The End of Gazumping in England?
Let specialties be therefore drawn between us,
That covenants may be kept on either hand.
William Shakespeare, Taming of the Shrew
Living and working outside of Canada opens your eyes to what really works at home. This story is illustrative of that. Canadians should be very proud of our efficient contract law system, particularly our tidy standard Agreements of Purchase and Sale that offer property buyers and sellers clarity and certainty on real estate purchases. (One might also add to this list the rational mortgage lending practices of Canadian banks and the mandatory underwriting of high-ratio loans by CMHC). We have good legal and finance systems in Canada that support a relatively accessible and fluid housing supply of new and resale housing. This is something the UK lacks to the point where I think it is a major impediment to the supply of new housing (because someone buying a new property must have certainty that they have a binding deals to purchase the new one and sell their old one!).
To wit – and as a point of great contrast between systems in Canada and the UK – when I ask my English colleagues, “how long do you think it took to get a binding deal on my last property purchase offer in Vancouver?” they invariably give me a questioning answer in the range of “X months?”. Their slack-jawed reaction is always priceless when I tell them, “12 hours from offer submission to binding acceptance!” This is usually followed by much head-shaking discussion on the insanity of the UK property contract law.
I first learned about the discrepancies in our systems from a Canadian lawyer Bob Aaron who posted more than a decade ago a story with the cheeky title “No Gazumping please, we’re Canadian“. It’s a peculiarity of English property law that any agreement to purchase a house or flat (or a development assembly for that matter) in England and Wales will remain open until “contracts are exchanged”. A buyer just does not have any certainty that she or he has a firm and binding deal until the very last minute. A seller can accept a higher bid at any point before contracts are exchanged (the purchaser has been “Gazumped”). More rarely, a seller can reduce their offer, perhaps if they’ve discovered some physical or title defect (the seller has been “Gazundered”).
In Canada, the agreement of purchase and sale is binding at the time the agreement is executed, subject to terms agreed within the agreement (see the APS link above for a sample contract). The other important backstop to these agreements is the legal concept of specific performance, which means that the purchaser must complete on the agreement; if they do not, their liability is not limited to the down-payment. Purchasers who default on the agreements are also liable for any damages and additional costs the seller must bear to re-sell the property.
The Financial and Emotional costs of Gazumping
Invariably, in the chronically under-supplied sellers’ market that has defined London for more than a decade , it’s always the case that buyers get gazumped. Adding insult to injury, the jilted purchaser has probably invested significant sums to inspect the property, review legal documents (land leases and party wall agreements etc.), and to check land titles back to the Norman Domesday Book of 1086!
The lack of a simple, binding purchase and sale agreement is a major frustration in England and I think that it invariably ratchets up the price of property. Somewhere around 18% of British housing purchase agreements collapse – annually, that represents 200,000 agreements on slightly more than a million total transactions – and a major reason is Gazumping.
The emotional toll is expensive too! A colleague of mine recently had to go through months and months of terrible anxiety and uncertainty as she worked her way through the purchase of a flat. Unnecessary stress as the seller vacillated and stalled on the exchange of information and documents to finally get to the final exchange of contracts.
For developers trying to assemble multiple pieces of land for a project, the situation is even more dire because they have to manage multiple offers and lengthy contract negotiations with the same risks that any one of the properties they have put purchase offers on will be Gazumped! The “bone-in-the-throat” land parcel in the centre of an assembly could hold the whole development hostage in the absence of binding agreements of purchase and sale.
The End of Gazumping?
The move to binding agreements and a simplified purchase system may be around the corner with the story reported in the London Telegraph yesterday (photo below). A rational legal purchase and sale system like Canada’s has been in force in Scotland for some time, showing there is some hope for the rest of the UK.