Recently, the Taiwan stock market has experienced significant fluctuations, and the global financial market is unstable. Liquidity has tightened further, putting unprecedented cash flow pressure on many investors and homebuyers. For many pre-sale home buyers, their original financial plans have been affected by the stock market volatility, and some buyers are even facing financial difficulties, unable to pay the final installment or complete the purchase. In this market context, the pre-sale housing market is gradually showing signs of default risk, with many buyers requesting cancellations or asking for refunds. Some developers have even received multiple cancellation notices in a single day, creating a severe situation.

This potential "pre-sale housing default crisis" not only shakes the stability of existing purchase agreements but could also trigger large-scale legal disputes and lawsuits. As economic uncertainty rises, within the next year, cases involving defaults, contract cancellations, and performance issues are likely to become the dominant type of litigation in the real estate sector. For both buyers and sellers, how to respond to these challenges and manage legal risks effectively will be crucial to protecting their rights.

How Does the Law View "Cancellations," "Contract Terminations," and "Breach of Contract"?

In the context of pre-sale home purchase agreements, when legal issues such as "cancellations," "contract terminations," and "breach of contract" arise, it is important to first understand the relevant provisions of the Civil Code. According to Article 248 of the Civil Code, if one party pays a deposit to the other, it is considered that a contract has been formed. This means that the deposit plays an important role in ensuring the fulfillment of the contract.

Article 249 of the Civil Code provides clear rules on the handling of deposits, which are as follows:

1. When the contract is fulfilled, the deposit should either be returned or counted as part of the payment.

2. If the contract cannot be fulfilled due to reasons attributable to the party paying the deposit, the deposit cannot be refunded.

3. If the contract cannot be fulfilled due to reasons attributable to the party receiving the deposit, that party must return double the amount of the deposit.

4. If the contract cannot be fulfilled due to reasons not attributable to either party, the deposit must be refunded.

In short, if the homebuyer wishes to back out, the developer can confiscate the deposit. Some contracts even stipulate additional penalties (usually between 5% and 10% of the total price), which provide protection for the developer in case of loss.

However, if the developer fails to deliver the property on time or cannot fulfill the contract, the buyer not only has the right to terminate the contract but can also demand the return of double the deposit and even seek compensation for losses. Importantly, changes in the economic environment (such as a stock market crash) do not constitute grounds for exemption. Courts generally will not support the buyer's refusal to fulfill the contract merely because the buyer claims "financial difficulties." This means that even if external economic factors difficulties, the buyer is still required to comply with the contract unless there are other special circumstances or agreements that prove the buyer should not be held responsible.

Other Situations That May Arise from a Stock Market Crash

Difficulty in Reselling

In the event of a stock market crash or economic recession, many pre-sale home buyers may face cash flow problems, which could prevent them from successfully completing the purchase or reselling the property as originally planned. However, due to the provisions of the "Average Land Rights Act," buyers of pre-sale homes are typically not allowed to freely resell the property within a certain period after delivery. This legal restriction makes it difficult for buyers to quickly sell or transfer the property. In the case of an economic shock like a stock market crash, many buyers may struggle to find suitable buyers, exacerbating liquidity issues in the market. This presents a significant challenge for both buyers and sellers.

Payment Default

Due to stock market fluctuations or economic downturns, many pre-sale home buyers may experience disruptions in their cash flow, especially as the final payment deadline approaches. Buyers may be unable to pay the remaining balance as scheduled. In such cases, the developer has the right to demand payment of a penalty or initiate legal action based on the contract terms. The penalty is usually a percentage of the total price, which not only imposes an additional financial burden on the buyer but could also lead to litigation, further increasing economic and legal risks for both parties. Therefore, developers should be prepared with response measures in advance to prevent losses from escalating in the event of a default.

Three Key Action Recommendations for Homebuyers

1.  Review Your Pre-Sale Home Purchase Agreement Immediately

When market conditions change, especially during periods of significant stock market fluctuations or economic downturns, buyers should immediately review their pre-sale home purchase agreement. Focus on the penalty clauses, cancellation terms, and whether there are any additional conditions that could be claimed as non-attributable. Many contracts include a penalty clause, typically ranging from 5% to 10% of the total price. If there are financial pressures or the buyer is unable to complete the purchase on time, the penalty could become a substantial cost, further burdening the buyer's financial situation.

2. Assess Your Cash Flow and Consider Negotiation or Legal Intervention

If the buyer determines they cannot fulfill the contract, the next step is to predict their cash flow situation and carefully assess whether they can pay the remaining balance or complete the property transfer by the agreed-upon deadline. If there are difficulties with payment, buyers can consider negotiating with the developer to seek an extension or other suitable payment arrangements. Additionally, it may be necessary to seek professional legal advice to understand if legal intervention is required, assisting with negotiations and striving for more favorable terms.

3.  If Considering Resale or Cancellation, Consult a Lawyer

If the buyer is considering resale or cancellation of the contract, it is important to consult with a professional lawyer. A lawyer can help review the legal validity of the agreement and inform the buyer of the legal risks involved in the cancellation process. This ensures that all cancellation terms and resale conditions are handled legally and prevents the buyer from falling into default traps or risks arising from informal verbal agreements. A lawyer's professional assistance will help buyers navigate legal issues in the resale or cancellation process and best protect their interests.

Three Key Risk Management Recommendations for Developers

1. Establish a Standardized Contract Termination Response Mechanism to Improve Efficiency and Legal Protection

When buyers show signs of breach, developers without a clear internal response process often miss the opportunity to collect evidence and protect their rights, putting them at a disadvantage in subsequent litigation. It is recommended that developers promptly establish a standardized contract termination process, including:

• Breach Warning System: Monitor buyer payment progress and communication status, and set up overdue reminder mechanisms.

• Legal Notice Process: For breach of contract, the legal department should issue an official notice, clearly stating the breach, the amount of damages, and the processing timeline.

• Preserve Key Evidence: Ensure proper storage of important documents such as contracts, payment records, and buyer communication for potential use in litigation or arbitration.

• Loss Calculation Mechanism: Calculate the penalty or compensation based on the contract terms and actual damages to ensure the amount is reasonable and legally enforceable.

2.  Exercise Caution in Using Penalty Clauses and Deposit Systems to Avoid Future Legal Disputes

   In pre-sale home agreements, deposit and penalty clauses are often tools to maintain transaction stability, so it is crucial to carefully evaluate the clause content and related provisions to avoid having penalties deemed excessively high or invalid by the courts, which could be detrimental to the developer.

3.  Preemptively Identify Potential Risky Buyers and Strengthen Litigation Preparation and Recovery Strategies

As the wave of defaults continues to grow, developers who take a wait-and-see approach and deal with defaults after the property is completed will face dual risks of difficulty in fund recovery and litigation pressure. Developers are advised to adopt the following preventative measures:

• a Risky Buyer List: Buyers with delayed payments, communication issues, or passive attitudes should be categorized as high-risk and addressed early within the internal process.

• Prepare for Legal Action in Advance: Work with lawyers to gather evidence and plan potential litigation strategies, including issuing notices, contract termination notifications, and breach of contract damage calculations.

• Utilize Negotiation and Partial Performance Mechanisms: If some buyers intend to fulfill the contract but face short-term financial difficulties, developers can provide buffer mechanisms and negotiate for a win-win situation to reduce litigation risks and costs.

The Pre-Sale Housing Default Storm is Upon Us: Early Legal Planning is Key

With the impact of the stock market crash affecting the capital markets, leading to tightened liquidity and a decline in consumer confidence, the pre-sale housing market has quietly entered a stage of heightened risk. Many buyers are struggling to meet contractual obligations due to financial pressure, and some developers are beginning to face the dual challenges of property delivery and cash flow. This default storm is no longer just a potential issue—it is a reality that is unfolding.

Whether you are a buyer holding a pre-sale home contract or a developer actively selling properties, you cannot remain unaffected by this storm. If you continue to adopt a wait-and-see attitude without preparing a response plan, it is highly likely that you will face harm to your rights, disruption to your cash flow, and even litigation challenges.

However, within every crisis lies an opportunity. By initiating early legal risk analysis and designing effective response strategies, it is possible to minimize losses and even favorable negotiation space or bargaining chips against the tide. From reviewing contracts, anticipating risks, handling defaults, to litigation defense and settlement negotiations, it is advisable to seek the comprehensive planning and support of a professional legal team.