Q: What are the implications of making a conditional offer on a property, and what conditions are available to us? Jeremy P.
A: What a great question Jeremy! This is a big subject so we will answer in ‘instalments’ over the next few weeks. Firstly, the more conditions there are in an offer to purchase property, the less attractive that offer will be to a vendor. Vendors have a natural aversion to contracts with many conditions because each condition introduces more opportunity for the purchaser to cancel the contract and therefore more risk to the vendor that the sale will not proceed. So if you are in a competitive (multi-offer) situation then you either need to be offering a good price or have as few conditions as possible. The three most common conditions are listed on the front page of the sale and purchase agreement (9th edition): Finance, LIM and building inspection. (It also includes OIA Consent. This is seldom used and applies to foreign buyers purchasing ‘sensitive’ land – and that’s a whole other subject!) And there is then the option to insert conditions in the Further Terms of Sale towards the end of the agreement. These are probably the conditions that you will be more interested in – things such as Due Diligence, Back-up agreement, Escape clause, sale of purchaser’s property, etc. There are plenty of them!
Before we get into what the various clauses mean, just be aware (just stating the obvious here!) any conditions that you put in the agreement are intended to be fulfilled: clause 9.8 (2) of the agreement requires purchasers to “do all things that may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.” So if you put in a subject to finance clause (more on that next week) that means you are expected to at least seek finance from banks and other lenders. If the vendor can show that you haven’t done that you cannot exit the agreement because ‘I haven’t managed to get my finance’.
We will go through a few of them over the next few weeks, starting with the common ones.
So let’s start with finance. This is one condition that some think is a bit of a catch-all for buyers to almost indiscriminately exit from a contract. But according to clause 9.8 (2) (“the party for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled…”) the purchasers must seek finance from banks and other lenders. As we say, some think this is an easy way out of a contract but recent court rulings, where the purchasers have made no attempt to secure finance, have resulted in the purchasers having to pay (sometimes considerable) costs to the vendor.
The finance condition is usually entered under Conditions on the front page of the agreement. Here you enter the Lender (you don’t need to nominate a lender, you can put “purchaser’s choice” if you prefer. If you don’t want to disclose how much you are borrowing you can enter “sufficient to complete” under Amount Required. Finally, under Finance Date you may decide to put an actual date (perhaps your preferred unconditional date), or a number of working days (usually three to five) – your real estate agent will help you here.
Incidentally, under Clause 9.8 (6) “At any time before this agreement is avoided, the purchaser may waive the finance condition…”. This means that if your finance comes through prior to the finance date you can tell the vendor or his agent that the condition is satisfied; you don’t have to wait for the time stipulated under the finance clause.
Next week we will cover off the LIM clause. This is an interesting one as it can be quite complicated.
As always, please seek legal advice BEFORE you sign a sale and purchase agreement – whether you are buying or selling.
We covered finance last time, so now we would like to go over another well-used clause: The sale being conditional on your acceptance of the LIM (Land Information Memorandum). In our opinion it is essential for you and/or your lawyer to view the LIM prior to purchase – the reasons for this will be the subject of another article at a later date.
You have two choices when including a LIM condition in the contract: You can use the clause on the front page of the contract, or you can insert your own clause under Further Terms of Sale.
Inserting your own clause gives you plenty of flexibility of course, so let’s look at what the standard front-page clause means to a prospective buyer.
When you ask for the LIM using this clause you have a total of 15 working days in which to order and examine the LIM. The 15 days includes up to 5 working days to order the LIM, and then another 10 days in which to review it. If there is anything that you are unhappy with in the LIM “on reasonable grounds” then you need to advise the seller and/or his solicitor exactly what it is, in writing, within the 15 working days – failure to do this will result in the clause being taken as satisfied. The vendor then has the right to give notice of their intention to remedy within 5 working days of receipt of the notice. The issue(s) must then be remedied by settlement date (the date at which you take possession of the property) otherwise the agreement will be cancelled.
If they won’t or can’t remedy the issue(s) then, again, the agreement is null and void, and your deposit, if any, must be refunded to you.
As with any legal agreement be sure to get legal advice before signing and make sure your solicitor checks the LIM thoroughly for you.