Exploring remedies for purchaser defaults in real estate agreements

The Law Association’s real estate agreement outlines the actions a vendor may take when a purchaser defaults on settlement, including the issuance of a settlement notice that allows the purchaser 12 working days to complete the transaction.

However, if the purchaser still defaults, the vendor has two primary options: they can sue for specific performance, or cancel the agreement, retain the deposit, and pursue additional damages. Given fluctuating market conditions, it is essential that vendors carefully evaluate which course of action is likely to yield the most favourable financial outcome. A clear understanding of these remedies is crucial for vendors to navigate purchaser defaults effectively.

The Real Estate Agreement is the standard sale and purchase agreement form widely used for property transactions in New Zealand. It includes a ‘Notice to complete and remedies on default’ clause (clause 11 of the eleventh edition (2022) form) that sets out the remedies available to a vendor if a purchaser fails to complete the purchase of a property on settlement. 

If a vendor is ready, willing and able to settle on settlement date, the purchaser will be in default if they fail to comply with the settlement obligations under the Real Estate Agreement - most importantly, payment of the purchase price.

In recent history New Zealand has generally experienced a buoyant property market, which has meant that, in the face of purchaser default, vendors have often been satisfied with simply cancelling the agreement, retaining the purchaser’s deposit, and reselling the property on the open market. As a result, the forfeited deposit has often represented the purchaser’s entire financial loss and sometimes has provided a financial windfall for vendors.

However, given the current downturn in the property market, several factors may influence whether this approach remains attractive to vendors. Ultimately, the decision will likely depend on whether retaining the deposit and reselling the property leaves the vendor in a financially neutral or improved position, compared to if the purchaser had completed the transaction. If it does not, vendors are more likely to pursue alternative remedies available as a result of the purchaser’s default.

Settlement Notice

Where a purchaser defaults on settlement, the vendor must first serve a settlement notice before they can cancel the Real Estate Agreement or exercise any other termination remedies available under the agreement. The purchaser then has 12 working days from receipt of the settlement notice to complete the settlement. During this period, the vendor is entitled to charge penalty interest at the rate specified in the applicable Real Estate Agreement.

If the purchaser fails to settle by the 12th working day, they will be deemed to have repudiated the agreement. At that point, the vendor may cancel the agreement immediately and elect to:

• Sue the purchaser for specific performance; or
• Cancel the Real Estate Agreement, retain the purchaser's deposit, and/or seek damages.

These options are discussed in detail below:

Option One: 

A vendor may sue the purchaser for specific performance - that is, seek a court order requiring the purchaser to complete settlement under the Real Estate Agreement. This remedy is typically pursued only if the vendor is reasonably satisfied that:

1. The purchaser has the financial capacity to complete settlement; and
2. Retaining the deposit alone would leave the vendor in a worse position than enforcing settlement under the agreement.

When seeking specific performance, the vendor will usually apply for a summary judgment from the court. The burden then shifts to the purchaser to establish that they have a valid defence. In most cases, the purchaser must demonstrate financial hardship so severe that completing settlement is “impossible.”

This concept of “impossibility” sets a high legal threshold, requiring comprehensive financial evidence to counter the vendor’s breach of contract claim. The court will likely examine the purchaser’s overall financial position, including personal assets, bank accounts, and access to further financing, to assess whether settlement can reasonably be completed.

It is also important to note that a vendor is not precluded from pursuing a claim for damages in addition to, or as an alternative to, specific performance.

Option Two:

A vendor may cancel the Real Estate Agreement and:

1. Retain the deposit paid by the purchaser; and/or
2. Sue the purchaser for damages.

However, a vendor may only claim damages if they suffer a loss that exceeds the value of the deposit—the vendor cannot be placed in a better financial position than they would have been had the agreement been completed as originally agreed.

The types of damages a vendor may claim include:

• The loss on any bona fide resale of the property, provided the resale agreement is entered into within one year of the original settlement date under the Real Estate Agreement.
• Penalty interest on the unpaid portion of the purchase price, calculated from the original settlement date to the date of resale.
• Reasonable costs and expenses incurred in any resale or attempted resale of the property (see paragraph below).
• Outgoings (excluding interest) and maintenance costs related to the property, from the original settlement date to the date of resale (see paragraph below).

Damages may be substantial, as recent case law has adopted a broad interpretation of “losses arising naturally from a breach of a contract for the sale and purchase of land.” Vendors now need only to demonstrate the extent of their consequential loss, which may include:

• Loss in resale value of the property;
• Additional real estate commission payable on resale;
• Penalty interest incurred if the vendor had agreed to purchase another property and was unable to settle due to the purchaser’s default;
• Bank charges, including servicing costs for bridging finance;
• Transport and storage costs for furniture or belongings while awaiting settlement on a new property;
• Rates and insurance premiums; and
• Legal costs incurred as a result of the purchaser’s default.

To illustrate the above principles, significant consequential losses were awarded in the recent case of Bath v Whakaruru [2024] NZCA 350. In this case, Bath agreed to purchase a residential property from Whakaruru for $1.16m, but subsequently defaulted on the agreement. Whakaruru acted promptly to resell the property, but suffered a loss, selling it for $781,500.

The Court of Appeal upheld damages exceeding $430,000 for Whakaruru’s net resale loss, finding that Whakaruru had taken reasonable steps to mitigate the loss by promptly marketing the property and accepting the most favourable resale offer—one with the highest deposit and the fewest conditions. As a result, the court concluded that Whakaruru’s actions were not unreasonable in the circumstances.

In other cases, courts have held that a resale settlement date occurring up to eight months after the original settlement date is acceptable. Accordingly, costs incurred during such a period may still be claimed from the defaulting purchaser. These rulings recognise the realistic risk that a vendor may face delays in securing further offers and confirm that such delays do not constitute a failure to mitigate loss.

Alternative options

Alternatively, where a vendor is entitled to cancel the Real Estate Agreement, they may choose to re-market the property to third parties without formally cancelling the existing agreement. If the vendor subsequently enters into a new sale agreement with a third party, the original Real Estate Agreement will be automatically cancelled.

Despite this automatic cancellation, the vendor retains the right to pursue the remedies outlined in Option Two above, including retaining the deposit and seeking damages from the defaulting purchaser.

In conclusion, a clear understanding of default remedies and available legal options is essential to empower vendors in navigating purchaser default scenarios effectively. As market conditions continue to shift, vendors must carefully evaluate their circumstances and select the most appropriate strategy to mitigate losses and secure fair compensation.

Please contact us to discuss any property related queries and we will be happy to assist.