Gazumping

Gazumping is a term that mostly relates to sale of property. It refers to a situation where a property seller orally agrees to sell a property to a buyer at a certain price but takes a higher offer from another person therefore disregarding the first agreement, or when a seller verbally agrees to a certain sum but later demands a higher price before formal contracts are signed. In either of these two cases, the first buyer is affected  and may be compelled to pay a higher price than initially agreed, or lose the purchase. This is why gazumping is regarded as an unethical practice.

On the other hand, there is a term known as gazundering which may be regarded as the opposite of gazumping. It   refers to a situation where a buyer orally agrees to purchase a property for a certain sum, but later offers a lower price and threatens to withdraw the offer if the seller disagrees. This usually happens in a falling market where the seller may be compelled to accept the offer.

Similarly, it is possible for a property to be withdrawn by a seller who is looking to get a better asking price in the future. This is known as gazanging.

Brief History

As a result of the fact that there is no legal backing on a buyer’s offer in the absence of a written contract as evidence, gazumping can easily take place during initial negotiations for the purchase of a property. The need for a written contract to render a buyer’s offer legal has its origin in the 1677 statute of Frauds, and was for the purpose of facilitating the conclusion of land and property transactions with ease.  

In the 1980s and 1990’s, this practice became widespread in England and Wales and it is a term that is commonly used in the UK. Under Scottish law, however, gazumping is not very popular because Scotland operates a system of conveyancing that is different from that which obtains in the UK. On the other hand, in the case of the United States, the term is not used.

Is Gazumping Legal?

How gazumping works usually depends on the region in question, and the system of conveyancing that is practiced. Although considered unethical, in England and Whales, gazumping may arise as a result of the nature of the property-buying process. When a buyer offers to purchase a property, a contract has to be drawn up and exchanged to give credence to the agreement. Until this happens, either party can disregard the agreement. Considering that some formalities need to be fulfilled before a contract is drawn, anything could happen within the time period and a seller could accept a better offer leading to a situation where the previous buyer may be said to have been gazumped.

However, the Scottish conveyancing system is different and therefore, leaves no room for most gazumping cases. When negotiations take place between seller and a potential buyer and an agreement has been reached, the seller is expected to provide an acceptance of a successful bid in written form. It is a legally binding document and a requirement based on the code of practice of Scottish solicitors. A potential buyer could also carry out a survey even before making an offer on the property. Based on this, a solicitor is not meant to entertain other offers on behalf of a client after an agreement has been made, especially as solicitors are expected to sign on behalf of both buyer and seller in Scotland.

In the United States, the laws pertaining to buying property vary from state to state.  However, the ‘purchase and sale’ contract is usually used. The buyers make an offer in written form, which become legally binding once it has been accepted by the seller. A window period exists within which the buyer can inspect the property and can opt out of the agreement if expectations are not met.  This, however, depends on the state.

Why is Gazumping a Problem?

Usually, the ‘gazumped’ buyer is left in a bad situation, which could mean time and resources lost. For buyers who may have taken critical decisions based on an initial oral agreement on a property that they are interested in buying, the consequences can be significant. In the case of a chain situation where a buyer is looking to sell his house before purchasing a new one and the potential buyer of the house cannot make any move until his has been sold, gazumping can cause problems. There are ways by which gazumping can be avoided.

How  a Buyer Can Avoid Being Gazumped

There are a number of things that a potential buyer can do to avoid being gazumped. Although it is not possible to completely eliminate that possibility, the risk can be reduced.

Since it is a practice that needs time to materialize, shortening the process of buying the property can reduce chances of being gazumped. This would involve completing all processes involved in purchasing the property such as carrying out a survey on time. In the same way, the availability of a financing option helps to speed things up. As such, the seller may not have the opportunity to consider other buyers.

With a clear time frame within which it is agreed that everything concerning the purchase will be concluded, the risk of gazumping is reduced. In addition, it is a good idea to draw a pre-contract deposit agreement or an agreement of exclusivity so that the validity of the oral agreement on the property is guaranteed for a period of time. Also, once an agreement has been reached, the property should be taken off the market to ensure that no other buyers express interest.

 Perharps, most important is that the buyer engages with a seller who has a clear policy on gazumping.

Is There a Solution to Gazumping?

In the event that a buyer has been gazumped, a difficult situation may arise. A way out could be to insist and emphasize interest such that the seller may inform the first buyer of the availability of the property if the other buyers subsequently withdraw their offers.

Related Questions

Published on 14th June 2017

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