Quick answer
Until contracts are exchanged, no one in the chain is legally committed, so anyone can withdraw without penalty, which is exactly why chains can collapse at the last minute. If a link above you drops out, your own linked sale and purchase can stall or fall through even though you have done nothing wrong.
Guidance for United Kingdom. General information, not legal advice.
We are buying and selling at the same time and the person at the top of the chain has just pulled out. Where does that leave us legally, and can we lose money?
Until contracts are exchanged, no one in the chain is legally committed, so anyone can withdraw without penalty, which is exactly why chains can collapse at the last minute. If a link above you drops out, your own linked sale and purchase can stall or fall through even though you have done nothing wrong. Legally you are not bound and you will not be sued, but the practical cost is real: money already spent on searches, surveys, mortgage arrangement and legal work is generally not recoverable because those services have been provided. Your options usually include renegotiating the price, giving the chain time to find a replacement buyer or seller, arranging bridging finance in some cases, or breaking the chain by moving into rented accommodation so you become chain-free and more attractive.
The key legal point is the exchange of contracts. Before exchange there is flexibility but also risk; after exchange the parties are committed and a buyer who pulls out can lose their deposit. If your chain has just broken, speak to your lawyer and estate agent quickly about whether the property can be re-marketed to a chain-free buyer, or whether short-term renting would let your purchase proceed. It is frustrating and you may lose some upfront fees, but you are not in legal difficulty for the collapse itself. This is general guidance rather than advice on your transaction.
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