The coronavirus clauses were developed by the Ministry of Housing Communities and Local Government and the Home Buying and Selling Group to deal with the disruption caused by the pandemic, but are not widely known about.
It means that if an agreement is put in place between a buyer and seller before the exchange of contracts, should either party be unable to complete because of Covid-related issues they can avoid the substantial financial penalty that is normally payable.
But homebuyers will only know about the clauses if their conveyancer explains the new options and an agreement must be reached before contracts are exchanged.
Beth Rudolf, director of delivery at the Conveyancing Association, (pictured) said: “Home movers should ask their property lawyer about the opportunity to include in the contract clauses that deal with the issues created by Covid 19.”
Under the temporary rules if a buyer or seller has exchanged contracts but is unable to complete the transaction on the completion date, then completion can be delayed or cancelled. Neither party would be liable to pay the ten per cent deposit in compensation normally due under the terms of a standard purchase agreement.
The clause can only be used under certain pandemic-related circumstances. These include the need to comply with government restrictions, being hospitalised, the withdrawal of a mortgage offer in the chain or a change in the financial position of one of the parties, which causes the chain to collapse.
Both the buyer and seller must agree for the clause to be included in the contract, before exchange takes place. If an agreement is not made, the standard rules apply.
The withdrawal of a mortgage offer post exchange is rare. But when it happens families in a property chain can legally be left penniless through no fault of their own.
Mortgage Solutions’ sister website YourMoney.com published a blog by Unbiased.co.uk that highlighted the devastating effects a mortgage offer withdrawal can have when it told the story of Abdus and his family who were in the middle of a property chain that collapsed.
The family had exchanged contracts to buy a larger home and at the same time they had exchanged with the first-time buyer purchasing their property. But before completion could take place, Santander withdrew its mortgage offer to the first-time buyer, and the whole chain collapsed.
Mortgage offers have been legally binding since 2016, when the European Mortgage Credit Directive was implemented.
However, banks still have the right to rescind an offer under certain special conditions, commonly referred to as a material change in facts, for example if the borrower loses their job. An offer can also be withdrawn if fraud is detected or if issues related to the property have arisen.
It cannot be withdrawn because the bank has changed its risk appetite and no longer wants to lend to the borrower.
Once contracts are exchanged, in standard agreements buyers (and sellers) are legally obliged to pay a ten per cent deposit to the injured party if they are not able to go through with the transaction.
The family were pursued by the vendor’s solicitor for £66,000 and were only able to collect £33,000 in compensation from their first-time buyer. They faced using their life savings to make up the difference.
Santander could not reveal the reason it withdrew its offer, but Mortgage Solutions understands the decision was not linked to the Covid-19 pandemic, nor a change in the bank’s criteria post offer, but based on the individual circumstances of the case.
Paula Higgins, chief executive of consumer group Homeowners Alliance, said: “We are concerned that lenders can withdraw offers after exchange. They should be required to honour their offers and if they wish to withdraw, to pick up any costs incurred by their client.”
A spokesperson for Santander said: “It is extremely rare for a mortgage offer to be withdrawn post-exchange, this would only be done in exceptional circumstances to comply with our legal and regulatory obligations, which extend beyond ensuring the mortgage is affordable. While we are deeply sorry for the distress caused to the parties in the chain, the decision to withdraw the offer was the correct one.”
Nick Morrey, product technical manager, John Charcol, said bridging finance would be an option to explore if the family wanted to proceed with the purchase, but there were many factors to consider.
“The bridging lender will want to place a legal charge, like a mortgage, across both the property being purchased and their current home to make sure there is plenty of equity available to them,” he said.
“Most bridging loans have to be repaid within 12 months so families need to consider how they will pay back the debt in such a short space of time. The sale of their existing home may not be enough to clear the bridge which means they would have to remortgage their new house and release equity to hand back to the bridging lender.”
Early repayment charges linked to the mortgage on the new property may apply.
Calls for change
Since the family’s story was published, Nationwide upped its mortgage offer to Abdus so the family could buy the property. Although his own home is still not sold, he said the situation will soon be resolved. “Nationwide has been our angel,” said Abdus.
If Abdus had not been rescued by his lender, he would have had to part with his life savings to pay the compensation. The Covid contract clauses would not have protected him because it is understood that Santander’s decision was not related to the pandemic.
Despite being able to move home, the stress has taken its toll on Abdus and his wife and he is calling for reform.
“I know circumstances like this are rare but you can see how damaging it can be when it happens,” he said. “There should be change. Contracts should not be exchanged without confirmation from the solicitor that funds are available. You should not be able to exchange only to find out later, the money is not there to complete on.”
MHCLG said it expects buyers and seller to behave reasonably where transactions have been interrupted by the pandemic so that chains can continue.
Buyers and sellers are advised to speak to their conveyancers about how the clauses can help them to minimise disruption caused by the pandemic. The government said there were no plans to offer a compensation scheme for families who had been forced to pay the ten per cent deposit because their chain had collapsed.
Rudolf said: “It is very rare that transactions do fall through after exchange of contracts and our sympathies naturally go out to anyone caught out by a situation like this due to matters outside of their control.
“If you cannot use the Covid-19 clauses, the best way to avoid it – if you have a house to sell to fund the purchase – is to consider ‘chain breaking’ so that your sale goes through independently and before your purchase. Many people cannot do this because it means moving out into temporary accommodation, so it is understandable they have to take the risks of a related sale and purchase.”
To find out more about protection against chain collapses post exchange because of the pandemic, contact The Home Buying and Selling Group or tell your clients to discuss the issue with a solicitor before the exchange of contracts.