Liability for breach of property contract after completion
Liability for breach of property contract after completion

The following Property practice note provides comprehensive and up to date legal information covering:

  • Liability for breach of property contract after completion
  • The general rule
  • Exceptions to the general rule
  • Non-merger clauses
  • What remedies are available for breach of an obligation which has not merged?
  • Post completion obligations
  • Conditions which become operative on completion
  • Alternative post completion remedies

This Practice Note considers when contractual obligations merge on completion of a property contract and remedies that may be available after completion.

For contractual remedies in relation to property contracts generally, see Practice Notes:

  1. Specific performance of property agreements

  2. Notice to complete

  3. Termination for breach of property contract

  4. Repudiation of property sale contracts

  5. Return or forfeiture of a deposit

  6. Misrepresentation, misstatement and non-disclosure in property matters

  7. Rectification—mutual mistake, and

  8. Rectification—unilateral mistake

The general rule

At common law, there cannot be two agreements that cover the same ground. When a contract is completed by deed, insofar as they cover the same ground, the provisions of the contract merge into the completed deed and the terms of the contract are discharged. For example, a contract for the sale of land merges into the transfer or conveyance and a contract for an agreement for lease merges into the lease.

This means that following completion the parties cannot bring an action for breach of a contractual provision which has merged into the deed—as from completion the rights of the parties are entirely governed by the completed deed.

Exceptions to the general rule

The common law rule does not apply to contractual obligations:

  1. which are kept alive by a ‘non-merger’ clause which provides that the provision will not merge on completion (see section below: Non-merger clauses)

  2. to give vacant possession. The obligation remains

  • actionable after completion (regardless of whether the contract contains a non-merger clause)

  • in respect of matters which are collateral to the contract for sale and are not covered by the deed. In Lawrence v Cassel the contract for sale obliged the seller to build the house in a workmanlike manner. Following completion defects in the building works became apparent. The transfer contained no reference to the building works. The Court of Appeal allowed the buyer’s claim for breach of contract because the obligation to build was collateral to the contract for sale and had no place in the completed deed. The transfer did not cover the same ground as the contract and the obligations in respect of the building works were not discharged

  • of such a kind that it cannot be supposed to have been the intention of the parties that they should be discharged by the deed. In Clarke v Ramuz, the Court of Appeal concluded (obiter) that whether a deed was intended to discharge obligations in respect of the period between exchange and completion must depend on the circumstances. One circumstance that must be material is whether the relevant party was aware of the breach on completion. If they were not, it is impossible to suppose that they intended the deed to operate as a waiver or release of liability. However, accepting the transfer with knowledge of the breach might

      amount to a waiver of the right

  • Non-merger clauses

    To avoid any uncertainty, it is best practice to include a non-merger clause in respect of any provision that:

    1. remains to be performed, or

    2. ceases to be performed on completion but that the parties intend to remain actionable after completion eg obligations in relation to the period between exchange and completion (collateral or otherwise) such as management or building obligations

    Where incorporated into the contract, the Standard Commercial Property Conditions (2nd and 3rd editions, conditions 9.4 and 10.4 respectively) and the Standard Conditions of Sale (5th edition, condition 7.3) provide that completion does not cancel liability to perform any outstanding obligation under the contract.

    Those standard conditions do not apply to obligations which cease to be performed on completion. If the relevant party wishes to reserve its right to bring an action for breach of such a provision, the contract must include a special condition to that effect.

    What remedies are available for breach of an obligation which has not merged?

    Post completion obligations

    As stated in the House of Lords case of Johnson v Agnew, in the case of a repudiatory breach (ie one that goes to the root of the contract), the innocent party can either:

    1. affirm the contract (ie treat it as ongoing) and seek to hold the other party to its terms by seeking an order for specific performance with damages for any loss arising from the breach or delay in performance, or

    2. accept the repudiatory breach and treat the contract as discharged. This is known as discharge by breach. There must be clear and unequivocal acceptance of the breach. Mere inactivity or acquiescence is generally not sufficient. While in practice discharge by breach is often referred to as ‘rescission’, this can create confusion because it is very different to ‘rescission ab initio’ (where a contract is set aside and is treated as never coming into existence). Discharge by breach (or rescission for breach) does not have the same effect—ie that the contract is treated as never coming into existence. Rather, the parties are absolved from future performance and the innocent party may claim damages for the breach. As stated by Lord Wilberforce in Johnson:

      ‘At this point it is important to dissipate a fertile source of confusion and to make clear that although the vendor is sometimes referred to in the above situation as "rescinding" the contract, this so-called "rescission" is quite different from rescission ab initio, such as may arise for example in cases of mistake, fraud or lack of consent. In those cases, the contract is treated in law as never having come into existence. (Cases of a contractual right to rescind may fall under this principle but are not relevant to the present discussion.) In the case of an accepted repudiatory breach the contract has come into existence but has been put an end to or discharged. Whatever contrary indications may be disinterred from old authorities, it is now quite clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about "rescission ab initio."...’

    The innocent party can proceed by action on the basis of both remedies in the alternative, ie affirming the contract and specific performance, or discharge by breach and damages. However, at trial they will have to elect which remedy to pursue.

    If at trial the innocent party elects to accept the repudiatory breach, they cannot later seek specific performance because the contractual obligations will be discharged. However, if at trial they elect to seek specific performance, and if that is not complied with, they can later either apply to enforce the order for specific performance or accept the repudiatory breach arising from failure to comply with the order for specific performance and treat the contract as discharged.

    For more information on repudiatory breach see Practice Note: Repudiation of property sale contracts and for more information on discharge by breach see Practice Note: Termination for breach of property contract.

    In Howard-Jones v Tate

    , the Court of Appeal confirmed that acceptance of a repudiatory breach does not bring about rescission ‘ab initio’. The seller covenanted to provide the property with new directly metered electricity and water supplies no later than six months after completion. As a result of the seller’s failure to do so, the buyer purported to rescind the contract and have the transfer set aside. The court held that the seller was not in breach on completion; on completion the buyer became the owner of exactly what he had contracted for (buildings without a direct water or electricity supply). However, the seller committed repudiatory breaches of the contract on the expiry of the six-month deadline, and the buyer, by accepting the repudiatory breaches, elected to treat the contract as at an end at the moment, at which point all unperformed primary obligations of the parties were discharged (ie discharge by breach). The repudiatory breaches rendered the buyer liable in damages, but did not entitle to the buyer to rescind ‘ab initio’.

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