A study of contract law (anticipatory breach of contract) versus commercial pragmatism
Mr L owned a farmhouse and land. He died leaving a Will, drafted by Barlow Robbins LLP, which provided for his wife, Mrs L. The Trustees of the Will of the late Mr L (deceased) were a Partner of Barlow Robbins LLP and Mr L’s son.
The family wished to downsize their land holding and release equity by the sale of the farmhouse and land but also needed to tie in the sale with a suitable purchase for Mrs L. The Trustees were happy to follow these wishes which had also been expressed as a possible scenario in the Will.
A buyer was found for the farm and farmhouse and a suitable property found for Mrs L. Contracts in the sale (£1,99m) and purchase (£710k) were exchanged in 2007 with completions so as to coincide in February 2008. All seemed well and usual enough….
However, the Buyer’s economic position had changed. He had suffered in the stock market volatility and had left it until too late to turn his investments into cash. In short, he was nowhere near as affluent as he had been and could no longer proceed with the purchase in February.
He instructed his solicitors to indicate, about a fortnight before completion, that he might not be able to complete the purchase, rather than would not. He indicated that he was looking at all his options to try to proceed with the purchase.
This posed a problem since such a letter could be deemed to be an anticipatory breach of contract (see footnote 1) and so accelerate the contract to allow the Trustees selling to declare the contract breached. The problem was the equivocal nature of the correspondence which indicated that it was still possible for completion to occur and that the Buyer was still attempting to make alternative arrangements. Consequently, the opinion was formed that it was not entirely open for the Trustees to treat the correspondence as an anticipatory breach of contract and, worse still, that we may be unwise to inform our own seller in case they were to treat our correspondence as an anticipatory breach of contract. There was no alternative but to wait and see if the Buyer could complete when the day of completion came.
This was a difficult position and somewhat counter-intuitive since the decent thing would seem to be to inform everyone in the chain of the problem. However, the consequent risks posed by a chain collapse and ensuing litigation were keenly to be avoided.
Two immediate steps were taken.
Firstly, the Trustees were able to explore an option for bridging finance at short notice using Barlow Robbins LLP’s bankers, LloydsTSB bank plc so that funds were in place to borrow money against the farm and farmhouse in order to complete the related purchase, if the Buyer let us down.
Secondly, the estate agents were called to see whether the second bidder was still interested (albeit he was a lower bidder and at £1,85m).
To understand what unfolded requires an appreciation that contracts for property do not normally make “time of the essence” and that lawyers do this nationally and, moreover, there is deliberately in the Standard Conditions of Sale a device of serving a Notice to Complete, so that there is flexibility in the system, allowing a second chance without the chain immediately collapsing. If a person is late in failing to complete on the appointed day by the appointed time then the Notice to Complete is served so that time is made of the essence to the contract and after 10 working days a seller can keep the defaulting Buyer’s deposit. The important thing to note is that the contract is still alive between the parties.
Returning to the case study, the Buyer defaulted on the day of completion and a Notice to Complete was served making time of the essence. Unfortunately, to make matters worse, the second bidder was prepared to come in but wanted and was able to evidence his ability to proceed with cash swiftly but at a lower price and the property market was beginning to founder. The Estate Agents involved were adamant that the peak in the property market had passed and that there was little purpose served in waiting out the market. (As we all know can observe – their advice was quite correct).
The problem was exacerbated because the second bidder was not prepared to wait the 10 working days (2 weeks) because he had already started to negotiate for another property and, understandably, did not wish to upset that negotiation, without knowing for sure that he could proceed with the purchase from the Trustees.
Commerciality became the key consideration. The economic and commercial factors meant that litigation was not a viable option. If the Buyer had lost in the stock-market was there any point in pursuing him? Although one could wait to sue for anything up to a maximum 6 years later there was a second bidder (albeit lower) ready to proceed immediately but not prepared to wait out the time of the Notice to Complete. Another consideration was the running cost of the bridging finance for the purchase.
The family, with the Trustees, took a commercial decision to enter into an agreement with the Buyer rescinding the Contract (see footnote 2) altogether (in effect this let the defaulting Buyer off from his obligations and an allowance was made for the deposit) and so the Trustees were able to conclude a simultaneous exchange and completion with the new buyer.
Achieving this result in the space of a few days was a huge undertaking and the new buyer still needed some of their own enquiries replied to notwithstanding that the bulk of many specific enquiries from the first contract had been reused. This all increased legal costs dramatically.
In summary, the overall commercial result achieved was a sale to the second bidder at an overall acceptable price (especially given the falling market), costly litigation against a potentially impecunious first purchaser was avoided and the bridging finance repaid with the minimum of disturbance possible caused to the widow.
Serving our clients interests first to achieve a commercially viable result is always our key aim. A costly piece of litigation may have been good for lawyers but would not have best served our clients financially or emotionally and we are proud to have achieved what is regarded by our clients, the Trustees and the family as the best result for them in a very difficult situation.
Anthony Garcia-Deleito,
Solicitor,
Residential Property, Barlow Robbins LLP
Glossary Footnotes:
1“anticipatory breach”
Where one party announces to the other party, prior to the date of performance of a contract, that it is not his intention to perform the contract, then the other party may, at his choice, either treat the notice of intention not to perform the contract as inoperative, and simply await the time when the contract is to be performed, and hold the defaulting party responsible for all of the consequences of non-performance: but in that case keeps the contract alive and has to fulfil his own obligations. Or, he may choose to treat the announcement of the intention not to perform the contract as putting an end to the contract wrongfully, and may bring his action for breach of contract immediately and sue for such damages as would have arisen from the appointed time for performance in the contract, subject to abatement in respect of any circumstances which may have afforded him a means of mitigating his loss. (For example, going ahead to conclude a contract with a viable second buyer waiting in the wings).
2 ie. cancelling the contract
