In the unlikely event your house sale falls through after exchange of contracts you may be wondering who gets the deposit? If at any point during the period between exchange of contracts and completion, if either party pulls out, the party that pulls out will be in breach of contract.
So if a house sale falls through who gets the deposit? If a house sale falls through after exchange of contracts it will be the party who’s not in breach of the contract that gets the deposit. Which means if the buyer is in breach of contract, the seller can keep the deposit. Whereas if the seller is in breach, the deposit should be refunded to the buyer.
The deposit on exchange is normally 10% of the contract price. The deposit funds will pass between the client account of the buyer’s solicitor and the client account of the seller’s solicitor.
In England and Wales either the buyer or the seller can pull out at any stage before exchange of contracts. There aren’t usually any financial consequences of pulling out before contracts are exchanged. However, each party will have incurred and will have to pay their own legal costs up to that point.
What are the three stages of a house sale in England and Wales
In the UK, well in England and Wales that is, a house is only truly sold when the contract is completed. There are usually three stages in the house sale in the England and Wales, as follows:
- Offer is made and accepted. Sale can still fall through for many reasons. Before contracts are exchanged the buyer or seller can pull out without financial consequence. However, each party will be responsible for their own costs incurred up to the point the other party pulled out.
- Contracts are exchanged. At this point it’s common practice for a 10% deposit to change hands and for a completion date to be set. The completion date can be the same as the date of exchange. But this is usually 30 days from exchange of contracts. In theory a house sale can still fall through during the exchange to completion period, but it’s uncommon. If the buyer pulls out once contracts have been exchanged, they stand to lose the 10% deposit. They may also suffer costs.
- Completion date. This is the date when all the funds for the agreed offer price are paid over to the vendor (or seller of the house). The house sale is complete at this point in the process.
If your buyer pulls out before exchange of contracts, there’s not much you can do about this. For example, pulling out of a house sale after the survey does happen. This is particularly true where something has been picked up on the survey.
Similarly, after an offer has been accepted on your house you can still back out. But usually not once contracts have been exchanged.
But what happens if a buyer pulls out after exchange of contracts?
What happens if a buyer pulls out after exchange of contracts?
It’s unlikely that your house sale will fall though. But this can happen because the buyer has changed their mind or if they have exchanged contracts but can’t complete. In this case it’s usual for the deposit to be forfeited by the buyer to be kept by seller.
In addition to the buyer loosing their deposit at this stage in the buying process, they may also be liable to pay damages to the seller too. If this has happened to you, your solicitor will be in a position to explain what to do.
Whilst it might be inconvenient if your house sale falls through, it does have one huge advantage. Let’s say you’ve just sold your house for £250,000. The deposit involved would be £25,000. In this case you are usually able to keep this deposit of £25,000. This is of course assuming the contracts of exchange allow for this, which they normally do.
You can then put your house back on the market for £250,000 and bank the £25,000. Not such a bad position to be in.
However, what the above scenario doesn’t take into account is if you are also buying another house at the same time. If your buyer can’t complete on the purchase of your house after they’ve exchanged contracts with you, this will have a knock-on effect making it difficult for you to complete as well. If you are not able to complete, you will also lose your deposit.
You have two options to avoid the risk of losing your deposit, which are:
- Find another buyer: If you have already exchanged contracts, and if the gap between exchange and completion is the usual 1-2 weeks, you won’t have much time to make this happen. We might be able to help if you contact us sooner rather than later.
- Sell and rent first: This solution only works if you’re not already in a conveyancing chain. Or if exchange hasn’t already happened. I recommend you take a quick read of this article to understand there are 15 advantages to selling and renting first. What are the advantages of selling your house and renting before buying again.
- Exchange and complete on the same day: There are a number of advantages of exchanging and completing on the same day. To understand the benefits, I’ve put together an article. Definitely worth a quick read: Advantages of exchange and completion on the same day.
More Reading: What to do if your house sale has fallen through twice
What happens if a seller pulls out after exchange of contracts
If a seller fails to complete after exchange, the deposit may be refunded to the buyer. So in this case the buyers would get the deposit money back. The seller may also be liable for financial damages at this stage too.
Having said that, it may be too late for the seller to pull out in any event, as an exchange of contracts is a legally binding contract in England and Wales.
If this has happened to you as a buyer of a house, you’d need to speak with your solicitor about what rights you have.
Who holds the deposit on exchange of contracts?
On exchange of contracts your solicitor will hold your deposit in their client account. Your deposit is only released to the vendor on the day of completion, unless for whatever reason the sale falls though.
But if you decide to pull out of the sale after exchange of contracts, you are likely to forfeit your deposit.
Pulling out of a house purchase before exchange
In England and Wales you’re within your rights to pull out of a house purchase at any time before exchange of contracts usually without recourse to you.
Issues often arise leading up to exchange of contracts that cannot be resolved or buyers have second thoughts on the property, but in either case you are better to pull out before exchanged of contracts.
Please don’t forget to read this before you leave…
Please don’t forget to also read this article to discover how you could save £71,475 on your next mortgage if you sell your house and rent before buying again. As I said earlier, even I was amazed when I did the calculations!
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