There are several reasons for the completion of a property purchase to be delayed. And depending on the parties’ position, they can provide a well-needed advantage or be disastrous to carefully considered plans, not to mention disrupting what is often a delicate chain of property sales and purchases. However delayed completion can offer another strategy available to property investors – especially where a potential property will only be attractive if planning permission is granted.
Delayed completion after exchange – the need for a specialist solicitor
Please note – to negotiate and manage a delayed completion, it is important to have an experienced conveyancing Solicitor on your side – and one with experience of delayed completion.
If your conveyancer is less experienced or has not come across this strategy before, you may find problems and a fundamental misunderstanding of your chosen solicitor of what you are trying to achieve as a property investor.
Here at Bonallack & Bishop we understand property investors. Senior Partner, Tim Bishop is an investor and developer himself and our specialist Property Investor team acts for investors and developers nationwide.
Click here to read about our specialist property investment team
For a FREE initial phone advice and no strings attached fee quote, call our team now on FREEPHONE 0800 1404544.
What is completion?
Completion refers to the final stage of the conveyancing process in a residential property sale and purchase. Upon completion the seller hands over the keys to the property and the purchaser pays the purchase price, less the deposit paid when the contracts were exchanged.
Prior to that, solicitors for both the buyer and seller swap signed contracts and the deposit is paid over. And it is at this point, at exchange of contracts in the conveyancing process, that the agreement between seller and buyer becomes legally binding.
What is delayed completion?
This occurs either when completion does not take place as agreed, or if both parties agree to put off completion of the transaction until a later date.
When is the completion date set?
The completion date is normally negotiated at the stage contracts are exchanged.
Although it depends on a number of factors, the average time lapse between exchange and completion in most transactions is around 14 – 28 days.
However, the seller or purchaser may need to re-negotiate the completion date if circumstances change. Completion times of two to four months are becoming increasingly common. And sometimes, especially where the deal is subject to planning permission, completion can be delayed for a much longer period.
The Delayed Completion Property Strategy and planning permission
With the ongoing increase in property prices, many developers and investors look for property with potential added value. And planning permission for improvements or further development can significantly increase the value of any land or property.
And often it’s just the approval of planning permission that makes the difference. So most developers would much prefer to buy an unimproved property without any planning uplift, rather than pay what is often a significantly higher price for any property with planning permission already granted.
But the problem is that many prospective developers would not want to buy the property without permission. And that’s where delayed completion or an option to purchase comes in.
The sale can be agreed with exchange of contracts “subject to planning.” In this kind of situation, the purchaser, the buyer does not have to fully commit to the sale until they are certain that planning permission has been granted. It is sometimes referred to as a type of “conditional contract.” And that contract must include a clear and final long stop date. However that long stop may be many years in the future.
Now anyone who’s gone through the planning process, will know that in general terms it is often uncertain and slow. So exchanging contracts “subject to planning permission” is often the best way to handle this – allowing an extended period for planning to be considered and granted.
Delaying completion subject to planning (like an option to purchase – see below) allows a developer to buy the right to a property (if they choose to complete) but allows them to pull out if planning permission is not granted and the planning uplift they are seeking is simply unavailable.
However it’s worth noting that normally any exchange of contracts, “subject to planning” will include some form of long stop completion date – a final date by which, even if planning permission is not been granted, the purchaser needs to either commit to purchase or pull out.
What is the difference between exchange with delayed completion and options?
Delayed completion, and both purchase and lease option contracts, can all be highly successful property strategies.
- Delayed completion
Exchange with delayed completion means that the buyer and seller agree to a price for a property and exchange contracts. The buyer pays a deposit; however, the completion of the transaction is delayed, in some cases for several years.
- Option to purchase
This occurs when a property owner sells the right, or option, to buy a particular piece of land or property to a prospective purchaser. The purchaser then has the choice as to whether or not they want to exercise that option at some future stage and purchase that property.
To be valid, option to purchase must satisfy the following 4 criteria;
· the option must be in writing
· the land must be described
· the purchase price must be stated
· the option must be both signed by the parties and dated
- Lease options
With lease options, the buyer also pays the seller an upfront fee to secure the option of buying their property in the future. Crucially, the price of the property is agreed at the time the option agreement is made, not when the property changes hands.
But the critical difference is that unlike option to purchase, with a lease option, the buyer takes control of the property – which allows them to either moves into the property or rents it out. However, the mortgage remains in the seller’s name even if the buyer is paying it.
Click here to read how are purchase lease option solicitors can help you
Is simultaneous exchange and completion possible?
Yes, a situation, where both exchange and completion take place at the same time, is possible. And in some circumstances it makes perfect sense. However this is relatively unusual and is only appropriate in certain circumstances.
Exchange followed by reasonably swift completion is the norm – and unless you really know what you’re doing and your particular circumstances suit simultaneous exchange and completion, a gap between exchange and completion is usually the best way forward.
Why do people delay completion?
Perhaps the most common reason for property investors and developers to delay completion is where they want to buy “subject to planning permission” as indicated above.
However they are not the only reason for delay completion – among the most common other reasons are the following:
· The seller or purchaser (sometimes both at different times) experience a delay in the chain concerning their property’s sale or purchase. A property chain is a connection between three or more buyers/sellers of properties where each depends on at least one other link to achieve their sale/purchase so they can complete theirs. The person at the ‘beginning’ of the chain is always a buyer; the person at the end is a seller. Those in the middle (the ‘links’) are seeking to synchronise the sale of their existing property and purchase a new one. If the chain collapses at some point, the affected party may need to negotiate a delayed completion date.
· One party wishes to delay moving into their new home until the end of the current school year.
· One party is moving to the UK from abroad and wish to delay completion until they return to the country.
· The property is currently being rented and the purchaser cannot move in until the existing tenancy ends.
· You are buying off plan i.e. you have paid deposit and exchange contracts on a property that is still to be built. This is not unusual.
· The property is a new build and the builders and/or tradespeople are running behind schedule and/or there are snagging issues that must be fixed before completion.
· The seller needs extra time to find a new property to purchase. This has become more common in recent years, particularly where the vendors have lived in their property for many years and want to spend time getting the right home to move to
· The buyer’s lender has not delivered the mortgage funds into the buyer’s bank account on the day of completion.
If completion needs to be delayed, the delaying party needs to inform their conveyancing Solicitor as soon as possible.
Protecting your option
Regardless of whether your option is in relation to registered land, the buyer will need a solicitor to register that option at the Land Registry. That’s because with the option registered, nobody else can register an interest in priority over the buyer’s interest.
What are the risks with delayed completion for the seller and purchaser?
Although delayed completion can work well for both buyer and seller, there are risks.
- Risks for the seller
A seller must hand over the property in the same condition it was in when contracts were exchanged. If any defects occur between exchange and the delayed completion date, the seller will need to pay to have them fixed.
If the new property being purchased by the seller has not reached the exchange of contract stage, a delayed completion may mean that the vendor of that property pulls out of the sale. The seller will then be required to find another property to buy. This could delay completion even further.
If completion is delayed for a long time, there may come a stage when the vendor changes their mind and no longer wants to sell up. In strictly legal terms, following exchange they are committed to exchange at a previously agreed price. So unless they can negotiate with the purchaser to avoid selling, they are committed.
- Risks for the purchaser
If you’re looking at delayed completion as a way of securing a property subject to planning permission, remember that even after exchange, you don’t own the property – so you won’t be able to borrow money using that property as security until completion, when you own it.
One of the biggest risk for the purchaser is their mortgage offer expiring. Most mortgage offers are between three to six months (although a Solicitor can negotiate longer terms). Most lenders will agree to extend the offer as they are aware of how easily a completion delay can occur. However, they are under no legal obligation to offer an extension.
Should the lender refuse to extend the offer, the purchaser will be required to go through the entire application process again. This means paying for a new valuation, further legal fees, and having financial documents such as bank statements re-checked. Self-employed purchasers who have already paid for a set of accounts could be required to pay for additional months. This is because lenders usually want to see the last three to six months of accounts applicable immediately before the application is made. And unfortunately, there is no guarantee that the new mortgage application will be approved which will result in the purchaser having to apply to another lender and start the process all over again.
Purchasers also need to consider the impact of having the 10 per cent deposit, which can be a considerable sum, tied up in a house they cannot move into for some time. If the seller knows or suspects at the time of exchange that they will need to delay completion the purchaser should pay a five per cent deposit only.
The risks for the purchaser also apply to sellers who are purchasing a new home to move into. The stress and inconvenience of a delay in completion can also factor heavily on all parties’ mental well being.
Choosing an experienced Residential Conveyancing Solicitor will help alleviate uncertainty as they understand the importance of always keeping clients informed of their transaction’s progress.
What happens if the seller or buyer fails to complete the completion date?
If both parties agree to vary the completion date, putting it back, there is no problem. However problems do emerge if only 1 of them doesn’t want to, or simply can’t complete on the agreed date.
As soon as the agreed completion date has passed the non-performing party is in breach of contract and owes the innocent party compensation. In such circumstances, the innocent party will issue a Notice to Complete. The notice provides the non-performing party with a 10 day grace period to carry out their contractual obligations. Daily interest may be charged during this period.
If the purchaser fails to complete, the seller is entitled to terminate the contract and retain the 10 per cent deposit. If the purchaser initially paid less, they would need to make the deposit amount up to 10 per cent. On top of this, the seller can claim damages, for example, if the price of the property has decreased since the date of the breach, the purchaser will need to pay the difference.
Should the seller fail to complete, the purchaser can charge them a daily rate of interest during the Notice to Complete period and have their deposit returned. They may also be able to claim compensation for any money spent on searches and/or surveys.
In cases where there is no agreed date for completion, His Honour Judge Kaye QC in Urban I (Blonk Street) Limited v Ayres, after examining the relevant case law concluded that:
“Where a contract for the sale of land does not contain any specified date for completion, and subject to any contractual indication to the contrary, it is implied that completion will be within a reasonable time. There is no breach of contract until that that time has arrived.”
What is a reasonable time? In Astea (UK) Ltd v. Time Group Ltd  EWHC 725,  All ER (D) 212, His Honour Judge Richard Seymour QC declared that establishing what constituted ‘reasonable time’ required taking a broad consideration of:
· Any estimate is given by the purchaser or seller of when completion would happen.
· Whether that estimate has been exceeded and, if so, for what reasons? For example, if extreme weather delayed the completion of a new build property the amount of compensation awarded may be reduced.
· Did the innocent party fail to do something that resulted in the non-performing party pulling out of the sale?
· Did the purchaser or seller require the services of third parties to meet the completion date?
· What exactly was the cause/s of the non-performance of the contract?
Although it is common for buyers and sellers to withdraw from a property transaction before contracts are exchanged, it is extremely rare for a sale to fall through between exchange and completion.
What are sale and rent back schemes?
Sale and rent back (also called “buy back”) schemes allow a person to sell their property to a company or individual and continue to live in it whilst paying rent. Unlike companies offering delayed completion and lease option schemes, sale and rent back scheme providers are regulated by the Financial Conduct Authority (FCA).
Authorised sale and rent back providers are controlled by strict rules, which are intended to provide protection to the occupier. Among those rules are requirements that the sale and rent back business must
- not drop promotional leaflets through your door
- must ensure that the occupier can afford to enter into these kind of agreement
- must arrange for an independent valuation of the home if there is not one already
- must offer the seller a 14 cooling-off period intended to provide them with a chance to think through their decision
- must provide a minimum 5 year fixed term tenancy
The risks associated with the above schemes are significant, especially concerning delayed completion (for several years) and lease options which are both unregulated by the FCA. Before committing to any such arrangement, speak to an experienced Conveyancing Solicitor.