“Subject to finance” clause removed in standard contract for sale
In 2019, Sam and Nardine Gayed from Bendigo, Victoria lost all their family savings on a $320,000 residential property deposit by overlooking the removal of the “subject to finance” clause in a standard sale contract. This clause would normally allow home buyers, who have not been approved for a loan by their bank, to withdraw from the contract and reclaim their deposit.
In their haste to secure their ‘dream home’, coupled with pressures from the selling agent regarding other potential buyers, both Mr and Mrs Gayed signed the agreement, notwithstanding the “loophole” detail. Their application for a 90% doctor’s scheme with their bank fell short due to a $2million threshold Mr Gayed was not aware of, and they were unable to fund the purchase of their home.
As a result, Mr and Mrs Gayed were in breach of the contract and the vendor was legally entitled to keep the Gayeds’ entire $320,000 deposit.
Buyer beware in property contracts
The Gayed family’s predicament serves as a warning to potential buyers. When two parties enter into a contract for a sale and purchase of property, both parties should be aware of their responsibilities and rights before signing and committing to the contract. The purpose of a deposit is not only to make an initial contribution towards the purchase, but also to provide the vendor with some security in the event that the contract is terminated. Reclaiming the deposit is a vendor’s ultimate recourse in the event that a contract is terminated.
In most circumstances, even if a vendor agrees to accept a 5% deposit at the time contracts are signed, a purchaser will still be liable to pay the full 10% if there is breach. It is important to carefully peruse the clauses and know your obligations in detail to avoid entering into binding arrangements where your interests may be severely compromised.
If you are considering entering into a contract for sale and purchase of land, you should have that contract reviewed by a solicitor or conveyancer to advise you of the type of pitfalls which might lead you to losing your deposit.
When a contract has been drafted and presented to a potential buyer, they should carefully consider any additional special conditions included in the contract and check for any details that may have been added or omitted that could potentially place the buyer at a disadvantage. Although Australian buyers are protected under the Australian Consumer Law (“ACL”) with respect to certain contract terms and clauses that may disadvantage them unfairly, it is important not to overlook any binding “loopholes” and not assume any part of a contract. The amount of protection you can be afforded under the ACL is also limited by the nature and circumstances of the contract.
Cooling-off period in New South Wales and Queensland
One advantage which buyers have in New South Wales and Queensland is the use of a ‘cooling-off period.’ This is defined period where a purchaser can exit the contract and reclaim their deposit. The penalty for exercising a purchaser’s cooling off rights is to relinquish 0.25% of the price of the property, which is far less than 10% and make a monumental difference in today’s property market. In NSW the standard cooling-off period for residential properties is 5 business days. In Queensland, the cooling off period is even broader, and allows a standard use of a subject to finance clause and also a clause entitling a purchaser to conduct a building and pest inspection of the property. The purchaser does not need to commit themselves to the contract until such matters are completed to the satisfaction of the purchaser.
Under the ACL, real estate agents must not unlawfully or intentionally mislead the buyer, including providing the buyer with a false impression, leave out or hide important information, or make false or inaccurate claims regarding the property. In NSW, “Schedule 1” under the Property and Stock Agents Regulation 2014 NSW provide conduct rules that apply to all agents and assistant agents. Ss 3-5 refers to real estate agents’ legal obligations to act “honestly, fairness and professionally”, and perform with “skill, care and diligence”, and prohibitions regarding “high pressure tactics, harassment or unconscionable conduct” respectively. These sections are significant in limiting agents from exercising unconscionable powers over buyers. Similar provisions for real estate agents in QLD are set out in the Property Agents and Motor Dealers (Real Estate Agency Practice Code of Conduct) Regulation 2001 QLD ss 7, 8 and 15.
Both buyers and vendors are strongly encouraged to seek legal professional advice and opinion when reviewing and considering contracts for sale of property.