Don’t let time run out for making a claim.

It is well established law that claims founded in contract are barred 6 years after the date on which the right to bring the claim accrues. 

This begs the question of when the cause of action accrues.  In the case of someone bringing a claim against the seller or purchaser of a property, does it accrue when the sale is completed or when contracts for sale are exchanged?

This can be a critical issue.  By relying on the fact that the cause of action accrues on completion of the sale, you might issue your claim after the six year limitation period has expired if, in fact, the cause of action accrues when the contracts for sale are exchanged.

This question arose in a recent case in which we represented a Lender and sought to have the claim against the Lender struck out on the basis that the Claimant’s claim was brought outside the limitation period.

The Claimant alleged that the Lender had sold the Claimant’s property at an under-value, after having repossessed it and obtained an Order for Sale.  The Claimant issued proceedings 5 years and 364 days after the sale of the property completed, but 6 years and 20 days after contracts were exchanged.

The leading textbook, Fisher & Lightwood says “the power of selling is effectively exercised as soon as there is an enforceable contract for sale of the mortgage property, even if it is merely conditional.  The equity of redemption is suspended once the contract is made, and extinguished upon conveyance”.  In other words, the borrower’s right to redeem the property (assuming they obtain the funds to do so) still exists after contracts are exchanged, although it is suspended.  It only ceases to exist when the conveyance is completed.

Our Lender client argued that the cause of action accrued when it became committed to a sale price which it had agreed to accept; that is when it exchanged contracts for sale.

We relied on the case of Waring (Lord) –v- London & Manchester Assurance Company Limited and others [1935] Ch 310.  In this case, the Mortgagor sought an injunction to restrain completion of the sale of the mortgaged property on the ground that there was no sale until completion of the conveyance.

In Waring the Judge said, “it seems to me impossible seriously to suggest that the mortgagor’s equity of redemption remains in force pending completion of the conveyance.”  He went on to say, “in the present case…. the sale effected by the contract, assuming …there is no objection to it on other grounds, binds the plaintiff, and it is too late after the sale for him to tender the mortgage money and become entitled to have the property reconveyed to him.”

In our claim, the Judge found that the cause of action accrued when the Lender became contractually committed to a sale at the price they had agreed to accept. He relied on the view expressed in the Waring case that entry into a contract by a Mortgage Lender brings the equity of redemption to an end.

The moral of the story is that if you are up against limitation in a claim relating to the sale of a property, the limitation runs from the date of exchange of contracts and not the date of completion. The only potential way round this would be if there was an allegation of fraud or bad faith.