Knowledge

The States Assembly recently voted to conduct a review of the residential conveyancing process with a view to considering a significant reform to Jersey’s property transaction process. Although it is anticipated that a comprehensive review will take place, the focus of the debate (so far) has centred around the prevention of the practices of gazumping and gazundering. These practices, while legal, have long been held responsible for undermining certainty in the residential property market.

What is gazumping?

Gazumping occurs when a seller accepts a higher offer from a new buyer after already agreeing to sell to someone else. This can happen immediately before the sale is due to complete, leaving the original buyer:

• out of pocket for legal, survey, and mortgage arrangement fees;
• emotionally distressed after losing a property they believed was secured; and
• disadvantaged in a competitive market, especially if prices are rising.

Gazumping is particularly common in hot property markets, where demand outstrips supply and sellers are tempted by better offers.

What is gazundering?

Gazundering is the reverse scenario. It happens when a buyer lowers their offer just before completion, often exploiting the seller’s urgency to complete the sale. This can result in:

• sellers accepting a lower price under pressure, even if it’s below market value;
• delays or collapse of property chains; and
• financial strain, especially if the seller has already committed to another purchase.

Gazundering tends to occur in slower markets or when buyers feel they have leverage due to survey results or market shifts.

The legislative proposal

Deputy Max Andrews has lodged a proposition that would require all residential property transactions to include a pre-sale agreement to be entered into by the contracting parties. Under the proposed legislation:

• a financial penalty would apply to either party who withdraws from the transaction without a legitimate reason, such as mortgage refusal, serious property damage, or the collapse of a property chain; and
• certain types of transactions would be excluded, including intra-family transfers, auctions, government-led sales, and commercial property deals.

The proposal has a target date for full implementation by June 2028.

The Council of Ministers have lodged an amendment which proposes that there is an industry consultation period in an effort to defend against unintended consequences.

Pre-sale agreements

A pre-sale agreement is an agreement entered into by the buyer and seller in advance of the completion date. It obliges both parties to complete the transfer of the property on a date in the future. Pre-sale agreements offer some measure of comfort that a completion will proceed on a given date, allowing the parties to move forward with confidence. For example, buyers and sellers can confidently pack up their respective properties and make arrangements for their move.

Pre-sale agreements are very common in other jurisdictions, such as England and Wales, and already form part of the legal landscape in Jersey. However, they are used infrequently with buyers and sellers generally moving  straight to completion.

Existing practice in Jersey

In Jersey, all transfers of property (other than share transfer property) must be completed by passing a contract before the Royal Court. Under Jersey law, an agreement to pass a contract before the Royal Court is not specifically enforceable. This means that where a pre-sale agreement is entered into and a party refuses to complete, the court has no power to grant an order compelling the refusing party to complete.

As such, where a pre-sale agreement is entered into, common practice is to include in the pre-sale agreement a fixed penalty payable by the breaching party. The fixed penalty is commonly set at one third of the purchase price.

Generally, parties prefer to proceed without a pre-sale agreement, as they do not want to incur the legal costs associated with its drafting and negotiation.

Existing practice in England and Wales

Whilst a court could compel a party who breaches their obligations to complete under a pre-sale agreement to complete the transfer, such court order is rarely available. Instead, the court is likely to order the payment of compensation only (which is usually set at 10% of the purchase price).

A standard form of pre-sale agreement (and supplementary contract terms) are used in England and Wales to provide consistency and efficiency in the market place.

The proposed regime

The proposed legislation anticipates that a pre-sale agreement is entered into earlier than the practice in England and Wales. The timing of the pre-sale agreements envisaged by Deputy Andrews' proposal has not been specified. However, the wording of the proposal leaves scope for the legislation to require a pre-sale agreement to be entered into after a sale has been agreed but before the buyer has had confirmation with their lenders that they are happy with the property's title and are willing to lend.

In England and Wales, the pre-sale agreement is entered into after:

• all the title investigations have been carried out;
• the lender has confirmed that they are happy to proceed; and
• all parties in the chain have confirmed that they are also entering into pre-sale agreements.

In England and Wales, a pre-sale agreement is generally entered into two weeks before the anticipated completion date.

Potential benefits

• Whilst there are isolated instances of gazumping and gazundering in Jersey, they occur very infrequently. It is much more likely that both abortive transactions and last-minute price-chips are caused as a result of legitimate issues revealed in the title investigation and property survey.
• A common complaint of the Jersey conveyancing system is that often the parties to a transaction are unsure until the day of planned completion, whether they are indeed going to complete the sale and purchase. The introduction of a pre-sale agreement would provide the parties with additional comfort that the transaction is more likely to go ahead in the final weeks before completion.

Potential pitfalls

• Where the legislation requires a pre-sale agreement to be entered into before a buyer has had the opportunity to fully investigate title, the buyer will be exposed to the risk of being obliged to purchase a property without being in possession of all the facts.
• We may see a swathe of litigation in Jersey which centres on the interpretation of the proposed legislation. For example, whether property damage was sufficiently serious to allow the buyer to withdraw.
• The costs associated with buying and selling residential property will likely increase as a result of the new regime, if adopted, as the parties' legal fees will also need to account for the drafting and negotiation of the pre-sale agreement.
• Without a standard form of pre-sale agreement and supplementary contract terms (as is in place in England and Wales) to aid efficiency, it will likely longer to complete a residential transaction.

Conclusion

A comprehensive regime in which a pre-sale agreement becomes common practice is likely to provide some additional certainty for parties to residential transactions, but it is unlikely to provide a definitive solution to the problems of gazumping and gazundering. It could be particularly beneficial where standard documents are introduced to the industry to aid the efficiency of the new process.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.