A recent High Court case confirmed that developers may not succeed in an action for specific performance of a contract for the sale of property if the purchaser can demonstrate that he/she does not have the assets or borrowing capacity sufficient to allow them to purchase the property.
In this case the purchasers contracted to buy residential units at the peak of the market. When the units were completed, the developer called upon the purchasers to complete and at that time the contract price significantly exceeded the market value of those units. The purchasers acknowledged that the contract was binding but claimed they were unable to complete due to a lack of access to finance. The developer sought an order for specific performance of the contract against the purchasers.
The purchasers argued that they could not complete the purchase and that the court should award damages in lieu of specific performance, in addition to the loss of their deposit.
The Court set down the principle that, although each case is to be determined on its own merits, if the purchasers can establish that completion is impossible due to a lack of funds where the purchaser has no realisable assets or no borrowing capacity, the court can decline to make an order for specific performance.
Damages were awarded to the developer. However the method of calculating this was not included in the judgment and has yet to be assessed. Clearly, it will not be for the full contract sum as this would have the same effect against the purchasers as an order for specific performance.
This case provides an important development given the current condition of the property market. It potentially allows prospective purchasers to be released from a contract where they can prove their impecuniosity.
Developers, however, could suffer the potential hardship of having to resell properties at a lower price than they had previously contracted to sell. However, the provision of damages for breach of contract and the loss of the purchaser’s deposit may soften the blow for them.
