While the exchange of contract makes a property transaction legally binding, a house sale isn’t guaranteed until the day of completion. While the time between exchange is typically 28 days or less, matters can sometimes go wrong between these key stages in the property selling process.
Homeowners opt to sell for several reasons. While they might seek to move down or up the property ladder, in some cases they can no longer afford where they live. When property owners face difficulties paying their mortgage payments, it’s common for them to have other types of debt. In such circumstances, their creditors have the option to petition for them to be declared bankrupt.
In this article, we look at what happens if a buyer or seller goes bankrupt before completion. Read on to understand your rights when you’re involved in a property sale that fall through because of bankruptcy and the actions you can take.
What happens if the seller goes bankrupt?
If a seller is made bankrupt before completion, they lose power over their property. Control is transferred to a Trustee appointed by the Official Receiver. The Trustee organises the bankrupt seller’s assets to repay their creditors. This usually involves selling their house to recoup its value and cover the costs and debts of bankruptcy.
When contracts are already exchanged, the sale is put on hold until the bankruptcy process is complete. The Trustee can then decide to continue with the sale or refuse to continue.
However, buyers can choose to apply for an order of specific performance from the court forcing the Trustee to complete the property sale or claim for financial loss as a creditor in the bankruptcy.
If the property sale is a “transaction at undervalue” and deemed by the court to have been undertaken to avoid creditors reclaiming debts, the court may void the sale. For instance, if a homeowner has a failing business and fears they may face bankruptcy, they may sell their property for a minimal amount to a relative, so it is no longer an asset.
However, if the buyer purchased the house for market value and in good faith with no notice of a pending bankruptcy petition, the property transaction may still be considered valid.
Buyers entering a property sale are advised to always seek support from professional solicitors who will act in their best interests. A qualified conveyancer will ensure buyers have protection in place should problems arise between exchange and completion.
If the buyer goes bankrupt
When a buyer is declared bankrupt before completion, whether the sale will continue is the Trustee’s decision. In practice, the appointed Trustee is often unable to continue with the transaction as the buyer’s mortgage offer is typically withdrawn by the lender when the bankruptcy order is made.
However, if the Trustee doesn’t continue with the property sale, the house seller has options. They can sue the bankrupt buyer’s estate to recover any financial losses that they have incurred because of the sale failing to complete. They also have the right to serve the Trustee with a “Notice to Complete” to force them to go ahead with the sale.
A further concern for the trustee is when the sale has not completed but contracts have been exchanged, as this can mean the loss of the deposit paid by the buyer who is now bankrupt. This is because the seller is generally allowed to keep the deposit. In circumstances where it can be proved that a seller took payment, whether it was the full purchase price or deposit from a buyer in the knowledge that they were facing bankruptcy, they can be forced to repay moneys to the Trustee.
It’s worth noting that if the sale price of a house reflects a fair market value, the seller is not typically under a duty to investigate the buyer’s solvency.
Do you need the help of a qualified conveyancer?
Providing conveyancing in North Wales, at Bennett Smith Solicitors, we have extensive experience handling the complexities of property transactions. Whether you are a buyer or seller, you can count on our qualified team for expert legal guidance and support at every stage of the home buying or selling process. Connect with our solicitors today and let us know how we can help you.
