When does a penalty apply under a home purchase contract?
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Detailed explanation, checklist and sources
A penalty after withdrawing from or failing to perform a home purchase is not automatically owed. First check the statutory cooling-off period, validly invoked contractual cancellation conditions, the exact breach and what the signed contract provides about notice of default and the penalty.
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On this page
- Start with the three-day cooling-off period
- Read every contractual cancellation condition carefully
- Establish which agreement was not performed
- Check the notice of default and cure period
- Calculate the penalty from the contract
- Seek an assessment before payment or termination
- Your checklist
- Frequently asked questions
- Sources and further information
Start with the three-day cooling-off period
A private buyer of a home has a statutory three-day cooling-off period after receiving the purchase contract signed by both parties. At least two of those days may not be a Saturday, Sunday or recognised public holiday. Within that period, the buyer may withdraw from the purchase without giving a reason and without compensation.
Read every contractual cancellation condition carefully
Check conditions concerning financing, a structural inspection, sale of the buyer's own home or other reservations. Pay attention to the deadline, required documents and method of notification. A valid and timely invocation of such a condition may end the purchase without a contractual penalty.
Establish which agreement was not performed
Note whether the issue concerns non-payment, failure to provide a bank guarantee, failure to cooperate with transfer or another obligation. Also check whether the other party complied with its own obligations. Merely stating that the purchase will not proceed does not prove that a penalty is owed.
Check the notice of default and cure period
Many purchase contracts specify which written notice of default is required and how much time the defaulting party still has to perform. Use the text of your own contract; a standard procedure or fixed period must not be assumed without checking.
Calculate the penalty from the contract
The amount, calculation method and relationship to additional damages follow from the penalty clause. A commonly used model contract is not automatically your agreement. Check the purchase price, percentage, daily penalty, maximum amount and the interaction with termination or subsequent performance.
Seek an assessment before payment or termination
Keep the signed contract, proof of receipt, all deadlines and messages. Do not pay a claimed penalty merely because an estate agent or the other party mentions a percentage. A court may reduce a contractual penalty in certain circumstances, but this does not happen automatically and depends heavily on the facts.
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Purchase contract signed by both parties
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- Purchase contract signed by both parties
- Date on which the buyer received the contract
- End of the statutory cooling-off period
- Contractual cancellation conditions and deadlines
- Supporting documents required by the contract for termination
- Notice of default and proof of receipt
- Contractual cure period and penalty clause
- Calculation of the penalty and any additional damages
Frequently asked questions
Is the penalty for a home purchase always ten percent?
No. A percentage may be included in a model contract or your contract, but it is not an automatic statutory amount for every home purchase. Read the signed penalty clause and the conditions under which it applies.
Does the buyer pay a penalty if financing cannot be obtained?
Not necessarily. That depends on a financing condition, the deadline and the required substantiation. Without a valid invocation of the condition, the outcome may be different.
Can an agreed penalty be reduced?
A court may reduce a contractual penalty under strict circumstances. The relationship between the penalty and the damage, the nature of the agreement and the circumstances are relevant. Do not rely on automatic reduction.