The completion period of a typical Sale and Purchase Agreement (“SPA”) transaction usually takes about 3 months from the date the agreement was stamped. In the event that the balance purchase price is not paid within 3 months, an extension of 1 month (with late interest of 8% per annum) is normally given to the purchaser in order to complete the sale transaction.
However, what happens if the seller, rather than the buyer, delays the completion of the sale transaction?
The ‘standard’ SPA usually does not penalize sellers in delaying the completion of the transaction but merely extends the completion date for the buyer. As an example, a ‘standard’ SPA agreement clause will state the following:
“Any delay by the Vendor in fulfilling his/hers/their obligations and responsibilities and in forwarding any documents as requested by the Purchaser’s solicitors or the Financier’s solicitors within fourteen (14) days from the day of requesting the same shall cause the Completion Date or the Extended Completion Date (whichever is applicable) to be extended accordingly subject to any other terms and conditions of this Agreement.”
From the buyer’s perspective, the buyer would have paid the down payment of 10% of the purchase price, legal fees and deposited the stamp duty payable on the property, the differential sum (if any) and the redemption portion of the buyer’s loan may have already been disbursed to redeem the property from the seller’s financier. At that point, the buyer’s loan interest instalment starts to kick in. In short, due to the seller’s delays, the buyer may find himself having placed cash down and possibly having to pay the bank interest, and yet not being able to complete the transaction and take vacant possession of the property.
What could be the reasons for a seller to delay the completion of the sale transaction?
Some reasons include the seller or the seller’s financier being unable to locate the original title or documents, the seller’s financier being unable to or is excessively delaying the execution of the discharge documents, the developer or liquidator is unable to or is excessively delaying its confirmation, the seller is unable to or is excessively delaying the fulfilment of the developer or liquidator’s terms in their letter of confirmation that may contribute to the property being unable to be handed over within the sale transaction period. Some sellers even take liberties of negotiating with the developer or the management office to reduce the administrative charges payable.
What can a buyer do to prevent such delays by the seller?
There are some clauses that can be negotiated and put in the SPA to deter such delays by the seller, for example:
- To provide the seller an additional grace period and imposing late interest on the seller – for instance, if the buyer’s financier has settled the vendor’s loan and is pending the discharge documents. A typical duration for the vendor’s financier to release the documents to the solicitors is within 14 days (however, you may suggest to perhaps provide a grace period of 21 days to the seller) and anything beyond the period, you may also suggest to include late interest. Late interest payable by the seller for delays exceeding that grace period, like how a buyer will need to pay late interest for exceeding the 3 months completion period.
- To terminate the transaction – if the seller is still unable to fulfil his/hers/their obligations and responsibilities within the completion period, the buyer may terminate the transaction if the seller excessively delays the transaction. The buyer may suggest if the seller’s delays exceed 6 months, the buyer may terminate the transaction. By stating this, it will create more certainty rather than relying on termination based on ‘unreasonable delays’, when ‘reasonable’ is not clearly defined.
- To obtain early vacant possession pending completion of the transaction – if the redemption sum has been disbursed by the buyer’s financier to redeem the property from the seller’s financier and the buyer’s interest instalment starts to kick in, it might be an unfair burden on the buyer to pay for both the interest instalment loan and rental for the buyer’s current accommodation. As a buyer, you can negotiate with the seller to deliver early vacant possession pending the completion of transaction or if the delays attributable to the seller exceed a certain number of days.
Besides the abovementioned, if the seller further delays the transaction for more than a certain period of time, there is a clause in the SPA i.e. “seller’s default”, which allows the SPA to be terminated by the buyer. The remedies that the buyer may seek for is either for specific performance or terminate the agreement by giving notice in writing to the seller, i.e. all payments including the 10% down payment, the differential loan and any other payment that the buyer has paid to be fully refunded by the seller. However, in a ‘standard’ SPA, such period is not usually defined and therefore will create uncertainty and difficulty to determine what unreasonable delay is and how long a period can be considered as unreasonable delay or when the seller can actually terminate.
It is worth mentioning that the various possibilities described above should be negotiated right from the start, during the drafting of the SPA. It is likely that such proposals will be met with some ‘resistance’ from the seller and/or their lawyer as, for better or worse, it is not yet ‘standard practice’ to do so.
This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the corporate practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.