Aborted property transactions: seller under‐compensation in the absence of legal recourse
| Date | 01 May 1999 |
| Published date | 01 May 1999 |
| Pages | 126-144 |
| DOI | https://doi.org/10.1108/14635789910258516 |
| Author | Seow Eng Ong |
| Subject Matter | Property management & built environment |
JPIF
17,2
126
Journal of Property
Investment & Finance,
Vol. 17 No. 2, 1999, pp. 126-144.
#MCB University Press, 1463-578X
Received 28 April 1998
Revised 22 December 1998
ACADEMIC PAPERS
Aborted property transactions:
seller under-compensation in
the absence of legal recourse
Seow Eng Ong
School of Building and Real Estate,
National University of Singapore, Singapore
Keywords Buyers, Compensation, Sellers, Singapore
Abstract Property purchasers who rescind on their contracts and forfeit the initial deposits are
exercising their right to not proceed with the purchase. The deposit to purchase endows on the
buyer an implicit call option that is valuable and the value exceeds the face value of the deposit. As
such, real estate sellers and developers are not adequately compensated for the abortion risk,
especially when there is no legal recourse for the sellers to seek specific performance and damages
in the event of default. The historical value of this call is estimated by inferring a time-varying
volatility from Singapore residential price data over the last 20 years. The results show that real
estate prices are more volatile in up markets than down markets, and that under-compensation
persists in both market conditions. This paper further highlights some measures to reduce the risk
of aborted sales and the under-compensation problem.
A steep fall in property prices aggravated by the recent stock market crash has unnerved
home buyers, some of them willing to forfeit multi-million dollar deposits to scupper deals
(Reuters report on the Hong Kong property market, 5 November 1997).
Developers emerged from a discussion with banks with no resolution on the hot topic of
whether they can sue buyers who default (Straits Times, 26 September 1998).
1. Introduction
The Asian currency crisis of 1997 prompted many property buyers in Hong Kong
to forfeit multi-million deposits in anticipation of drastic property price declines
(Straits Times, 1997a). When aborted sales were first reported in Singapore as
buyers rescinded their contracts (Rashiwala, 1997), they were described as an
``unusual phenomenon'' (Lee, 1997). This was because the decision to abort was
made after these property buyers had signed sale and purchase agreements and
paid 20 per cent deposits for new properties under development.
The deposit to purchase must be distinguished from the option to purchase.
While the option to purchase is signed when an agreement to purchase a
property is reached, buyers are required to pay an additional deposit when they
exercise the option to purchase and enter into a sale and purchase agreement.
The deposit typically amounts to a total of 20 per cent for new residential
The author wishes to thank Joseph Chun and Phillip Chan for providing the conveyancing and
legal framework for this study and two anonymous referees for several insightful comments.
Please e-mail comments and queries to seong@nus.edu.sg.
The research register for this journal is available at
http://www2.mcb.co.uk/mcbrr/jpif.asp
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Academic papers:
Aborted property
transactions
127
developments and 10 per cent for existing properties in Singapore. The time lag
between the payment of the deposit and completion ranges from eight to ten
weeks for existing properties, and two to three years for new developments.
Over this interim period, buyers can and, as recent evidence shows, do rescind
the contract to purchase by forfeiting the deposit.
When the deposit is paid to secure a property, a sale and purchase
agreement (SPA) is entered into. In other words, there is a legal contract
between the property buyer and seller. What is interesting is that when aborted
sales occurred in 1997, many developers in Singapore did not resort to legal
recourse, but merely permitted the buyers to walk away (Lee, 1997). A survey
of the sale status of major development projects in Singapore revealed that no
less than 25 sales[1] were aborted from April 1997 through March 1998 (see
Table I). None of these aborted sales were brought to court.
Matters came to a head in September 1998 when progress payments were
due for an up-market condominium development (Oon, 1998). Many of the 322
buyers were believed to have difficulties meeting the progress payment (Lee,
1998) and the issue of whether the developer should take action against buyers
who default on their contracts became a legal question (Yeow, 1998). Under the
sale and purchase agreement (SPA) effective from October 1997, the developer
can forfeit the 20 per cent deposit when the buyer defaults and having done so,
has ``no further claim'' on the buyer. However, the SPA prior to October 1997,
which applies to the condominium in question, provides that the developer
should not be prejudiced ``to any other rights available at law or in equity'' after
forfeiting the 20 per cent deposit (Lee and Oon, 1998).
Rather than addressing the legal issues, this paper contends that the right
for the buyer to walk away from the purchase (legally so, under the amended
Table I.
Aborted sales for
major residential
developments from
April 1997-March 1998
Development 2Q 1997 3Q 1997 4Q 1997 1Q 1998
Duchess Crest 3
Bishan 8 5
Changi Heights 2
Maysprings 9
Estella Gardens 1
Aquarius by the Park1
Yunnan Gardens 1
Par Parlais 1
The Hillside 1
Montrosa 1
Total 3 16 1 5
Source:URA Potential Supply Supplement (1997:1-1998:2)
Note: This table estimates the number of aborted sales for major residential developments
(defined as having more than 99 units). The number of aborted sales is the difference in the
gross number of units sold as at the end of the quarter from that in the preceding quarter.
As such, this table shows the net decrease in total number of units sold. The actual number
of aborted sales can be higher than the figures reported if new sales were made in the
quarter.
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