has suffered as a result of the “guilty” party’s breach. However, where the contract is for the sale and purchase of a property, the non-defaulting party may not be able to produce evidence of significant monetary losses and may prefer to pursue alternative remedies, such as specific performance. Alternatively, if the non-defaulting party cannot prove any loss, and does not wish to enforce the terms of the contract, it might ask its advisers whether it can terminate the contract as a whole and either re-sell the property (if it is the seller) or reinvest its finances in another venture (if it is the buyer).
It is important to distinguish between rescission and termination of a contract for breach. While it is common to refer to a right to “rescind” a contract, rescission is a specific equitable remedy which may be available in cases of misrepresentation, duress or mistake. This article concentrates on the contractual right of a non-breaching party to terminate the contract as a result of the other party’s repudiatory breach, which is separate to, and distinct from, any rights to rescind the contract.
When does a right to terminate arise?
A right to terminate a contract is a contractual remedy, and may arise out of the express or implied terms of the contract or under common law. Contracts for the sale and purchase of property will usually incorporate the Standard Conditions of Sale (for residential properties) or the Standard Commercial Property Conditions (for commercial properties) (together, “the Standard Conditions”). The latest versions in use are the fifth edition for the Standard Conditions of Sale (“SCS”) and the second edition for the Standard Commercial Property Conditions (“SCPC”).
Both the SCS and the SCPC provide for a right to terminate the contract in certain specified circumstances (note that this is referred to in the Standard Conditions as a right to “rescind” the contract). The SCS and SCPC are not identical and parties must always check their contracts carefully to see whether some or all of the Standard Conditions have been incorporated and which, if any, have been varied as part of the contract.
Failure to complete
This article will focus on a failure to complete the transaction on the contractual completion date. In most property transactions, the parties will exchange contracts and agree a specific completion date. If, on that completion date, Party A is “ready, willing and able” to complete, but Party B is not, then Party B is in breach of contract. A party is “ready, willing and able” to complete if it could complete but for the default of the other party and, in the case of a seller, if the amount to be paid on completion would allow it to transfer the property free of any mortgages (unless the contract provides that the property is to be sold subject to those mortgages) (see SCS and SCPC 1.1.3).
Notices to complete
A failure by Party B to complete on the contractual completion date does not give rise to an automatic right for Party A to terminate the contract. The SCS (6.1.1) and SCPC (8.1.1) both state that in relation to completion, “time is not of the essence of the contract unless a notice to complete has been served”. Where time is not of the essence in a contract, a failure to comply with an obligation by a specified date does not give rise to a right to terminate.
To make time of the essence, if Party A is ready, willing and able to complete, then it should serve a notice to complete on Party B. The notice to complete will specify that completion must take place by a particular date (within 10 working days, excluding the day on which the notice is given, under SCPC 8.8.2 and SCS 6.8.2) and makes time of the essence in relation to that date.
Repudiatory breach and the right to terminate
By making time of the essence in relation to the revised completion date, the non-defaulting party has made completion by that date a condition of the contract and a failure to complete by that date constitutes a repudiatory breach of contract. While the contract may contain its own specific provisions, the Standard Conditions set out the following consequences if a party fails to comply with a notice to complete:
- Under the SCS, if the defaulting party is the buyer, it must pay a deposit of 10% or the difference between the deposit originally paid and a 10% deposit (SCS 6.8.3);
- If a buyer fails to complete, the seller may terminate the contract, forfeit and keep any deposit and accrued interest, re-sell the property and/or claim damages (SCPC 9.5 and SCS 7.4); and
- If a seller fails to complete, the buyer may terminate the contract and demand repayment of the deposit plus interest (SCPC 9.6 and SCS 7.5).
In either case, the non-defaulting party retains its other rights and remedies.
Hakimzay Ltd v Swailes
Hakimzay Ltd v Swailes [2015] EWHC B14 (Ch); [2016] EGLR 1 provides a useful reminder of the above principles, and highlights some of the pitfalls which practitioners need to avoid when advising clients on how to deal with a delayed completion.
The facts of the case are straightforward. Hakimzay Ltd was the buyer and Robin Swailes was the seller of a property in Oxford. The sale price was £643,000, and a deposit of £64,300 was paid on exchange of contracts. The contract had a completion date of 3 April 2014. The property was subject to an assured shorthold tenancy in favour of a number of tenants. The SCS were incorporated, including the obligation on the seller to give vacant possession (SCS Special Condition 4). The seller had difficulty persuading one of the tenants to leave, and was unable to complete on the agreed completion date.
The buyer served a notice to complete on 11 April 2014, which expired on 29 April 2014. The seller was not able to complete on 29 April 2014 as the tenant had still not vacated. The buyer did not elect to terminate the contract. The tenant did vacate on 1 May 2014, and the seller’s solicitors informed the buyer’s solicitors that they were ready to complete. The buyer did not complete, claiming that it wished to inspect the property to ensure vacant possession could be given; there were also discussions around interest and/or a reduction in the sale price.
On 7 May 2014, the seller’s solicitors sent a letter headed “Notice to rescind”. This letter claimed that time remained of the essence and, given the buyer’s failure to complete, the seller purported to terminate the contract and retain the deposit. The buyer issued proceedings for specific performance of the contract, and the parties each applied for summary judgment.
The court found that the contract had not been validly terminated by the seller, and that the buyer was entitled to specific performance. The seller’s failure to complete by the date specified in the notice to complete gave rise to a right to terminate on the part of the buyer; however, the buyer had not exercised that right, with the effect that the contract remained in force. The parties did not agree an alternative completion date, with the effect that the buyer’s failure to complete did not constitute a repudiatory breach and so did not give rise to a right to terminate on the part of the seller.
The trap which the seller had fallen into was that he assumed that time remained of the essence in the contract after the notice to complete had expired. He believed (erroneously) that he had a right to terminate the contract when the buyer failed to complete after the last tenant had vacated the property. Judge Keyser QC explained that this argument was based on a “conceptual confusion”: in the absence of an agreement between the parties to fix another completion date, time could not be of the essence as there was no date by reference to which either party could be said to have defaulted.
The bitter pill for the seller must be the judge’s comments that if he had simply served his own notice to complete, time would have become of the essence again. Under the SCS, if the buyer had then failed to complete by the revised completion date, the seller would have been entitled to terminate the contract, retain the buyer’s deposit and dispose of the property.
This case is a useful refresher on the key legal principles to bear in mind when dealing with delayed completion:
- The Standard Conditions are clear and state that time is not of the essence unless a notice to complete has been served;
- Time cannot be of the essence except in relation to a specific or ascertainable date;
- If time is not of the essence in relation to completion, then a delay in completing cannot constitute a repudiatory breach.
Why this matters
Delays on completion are common in property transactions. At common law, time is not of the essence in a contract unless specified (although the parties’ conduct could imply such a term). However, most property contracts will incorporate the Standard Conditions, which provide for an express right of termination by the non-defaulting party, so long as it follows the procedure set out in the Standard Conditions and gives the defaulting party a valid notice to complete. Parties should note also that the Standard Conditions contain provisions relating to service (SCS 1.3 and SCPC 1.3). In a rising market, buyers should be aware of the risks of delaying completion, where an opportunistic seller could seize the chance to retain the deposit paid and go on to dispose of the property at a higher price.
The legal principles underlying a notice to complete are simple, but often misunderstood. Judge Keyser QC inHakimzay set out a neat summary of what it means to make time of the essence in relation to performance of a contractual obligation: “To say that time is of the essence of a contract is not to make a metaphysical statement. It is to identify the fact that a failure to comply with a contractual requirement as to time of performance, whether that requirement be a provision of the contract itself or arise pursuant to a valid notice making time of the essence, will itself amount to a repudiatory breach.”
This case is a cautionary tale both for practitioners and for sellers. Sellers should be confident that they can deliver what they have promised within the time specified before exchange of contracts, or run the risk that their buyer will serve a notice to complete when completion is delayed. In addition, practitioners need to be careful not to misunderstand the consequences of a notice to complete, and to always remember that time can only be of the essence in relation to a specified date; without a specified date, while delay on the part of the other party may be unsatisfactory, it cannot constitute a repudiatory breach.
Further reading
Chitty on Contracts, 32nd edition, volume 1, chapter 21 (Sweet & Maxwell)
Megarry & Wade: The Law of Real Property, 8th edition, Chapter 25 (Sweet & Maxwell)
Standard Conditions of Sale, 5th edition
Standard Commercial Property Conditions, 2nd edition