Can a house sale fail after exchange? (What if either party pulls out?)

What happens if a buyer pulls out after exchange of contracts?

In the England and Wales (because property contracts in Scotland are different), pulling out after exchange of contracts is not very common. But it does happen. If a buyer of my property pulled out, I’d be rubbing my hands together. But why is that?

What happens if a buyer pulls out after exchange of contracts

Can a house sale fail after exchange in less than 20 seconds…

In England and Wales, once both parties have signed and exchanged contracts, it is extremely difficult for either party to pull out of the agreement. If it’s the buyer who pulls out after exchange of contracts, they will lose their deposit. They could also be sued by the seller. Whereas if it’s the seller who fails to complete, the buyer may rescind the contract. They are also entitled to have their deposit returned with interest.


What is Exchange of Contracts?

In England and Wales, exchanging contracts is the last but one step in a house purchase. Where completion is the final step in the process.

Under English & Welsh law exchange of contracts occurs after your solicitor has carried out all necessary searches. It’s after the mortgage has been arranged where necessary, the surveys are complete if required and there is agreement to the terms of the contract.

Once each party has signed the contracts and they have been exchanged between solicitors on either side, they are binding. For the exchange of contracts to be binding in law, there’s has to be whats referred to as ‘consideration‘.

Consideration in this case will be the ‘exchange deposit‘, which is generally 10% of the purchase price.

Up to the point when you exchange contracts, the house buying process is not legally binding in English and Welsh law. Prior to exchanging contracts, either a buyer or a seller can pull out of the process at any time.

But what about after exchange of contracts and can a house sale fail after exchange?

More Reading: Why is there a gap between exchange and completion? (Is a gap needed?)

What happens if a buyer pulls out after exchange of contracts?

Pulling out after exchange of contracts is not generally accepted in England and Wales. This also happens very rarely. The reason for its rarity is that the buyer would not only lose their deposit if it was them that pulled out after exchanging contracts, but they could also be sued too.

Can a house sale fail after exchange?

In England and Wales, once both parties have signed and exchanged contracts, it is extremely difficult for either party to back out of the agreement. But can a house sale fail after exchange and what happens if either party does pull out after exchange of contracts?

What if it’s the buyer who pulls out after exchange of contracts?

If it’s the buyer who doesn’t complete or who pulls out after exchange of contract, they will lose their deposit and can be sued.

The vendor (or seller) may serve a notice on the buyer requiring them to complete. This would include a requirement for them to pay the vendor’s additional legal costs. Additionally, and depending on what’s written into the contract, the buyer may also have to pay interest on the unpaid purchase price.

In some cases, if the seller subsequently sells the property for a lower amount, the buyer may be liable for the difference. But see below as to why this may be a blessing in disguise when it’s the buyer who pulls out after exchange of contracts.

More Reading: If a house sale falls through who gets the deposit (Can seller keep deposit)

What if it’s the seller who pulls out after exchange of contracts?

If it’s the seller who pulls out after exchange of contracts and fails to complete, the buyer may rescind the contract.

In this instance, the deposit must be returned to the buyer with interest. The vendor must also pay to cancel any registration of the contract too.

Why it may be an advantage if a buyer pulls out after exchange of contracts

If it were me where the buyer of my house pulls out after exchange of contracts, I’d be rubbing my hands together. Why is that you may ask?

An example where it’s beneficial if a buyer pulls out after exchange of contracts

Let’s suppose the house I’m selling is worth say £300,000. In this case the deposit the buyer would have to pay on exchange of contracts is £30,000, or 10% of the purchase price.

Let’s say that after exchange of contracts, the buyer has second thoughts and decides not to complete and pulls out. Unless I have an urgency to move for what ever reason, I’ve just made an easy £30,000.

I’d simply put the house back on the market for £300,000 once more. I’d then hope to sell it again at £300,000. But with the £30,000 in the bank already.

In theory I could afford to sell the house for a little cheaper than the £300,000, in order to make it sell faster, but still be ahead.

More Reading: What sells a house fast in the UK? (How fast is fast?)

Of course I understand that you may need to move and if someone pulls out at the last minute like this, even though you can keep their deposit, this may not help you or be convenient to you.

However, you could use the deposit money to go ahead and buy your new house, subject to other financial constraints. Or if you need to more for work purposes, you could rent for a while in the new area until your house sells for the second time. But remembering that you are ahead with £30,000 in the bank.

More Reading: What to do if your house sale has fallen through twice (A lifeline of ideas)

What about in a down-trending property market?

When this scenario may not be a good outcome is if you’re in a significantly downward trending market. If you are, it may be that you’ll need to lower the price of your house to sell it once more. This price reduction may be more than the deposit you held from the previously canceled sale..

However, as already mentioned, you are within your rights to sue the buyer for the difference in price from what you sold it for in the first place.

More Reading: How to sell a house fast in a slow market (7 top tips for the UK)

Reasons why a buyer may pull out after exchange of contracts?

There are many reasons why a buyer may pull out of the transaction after exchange of contracts, which include:

  • An unexpected redundancy making the house purchase no longer affordable.
  • It could be as simple as a change of mind.
  • The necessary funds may not have arrived or the mortgage company could rescind on their mortgage offer, which can happen.

More Reading: How to sell your house quickly for a good price (Plus 7 mistakes to avoid)

I hope this article has helped on can a house sale fail after exchange

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Can a house sale fail after exchange? (What if either party pulls out?)

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