- A contract for the sale and purchase of heritage will typically include provision for situations where settlement is delayed or does not take place. The failure to distinguish between the two has been considered a number of cases commencing with Lloyds Bank v Bamberger 1993.
Critically assess the case law and how provisions in missives should be framed to avoid the problems.
In contracts of sale and purchase of heritage, time is not of the essence by implication, but can be made of the essence by express provision. It is now standard practise for the seller’s solicitor to insist on making time of the essence in relation to payment of the price on, or within a short period following the date of entry. The general rule in Scots law is that time of performance is not an essential requirement. Parties are given a reasonable time to perform their obligations. What is reasonable is determined by the courts according to the individual circumstances of each case.
As seen in the Visionhire v brides trust case, inconvenience can be caused to the seller if there is no compulsion on the purchaser to settle timeously. Another inconvenience to purchaser if seller fails to move. Two reasons for this are delay in performance and non-performance. The similar situation occurred with Mobile Mechanic London. Standard clauses have been created for residential missives, that ought to be acceptable for many transactions. The Combined Standard missives are seen as a ‘first step’ towards greater standardisation. It is necessary to have some sort of provision to deal with non-payment of the price because the common law is unfair to the seller.
These clauses attempt to cover all possibilities and allow the parties to agree on how damages will be calculated however they must be reasonable. This was illustrated in the Dunlop Tyre case; where the damage was agreed to be regarded as liquidated damages and not as a penalty.
Interest is by law from the date of entry if the purchaser is in possession and if the price is not then paid. This rule applies, even when delay is mainly or solely due to the fault of the seller. There is no legal interest but 5% is usual. The rule of interest can be avoided if the purchaser at the date of taking possession, deposits the whole purchase price in joint names of himself and the seller as seen in; Prestwick Cinema Co v Gardiner 1951.
As a result, missives now almost invariably include an express provisions for payment of interest by the purchaser if there is delay in settlement. In the Bowie v Semples 1978 case it was held that a purchaser is not obliged to agree to take entry, and to pay the interest price or interest, until the seller is in a position to fulfil his part of the bargain by delivering a valid disposition. If the purchaser fails to pay the price on the due date through no fault of the seller, the sellers ultimate remedy is to rescind the contract and claim damages.
In the Lloyds Bank 1993 case, the sellers raised an action seeking damages including interest on the purchase price. Their appeal was rejected on the footing that the interest provision was intended to apply only where the contract was being performed and was therefore inapplicable where the contract had been repudiated. Common law damages could still be recovered however. This was affirmed in the Black v McGregor 2006 case.
One way of avoiding uncertainties and disputes in quantifying a claim in damages is for the parties to pre-estimate the loss in a form of a clause of liquidated damages. Liquidated damages are calculated as the amount of interest at the price at 4%. After the result in these two cases, the clause was changed and in its new form, it provided for payment of interest from the date of entry until the date when following rescission, to the price received following a resale.
This is however unsatisfactory as the seller might not want to resell. This clause is not perfect and there is not much sign of a genuine attempt to prestimate the seller’s loss. Viewed in this light, this provision may be at risk of being struck down as a penalty clause.
Finally, you will want to remove uncertainty as to how the contract might be brought to an end and thus exercise the ultimatum procedure. This is where the seller must give notice that, if the price is not paid within a period of that notice, they will hold the purchaser in breach. In many cases, it is unclear whether the breach is material or not.
The method to establish material breach was set out in Rodger (Builders) Ltd v Fawdry 1950. It is simply a notice that fixes a reasonable time for the defects to be remedied; on expiry of the ultimatum, non-performance will make the breach material. The effect of non-compliance with a reasonable notice is to allow the contract to be rescinded.
If the aggravated party delays rescinding the contract and has not given a notice to perform or ultimatum, that party will lose their right to rescind the contract. Of course the loss of right to rescind does not mean the aggravated party is deprived of remedies; the remedy of damages is still available.
A recent case which has reaffirmed the Scottish Law principles that the innocent party can force the repudiating party to adhere to the contract. In the case of AMA (New Town) Limited against R. Law 2013 a property developer sued for payment of the price to be paid for a newly-built property. The defaulting purchaser defended the action and attempted to argue that the seller’s only remedy was to claim damages.
The Scottish Court of Appeal disagreed, noting that Scottish Law had always taken a different approach from that of England, and that it had never been the case that in Scotland the innocent party could be ‘forced’ to restrict their claim to damages by the other party who was defaulting on their obligations. Providing the defaulting party does not have to do anything in order to allow the contract to be completed, then the innocent party is entitled, as a matter of right, to hold the defaulting party to their contractual obligations.