Due to a variety of reasons, a buyer may not be able to complete a property sale transaction and may have to cancel the sale deal at the last moment. However, can the seller drag the buyer to a court of law and get a decree to make him go through the sale? We try to find answers to this complex legal question in this guide.
Legal recourse for the seller if a buyer backs out
A seller can file a civil suit for specific performance and make a buyer comply with the rules of the contract in case a buyer backs out due to an ill-will or to disturb the seller.
What is suit for specific performance?
Under the law of contract in India, specific performance is a remedy. When a suit for specific performance is filed against one part based on the terms and conditions mentioned in a contract and the court declares such suit to be of merit, the defaulting party is obliged to the specific act. They are liable to pay damages and penalties. In a suit for specific performance of a contract, the plaintiff may claim compensation for its breach in addition to such performance.
In a suit for specific performance, the plaintiff must allege and prove a continuous ‘readiness and willingness’ to perform the contract on his part from the date of the contract.
When can a buyer cancel a sale deal?
The court might rule in favour of the buyer if they are unable to go ahead with the deal due to genuine personal or financial reasons.
In case of serious defects in a property
Sale agreements have a clause that provides the buyer the legal right to back out of a property deal if a serious defect is found in the property after a technical verification. Buyers applying for a home loan do not have to hire professionals since the bank sends its team of technical experts for the technical verification of the property. Buyers who are not applying for a home loan recruit professionals to find out if there are any structural issues. In case something comes to light, the buyer has the right to back out.
If a seller breaches the contract
In case a seller breaches the contract in any manner or form, a buyer can end the contract. For this, they cannot be sued. Even if a suit is initiated, the court would either dismiss the suit or rule in favour of the buyer.
If the bank rejects the home loan application
In case the buyer is using housing finance, they can use a contingency clause in the agreement, stating that the completion of the deal will depend on the lender approving the loan application. The bank can reject a borrower for various reasons, including his creditworthiness or problems with the property valuation. If the technical appraisal by the bank’s representatives, for instance, determines that the property value is lower than the deal value, the lender would reject the loan application.
If the buyer is unable to arrange the down payment
Last-minute impediments in arranging funds could spoil the deal. If a buyer is selling his property to buy the new one and if he is unable to complete the deal within the stipulated timeline, the seller can forfeit the token money but he may not sue the buyer for opting out of the deal.
If a buyer is protected by an indemnity clause
The indemnity clause within the sales agreement confirms that the sellers assert the accuracy of all provided information and affirm their unencumbered ownership of the property. Additionally, the sellers undertake the responsibility to compensate the buyer for any financial losses incurred due to disputes arising regarding the property’s ownership. In case there is a breach on that front, the buyer is free to back out.
When can a seller take a buyer to court?
Depending on the stage of the transaction and the type of default, a seller could drag a buyer to court.
After the buyer and the seller have agreed to enter into a sale
The initial stage of a property transaction is the verbal agreement between a buyer and a seller. Since no contract is signed and no money has been exchanged at this point, neither the buyer nor the seller has any right to take either party to court, demanding specific performance.
“It is if a property deal falls through at this stage. While some time, energy and effort are lost due to the buyer not being able to proceed with the sale, the law cannot be involved at this point because everything is verbal and no contract is in place,” says Brajesh Mishra, a Gurgaon-based lawyer with specialisation in property law.
After a buyer has paid the token money to a seller
In India, it is a common practice for the buyer to give a token amount to the seller as a gesture of goodwill and trust.
“A buyer pays a part of his down payment for the property as the token money, in case he is buying the property from a developer. So, if a buyer plans to pay Rs 10 lakh from his pocket for the purchase of a property that is worth Rs 50 lakhs, he would typically give the developer Rs 1 lakh as the token or booking amount,” explains Gaurav Singhal, a Delhi-based property broker.
In case a buyer is unable to move forward with the sale after they have given the token amount, they will have to let go of this money. It would be considered the cost of inconvenience caused to the seller.
After the sale agreement is registered
An agreement to sell is executed and registered after the buyer and the seller reach a verbal agreement about the future sale and want to formalise the process. The sale agreement is the first of the many documents that are executed through the property purchase cycle. An agreement to sell must be registered for legal validity. This means that once an agreement to sell is registered, breaching any terms and conditions would amount to a breach of contract.
“According to the Indian Contracts Act, 1989, the parties to a contract must either perform or offer to perform their respective promises. Breach of contract is the failure to deliver on a promise made through a legally valid contract. It is a violation of the agreed-upon terms in a contract. This failure to deliver a promise or violation could be due to ill intention of the party due to prevailing circumstances,” explains Prabhanshu Mishra, advocate, Lucknow High Court. Section 73 of the Indian Contracts Act describes the compensation for loss or damage caused by a breach of contract. The seller can file a suit for specific performance in a court of law.
At this point, a significant amount of money is paid to the seller as the advance payment for the sale price. Most sale agreements have a condition that the seller will have the right to forfeit any advances if the deal falls through due to an issue arising from the buyer’s side.
After the sale deed is registered
A sale deed is a key document through which the right in a property is transferred from one person to another. After a sale deed is duly registered, the sale process is complete. Even though a sale deed can be cancelled based on a variety of factors, a registered document can only be cancelled with the consent of all parties concerned, the seller included. This means that the buyer alone cannot proceed with the sale deed cancellation. As a result, the need to approach a court of law would not arise in such a case.
Housing point of view
Home sale is no easy feat and involves a complex legal and financial process. Hiring the services of professionals – lawyers, chartered accountants and property brokers – is crucial.
Be alert at the time of buyer screening. In case of any red flags, do not proceed with the sale. Once a matter reaches court, you would end up spending several years fighting a legal battle, wasting time, money and energy.
FAQs
What is a sale deed?
A sale deed is a legal document through which a property is transferred from one person to another. A sale deed is executed when the buyer pays a due price for the property to a seller.
What is a sale agreement?
A sale agreement is executed when a buyer and a seller agree to a property sale. The agreement sets the terms and conditions of the future sale, based on which a sale deed is executed.
Can a sale deed be cancelled?
Yes, under the Specific Relief Act, 1963, a sale deed can be cancelled within three years of its execution based on the grounds prescribed in Sections 31-33.
What is a contract?
According to the Indian Contracts Act, 1989, all agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object and are not expressly declared to be void.
Can a seller cancel a property deal?
Yes, a seller can cancel a property deal.
What can a buyer do if the seller backs out?
If a seller backs off from a property deal, the buyer can file a suit for specific performance in the courts of law.
| Got any questions or point of view on our article? We would love to hear from you. Write to our Editor-in-Chief Jhumur Ghosh at jhumur.ghosh1@housing.com |
