When does a refusal of a further offer from a defaulting purchaser amount to a failure to mitigate?

When a purchaser defaults under a contract for the sale of real estate, the vendor can retain the deposit under the standard terms of the contract for the sale of real estate in Victoria. The vendor can then attempt to re-sell the real estate. When the property market is in uncertain times, the vendor may not achieve the same sale price the second time around.

The contract provides that the vendor can sue the defaulting purchaser for the shortfall on the resale. The vendor must take into account the deposit that has been retained.

The question often arises: "Did the vendor mitigate his or her loss on the resale?"

In the South Australian Supreme Court, this issue arose in circumstances where the defaulting purchaser offered to purchase the property in question for the original price, provided the forfeited deposit formed a part of the purchase price.

The Court was called on to determine whether, by rejecting that offer, the vendor had mitigated her loss, when the property was later sold at auction for less than the previous offer?

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In Murphy v Mitanovski - BC201207009; [2012] SASC 158, the relevant chronology was:

• 14 February 2010: contract for sale of a (South Australian) residential property;
• 2 July 2010: Settlement due; purchasers failed to complete;
• 20 July 2010: vendor served a notice requiring the purchaser to complete the contract;
• 30 July 2010: vendor served a further notice requiring the purchaser to complete the contract;
• Around August 2010: vendor rented out the property to cover some ongoing losses (she had purchased a new home in anticipation of settling the sale of the property);
• 27 August 2010: vendor terminated the contract and forfeited the deposit ($10,000 of $782,000);
• August 2010: property withdrawn from the market;
• 22 September 2010: original purchasers offered to purchase the property for the original purchase price, provided the retained deposit was credited against the price;
• the new offer was rejected;
• late October 2010: property again advertised for sale through a new agent;
• 20 November 2010: the property was sold at auction for $750,000 (a shortfall of $32,000 over original sale price).

The vendor sued the defaulting purchaser for the difference between the original sale price and the price at auction ($32,000), plus costs (including the costs of bridging finance to allow the vendor to complete the purchase of her replacement property), less the forfeited deposit.

Appeal decision

The Supreme Court dismissed the appeal from the original Magistrates Court decision to dismiss the claim.

Proof of loss

The vendor’s loss in these circumstances is the difference between the contract price and the market value of the land at the due date for completion (2 July 2010).

Although there was no direct evidence of the value at 2 July 2010, the court accepted that in this case the November 2010 auction price could be used as such evidence, noting that the value of similar homes does not ordinarily fluctuate significantly over a four-month period.

The purchasers unsuccessfully argued that:

• there was a general decline in real estate values in 2010 ( in other words, the November 2010 price was not a substitute for the 2 July 2010 value);
• the property was marketed for auction as “re-released” and “definite sale”, which contributed to the failure to achieve the best possible price; and
• the purchasers’ September offer of $782,000 suggested that the 2 July 2010 value was $782,000, and so there was no loss suffered. It also suggested that the auction failed to achieve the best price.

Mitigation

White J of the Supreme Court of South Australia held that refusing the purchasers’ September offer was not unreasonable (at paragraphs 50 and following):

… a plaintiff should not be required to accept an offer from a defaulting party if the acceptance would involve a negation or abandonment of the rights which the plaintiff has under the contract against the defendant.

However, the Court found (at paragraphs 58 and following) that the vendor's obligation to mitigate her loss was ongoing and the vendor failed to take reasonable steps to mitigate her loss in and from October by failing to enquire whether the purchasers wished to renew their offer (after the September offer was declined) when the vendor’s agent estimated the property would sell in the range $670,000–$730,000.

In these circumstances, it would have been reasonable for the [vendor] to have instructed [the agent] to enquire whether the [purchasers] were still interested in buying the house at $782,000 and, if so, to provide some evidence of their ability to complete the contract … I think it likely that the [purchasers] would have renewed the offer.

... It is understandable that the appellant had concerns about the respondents’ reliability and financial capacity. It is understandable that she did not wish to experience again the uncertainty and difficulties which had occurred in July in relation to the completion of the contract. However, by October the appellant had already moved out of her home into new premises. Any delays by the respondents would not have caused the personal inconvenience which she no doubt experienced in July.

Relevance in uncertain times

As the property market in Victoria is still uncertain about where it is heading (up or down), it seems that the issue of losses by vendors on re-sale is likely to be tested. In light of this decision, defaulting purchasers will be looking very closely at the circumstances of the re-sale and deciding whether to challenge the vendor's efforts to obtain the best possible price on the re-sale.