Five critical warnings before you sign a Contract!
Licenced Conveyancer (NSW) Rachel Godden discusses these important issues when you are buying property.
When you are buying property in Queensland (i.e. vacant land, a house or unit), it is not unusual for buyers to sign Contracts prepared by the real estate agent without obtaining their own independent legal advice about the terms and conditions in the Contract they are signing. Buyers are often assured by the agent that there is a 5 day cooling off period and that the Contract is also subject to approval of finance and a satisfactory pest and building report (with advice usually given that any of these conditions can be relied upon by the buyers to effectively walk away from the Contract). However, as with any Contract that you sign, the devil is in the detail. A standard REIQ/Law Society Contract in Queensland is a 16 page document (without annexures and special conditions). It never ceases to amaze us as lawyers that cautious and intelligent people sign a Contract to buy a property for in excess of $1 million and do not think to obtain proper legal advice before signing that Contract!
There are 5 things that we often find people overlook when they are signing Contracts without obtaining legal advice:-
Cooling off period – 5 business days – .25% penalty
Every Contract in Queensland (except Auction Contracts) are usually subject to a 5 business day cooling off period from the date of the Contract or the date that the fully executed Contract is received by the buyers or their lawyers. Sometimes this can be a contentious issue about exactly when the 5 days commences running but usually Contracts are faxed or emailed to the buyers and/or their lawyers as soon as they have been signed and dated.
What many people overlook is that if you elect to terminate the Contract within the cooling off period, you forfeit .25% of the purchase price. On a $500,000 Contract this amounts to $1,250. On a $1 million Contract it amounts to $2,500. This can be an expensive exercise if you change your mind and elect to terminate the Contract! You could easily obtain legal advice for far less than these amounts before signing a Contract. People are usually pressured by the agent to sign and don’t wish to “lose the property”.
Insurance risk for the property passes to the buyer after the Contract is signed!
Clause 8.1 of the Contract provides:-
“The property is at the buyer’s risk from 5.00 p.m. on the first business day after the Contract date“.
This means that if the property burns down 2 days after you sign the Contract, you could be liable for the damage to the building and be forced to complete the Contract! Strata units are a little different as the building is usually covered by the body corporate insurance but you should still take out contents cover for the internal fixtures and fittings.
This is something that is often overlooked by buyers and the real estate agents involved. Sometimes it could be several days before you get to speak to your lawyers (who should tell you immediately) about this but by then the damage could already be done!
You should immediately contact your insurance broker or arrange a cover note of insurance for the property immediately after you have signed the Contract. Although you have until 5.00 p.m. on the first business day after the Contract date, you should be careful to arrange this insurance cover immediately.
Make sure you are buying the property in the right person’s name or the correct entity.
Most couples who buy a property purchase the house in their joint names. This is fine for a principal place of residence, unless one of you is a professional or owns your own business, in which case you may not wish to have property in your name for asset protection purposes. It also helps if you have your full names on the contract – most banks and lenders require this for their loan and mortgage documents.
If you are buying an investment property you should check with your accountants and lawyers as to the correct person or entity that should be buying the property in the Contract. Sometimes for an investment property it is best that it is in one particular person’s name or you may have a company or family trust that should be the appropriate entity to buy the property. Unfortunately, if you complete a Contract and sign this in the wrong entity or names, your only remedy may be to terminate under the cooling off provisions and you will have to forfeit .25% of the purchase price. In some cases it may not be until after the cooling off period has expired that you receive the appropriate advice as to the correct entity. In this case even if the sellers agree to sign a fresh Contract with you, you run the risk of paying double stamp duty on those Contracts. Once again, buyers need only check with their accountants and lawyers prior to them signing or preparing Contracts.
Contract is ‘subject to finance’ clause.
Many people think that if their Contract is “subject to finance” that this gives them an opportunity to get out of the Contract at any point in time prior to the finance approval date. This is simply not correct. Clause 3.1 of the Contract provides:-
“3.1 This Contract is conditional on the buyer obtaining approval of a loan for the finance amount from the financier by the finance date on terms satisfactory to the buyer. The buyer must take all reasonable steps to obtain approval.”
The key sentence is that the buyer must take all reasonable steps to obtain finance approval. This places a positive obligation on the buyer to do whatever is reasonable to obtain their finance. It does not mean that if you change your mind in relation to purchasing the property you can rely on this clause to terminate the Contract. If you have received an approval from your Bank or Building Society it would be very difficult to argue that you have not taken reasonable steps to obtain finance. You could find yourself in breach of the contractual terms and risk forfeiting your deposit and being held responsible for any damages on a resale (or being held to the Contract and sued for specific performance).
You should never accept advice from anyone to the effect that if you have a subject to finance clause that you can pull out of the contract at any time.
Contract subject to pest and building reports.
Another common misconception amongst buyers is that if their Contract is subject to a satisfactory pest and building report that this will give them the grounds to pull out of the Contract if they change their minds about buying the property. They think that any minor issue which is noted on a pest or building report will enable them to terminate the Contract and obtain a refund of their deposit.
Once again, this information is incorrect. Clause 4.1(1) of the Standard Conditions provides:-
“4.1 Building and Pest Inspection
(1) This Contract is conditional on the buyer obtaining a written building report from a building inspector and a written pest report from a pest inspector (which may be a single report) on the property by the inspection date on terms satisfactory to the buyer. The buyer must take all reasonable steps to obtain the reports (subject to the right of the buyer to elect to obtain only one of the reports).
(2) The buyer must give notice to the seller that:-
(a) A satisfactory inspector’s report under clause 4.1(1) has not been obtained by the inspection date and the buyer terminates this Contract. The buyer must act “reasonably”; or
(b) Clause 4.1(1) has been either satisfied or waived by the buyer.”
The crucial point here is that the buyer must act reasonably. This means that the buyers cannot rely upon minor cosmetic issues with the house or unit in order to terminate the Contract. For example, a rusty roof gutter or a cracked tile would not normally be sufficient to warrant terminating the contract. A structural crack or the presence of active termites would be different – it must be a substantive issue with the property.
Once again, the misconception that you can terminate a Contract due to any minor non-compliance in the building and pest report is completely wrong. Not only are you obliged to act reasonably (which means being unable to terminate due to minor issues), you can also be involved in expensive litigation for attempting to terminate a Contract in accordance with a building and pest report if it is not a significant issue. Another common practice that occurs in situations where the market is not very strong is buyers attempt to renegotiate the purchase price of the property based on issues that have been raised in the pest and building reports. Once again, there is no contractual basis to do this and you either terminate under the adverse pest and building report or accept it and confirm the Contract is unconditional. Attempting to renegotiate the purchase price increases the legal work that is required in relation to the matter and, in some cases, can lead to expensive litigation.
These are just some of the issues that can raise their heads in the context of signing a Contract for the purchase of property in Queensland. We strongly recommend that all potential buyers of property obtain legal advice from an experienced property lawyer BEFORE you sign any document. Attwood Marshall Lawyers provides a pre-contract advice service to our clients where we will vet the Contract for you prior to signing. This is not always feasible on the weekends but our Robina Town Centre office is open Saturday mornings from 9.00 a.m. to 12 noon and most of our lawyers are available for urgent advice if required after hours.
If you have any queries in relation to your proposed property purchase, you are welcome to contact our office with any enquiries concerning property and commercial advice. Please contact our Property and Commercial Department Managers, Jess Kimpton on direct line 07 5506 8402, email [email protected] or Andrea McGarry on direct line 07 5506 8242, email [email protected].
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