Property Buyers: The Danger of Not Doing Your Financial Homework

“Look before you leap” (wise old proverb)

Don’t let the excitement of buying a property blind you to the necessity of doing your homework before you agree to anything. Look before you leap!

It’s not just a matter of buying the right property at the right price – make sure that your finances (and particularly your cash flow situation) won’t stop you from fulfilling the financial obligations your signature on the sale agreement binds you to.

Otherwise, you could find yourself in the same unenviable position as the property buyer recently ordered by the High Court to pay substantial damages after she couldn’t pay the required deposits.

Three sales, and the seller claims damages

• A trust sold a property to a buyer for R750,000.
  
  
• The buyer failed to pay the two required deposits totalling R280,000, the trust cancelled the sale and put the property up for resale.
  
  
• It resold the property for R500,000 and sued the buyer for its R250,000 loss on the sale, plus the estate agent’s commission of R22,500 it paid for the new sale.
  
  
• The buyer fought the claim on a variety of grounds, none of which found favour with the Court. It ordered the buyer to pay, in addition to legal costs on an attorney and client scale, a total in damages of R235,875. That’s a figure seemingly arrived at by the Court by taking into account an amount of R40,000 already paid in by the buyer, which presumably leaves the buyer down a total of just under R280k plus two sets of legal costs.

Important lessons for buyers and sellers 

1. Buyers: Before you sign…

   Of course, the big lesson here for buyers is to make sure they can comply with the terms of the sale agreement they sign, with particular emphasis on their ability to make payments as and when due.

2. And sellers: Before you sign…

   Sellers on the other hand will want to avoid all the risk, delay and cost that the trust in this case was put to by investigating upfront the financial position of all potential buyers before accepting any offer. Make sure also that the terms of your sale agreement protect you adequately in the event of any default by the buyer.

3. Seller: Mitigate your damages
   
   Our law requires that if you want to sue for losses you incur as a result of someone else's breach of contract (or wrongdoing), you must first take reasonable steps to minimise your losses.
   
   As the Court put it: “… the mitigating rule is a rule where a breach of contract has occurred. The innocent party cannot merely sit back and allow their losses to accumulate; the party must take reasonable positive steps to prevent the occurrence or accumulation of losses. The rule does not require the innocent party to do anything more than a reasonable person could do under the same circumstances. Reasonable expenses incurred in carrying out the mitigation steps may be claimed as additional damage suffered. The onus of proving what steps could reasonably have been taken, or that the expenses incurred were unreasonable, rests on the party in breach.” (Emphasis added) 
   
   As the seller, therefore, be sure to actively seek alternative buyers, use professionals to assist only as reasonably necessary, and accept only a reasonable resale price. In this case the evidence had established that the trust had acted reasonably both in reselling the property at the price it did, and in using the services of an estate agent to do so.

As always, agree to nothing without professional advice!