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seller goes bankrupt between exchange of contract and completion

jv13 Offline Mute
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17-09-2013,06:24 PM
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seller goes bankrupt between exchange of contract and completion

Hello all. Is there anyone familiar with interaction of property purchase and insolvency law?
I am buying a flat and would like to know what would happen in the hypothetical case that the seller goes bankrupt between exchange of contracts and completion. Is good title deemed to have passed on exchange, with completion representing payment by instalments? Or does title only pass on completion? If my maximum exposure to the Seller going bankrupt in this time period: a) nil b) exchange deposit amount or c) total purchase price that I have agreed to pay by completion date in an? If answer is b) or c) how can I protect myself, other than by shortening this period?

To complicate the story, there is also the lease extension involved. The exchange deposit is only half the value of the lease extension premium. The seller has no funds and will rely on completion moneys to pay for the lease extension. How can I protect myself against the scenario of the seller becoming bankrupt between completion date and the date of the freeholder signing the lease extension?
Thank you in advance for your help.
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Vanessa Warwick Offline Mute
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17-09-2013,06:57 PM
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RE: seller goes bankrupt between exchange of contract and completion

Hi Vijay,

Regardless of the sale, you should be aware that, if a vendor goes bankrupt, the sale can be unravelled up to SIX years later if the insolvency practitioner deems that the property was sold for less than market value i.e. that creditors were cheated out of equity.

I imagine if the seller went bankrupt at any time during the sales process, everything would be frozen.

If you have any suspicion whatsoever that the vendor is in a vunerable financial position, you should walk away from the deal imho.

Read BMV Bombshell for further information.
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jv13 Offline Mute
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17-09-2013,09:49 PM
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RE: seller goes bankrupt between exchange of contract and completion

Thank you Vanessa. No inkling of bankruptcy at all. Property purchase is for fair market value. I was just trying to understand my credit risk : a) for curiosity and b) because I am a risk averse guy.
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Vanessa Warwick Offline Mute
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17-09-2013,09:58 PM
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RE: seller goes bankrupt between exchange of contract and completion

Okay Vijay, very sensible to check in any case.

I have contacted Richard Spencer, a property conveyancing solicitor, to draw his attention to this post, and hope that he will be able to respond your question to give you a definitive answer.
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richard_spencer Offline Mute
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18-09-2013,12:07 AM
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RE: seller goes bankrupt between exchange of contract and completion

Vijay

Good question - this happened on a deal I worked on. There is obviously nothing you can do to stop the bankruptcy but you probably won't lose your deposit.

This is a risk for those doing 'delayed completions', especially where the investor enters the property on exchange and carries out works to the property. If the seller is made bankrupt between exchange and completion, the buyer could lose the deal and not recover money spent on the property.

If there is a sole owner who is made bankrupt, the property automatically vests in the trustee in bankruptcy. The TiB may be willing to continue with the sale to you or may choose to sell to a third party. If he is willing to sell to you, the TiB signs the transfer.

The position is slightly different if there is more than one owner and only one owner is made bankrupt. The TiB may need a court order to force the sale through.

When you exchange contracts, the seller's solicitor usually holds the deposit as stakeholder, meaning he can't hand it to the seller until completion takes place. If the seller is made bankrupt before completion, the deposit should be safe from the hands of the TiB. On delayed completions, some investors allow the seller to have the deposit - this is always at the investor's risk!

In your case, I trust your lawyer will ensure that the seller serves a Section 42 notice for the lease extension and assigns this to you on completion.

All of the above is obviously for information only and cannot be relied on by anyone. You should ask your solicitor to advise you before you proceed.

Good luck with the purchase.

Regards

Richard
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jv13 Offline Mute
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22-09-2013,10:26 PM
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RE: seller goes bankrupt between exchange of contract and completion

Thank You Vanessa & Richard for the very clear guidance.

Incidentally, my solicitor is not planning to go down the S 42 notice route, although that may save me some stamp duty. Instead we are trying to get agreement that either my or the seller's solicitor will route the lease premium amount direct to freeholder's solicitor, or my solicitor will keep a retainer equal to the lease premium until the lease extension, signed by the freeholder, is provided by the seller.
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