On Monday Julie took part in a Facebook Live session with local property agent Melanie Attwater to discuss moving during the COVID-19 crisis (see more about the guidance on Julie’s recent blog).
Watch Julie speaking about moving during the crisis:
Julie answered some simpler questions during the Facebook live, but there was one that went into a little more detail so we thought it would be helpful to talk about it here on our blog.
Question from Tony who exchanged contracts and now mortgage funding may not be available in time for the contractual completion date:
Hi Julie. My query is: we exchanged contracts on a property about 6 weeks ago. We complete the purchase on 30 April 2020. Part of the funding for our new house is being raised by properties we already own (re-mortgaging).
Since the lockdown has been enforced we have not been allowed to get a surveyor to visit our property, even though the fees for this have been paid (so our mortgage offer could be granted). We know the money to be raised is available within the value of our rental property.
As a consequences we have the funds in place to complete the purchase, but do not have the stamp duty figure (as this was being raised from the investment property). We are going to continue with the completion and sort out the stamp duty at a later date.
Have you experienced this before?
- Tony
Answer from Julie West specialist property solicitor
Hi Tony,
You’re in a tight spot here. In effect you’re in a chain, because you’re relying on another transaction, the re-mortgage, to fund the purchase. Fortunately, you have a reasonable interval between now and completion to try and find a way forward.
Where a mortgage application is held up because physical property valuations have stopped, and you need the mortgage to pay the stamp duty land tax (SDLT) due on an already exchanged purchase, this is what I would advise:
Negotiate to postpone completion Investigate whether your seller will agree to postpone the completion date until the COVID-19 emergency is past, and normal lender processes are restored, to give you time to sort out your funding as originally planned. You can’t insist on this, it’s a solution that relies on goodwill and mutual co-operation, but it’s what the government guidance asks everyone to do.
Vary the contract terms If you can agree to defer completion, the contract would need to be formally varied, to incorporate the so-called “COVID-terms”, making completion conditional on your giving notice to the seller when the current restrictions are lifted and when funds are available from your re-mortgage. No-one can predict how long the lockdown will apply, therefore the contract would probably be made subject to a long-stop date, after which either party could end the contract without penalty. Your solicitor would deal with this.
Investigate alternative finance If the seller won’t agree to defer completion, start investigating alternative finance now. Some lenders are introducing desktop valuations on some properties in place of physical valuations. Ask your mortgage broker to check out whether you can apply to another lender, perhaps in parallel with your existing mortgage application.
Explore a bridging loan Investigate whether you can get a short-term bridging facility with your bank to tide you over. This is usually a costly option, but you may find the bank is making special arrangements to help its customers. Depending on the amount of the SDLT bill, you may be able to arrange a (possibly cheaper) ordinary unsecured loan.
Find out whether seller will suffer consequential loss Find out what impact, if any, delayed completion will have on the seller, what is the likely consequential loss? If the seller was just going to bank the sale proceeds there is minimal consequential loss. If the seller needs the sale proceeds to fulfil other contractual obligations which, if broken, will incur financial loss, this could increase your exposure, because it would increase the amount the seller could claim from you for breach of contract.
Play for time – complete late If you need to play for time, and there is minimal risk of consequential loss, you can elect to complete late. Your deposit is not at risk until the seller serves a formal notice called a “notice to complete” making time of the essence. This could buy valuable time, but will be uncomfortable. It’s rare. You would still be liable to pay interest for late completion. Not an approach for the faint hearted, but it could gain you (usually) ten days to get the funds together a different way.
Interest for late completion If you delay completion, but the transaction does eventually go through, and the seller suffers minimal or no consequential loss, you would have to pay interest on the balance of the purchase price outstanding, at the contract rate (usually 4% or thereabouts) for each day that you are late. A strategy to mitigate this, would be to pay over the purchase price to the seller’s solicitor but on the basis that it is held by the solicitor as “Stakeholder” pending formal completion. The seller must then offset the interest earned on the money against the interest payable.
Other remedies – forfeit deposit If you delay completion the seller must decide whether to hold on, to give you time to find the rest of the money you need, or to end the contract. If the contract is ended, the seller may pursue other contractual remedies, the most well-known of which is to keep the deposit.
Failure to complete – other remedies. If the market falls, and property values generally fall, you may not be able to borrow as much from the re-mortgage as you planned. If the property eventually sells for substantially less, there is a risk the seller could sue you for the shortfall, being the difference between the price you were going to pay, and the price he eventually sells for. In normal conditions this is a very rare event. In present circumstances it is a definite risk. In this worst-case scenario, you would be considering the nature and financial standing of your seller. Does the seller have deep pockets and is the seller likely to pursue you through the courts to recover every penny? Most sellers have neither the financial resource nor the appetite to embark on costly litigation, but you can’t bank on it.
Complete but defer SDLT payment So as you have enough money to complete, and are only short of the money to pay the SDLT, then having exhausted or discounted all the above, I would advise you to complete your purchase. You must file a land transaction return and pay the tax within 14 days of completion. You will be charged a penalty of £100 if the return is filed late, and after three months the penalty doubles. In addition, penalty interest is charged by HMRC from the date 14 days after completion until the date of payment. As the current penalty interest rate of 2.75% is lower than the contract rate, usually 4.5%, you’re better off owing HMRC if you’re unlikely to raise the funding you need for some time. You will at least have secured the property, and your solicitor will be able have your name entered on the registered title.
SDLT pay what you can To reduce the late payment interest due to HMRC, I would advise you to pay whatever you can towards the full amount of SDLT due.
Mitigating circumstances I suggest you also get your solicitor to write to HMRC, to set out the reasons for late payment. It’s too early to say whether HMRC will regard the disruptive impact of COVID-19 on re-mortgage completions as mitigating circumstances, or whether it will be able to waive late payment of SDLT penalties, but it’s got to be worth a try. If you exchanged contracts well before the government issued its guidance to the home move industry on 26 March 2020, you can fairly say that you could not reasonably foresee lockdown or its impact on residential property transactions, and that the delayed SDLT payment arose as a consequence of government policy.
In normal times your solicitor’s role is to get you safely into your new property with minimum risk and maximum certainty. This is very difficult to achieve currently, because every aspect of the process of buying and selling residential property is volatile. This is why the government is asking all involved in the property industry to work together, and defer completions, wherever possible.
Thank you for putting this question, it highlights how fragile lender’s processes are in the current COVID-19 lockdown. Well laid plans come unstuck, leaving buyers at risk of significant financial loss. Parties to residential property transactions need to proceed with great caution.
The best and safest transactions of all at present, are those that are not dependent upon any other transaction.
Julie West