Property seller was entitled to seek full purchase price when buyer pulled out, rules Court of Session

Finding in favour of AMA, an Edinburgh-based developer, Lady Dorrian said the "innocent party" could choose whether to accept that the contract had been cancelled and claim damages, or to pursue its right to payment of the full sum of money set out in the contract.

Litigation expert Claire Thornber of Pinsent Masons, the law firm behind Out-Law.com, said that in similar circumstances most sellers would opt to "rescind the contract, then resell and seek damages". However, the ruling gave property owners another option, particularly in cases where there was unlikely to be another purchaser, she said.

"This is an important decision with far-reaching consequences for homebuyers, sellers and developers," she said. "It remains to be seen whether other developers decide to take retrospective action in the way of this ruling – there will be many more instances where purchases have fallen through given the changing economic circumstances."

"It is clear homebuyers will have to be more careful than ever when entering into contracts. It is by no means certain that a seller would exercise the option to recover the full asking price if a purchase goes awry, as it is probably reasonable to assume in many cases that purchasers are withdrawing due to a lack of funding. However, that option exists and buyers should be wary," she said.

The case concerned three luxury flats in Edinburgh, each of which was sold for £212,000. The purchasers were Ron Law, his wife Sarah and Glenmorison Ltd, a company in which Mr Law had an interest. In each case, the purchaser tried to argue that the contract was incomplete and so AMA was not entitled to pursue them for payment. The court disagreed, saying that under the contract "payment was triggered by the date of entry and nothing else".

"I accept that in certain circumstances it would be open to the court, for reasons of equity, to refuse to grant implement but in my view those circumstances would require to be highly unusual ... circumstances in which implement would impose a burden on the repudiating party completely out of proportion to the remainder of the contract ... Here, the burden is simply payment of the price which has been contractually agreed," Lady Dorrian said in her leading judgment.

"If the boot were on the other foot, the court would not refuse implement to a purchaser just because there would be inconvenience to the seller in granting a marketable title ... I acknowledge that if the respondent is in truth so impecunious as to be unable to pay the price, complications can arise. However, there are ways in which such complications can be resolved," she said.

One of the other judges on the three-judge panel, Lord Menzies, said that to rule in favour of the Laws would “have the effect of inverting” a “well-established rule of Scots law” that if one party breaks off a contract, the other has the choice to accept it and sue for damages, or to seek enforcement of the contract.

“[AMA] clearly believe that the alleged impecuniosity is rather an unwillingness to proceed further because it is now not convenient,” he said. “They clearly believe that they will be able to recover the funds they seek. They may be right about that; they may be wrong; but the risk is one for them to choose to take. It is not something about which they should be dictated to by the party in default.”