The contract of sale is usually prepared by the real estate agent or, less frequently for house and land contracts, the seller’s solicitors.
The standard Real Estate Institute of Queensland (REIQ) contract contains a Reference Schedule in which all pieces of information relevant to the sale are set out. In addition to the critical items (details of the property, the purchase price, deposit and settlement date), other items that deal with fixtures and chattels should be checked to ensure they are correctly recorded. Details of any title encumbrances (e.g. easements) and tenancies that will exist at the time of completion of the contract must also be checked.
Buyers should be particularly wary of special conditions that are added to the contract. In some instances, sellers may delete certain provisions of the standard terms of contract without explaining the full significance of those deletions to the buyer. Specialist advice should be immediately sought if the buyer is unaware of the meaning of a special condition that has been added, or if there is any concern that the special condition may otherwise operate unfairly to the buyer.
The standard REIQ contract contains a recommendation that the buyer obtain an independent property valuation and independent legal advice about the contract and the buyer’s cooling-off rights before signing. Prudently, a seller would also be well advised to obtain specialist advice about the effect of the contract of sale before signing.
The REIQ contract provides that the property is at the risk of the buyer from 5 pm on the first business day after the contract date. As soon as possible after the contract is signed, it is very important that buyers protect their interest in the property by arranging appropriate insurance over the property.
A buyer who is obtaining finance to complete the purchase needs to be aware that most lenders will impose insurance requirements as part of making the loan available. In these circumstances, the buyer should ensure that any insurance that is arranged will satisfy the insurance requirements of the lender.
Clause 3 of the REIQ contract provides that the 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. Clause 3 is only activated if each of these three items (finance amount, financier and finance date) is completed in the Reference Schedule. Full and proper completion of these items will avoid potential disputes later.
The expression ‘on terms satisfactory to the buyer’ permits a buyer acting honestly to subjectively decide whether any finance offered suits the buyer’s particular needs. A buyer who does not act honestly may be sued for breach of contract.
It is important to notice that clause 3.1 specifies that a buyer must take all reasonable steps to obtain approval. A buyer is not able to escape contractual obligation simply by not applying for finance. In fact, a failure to apply for finance approval would constitute a breach of contract that would entitle the seller to keep the deposit and may allow the seller to recover damages if loss can be demonstrated (beyond the extent of the forfeited deposit).
The clause stipulates that, when there is a failure to obtain the type of finance specified and that failure is not due to a fault of the buyer, the buyer has the right to terminate the contract and to receive all deposit monies back.
Buyers should be careful before they advise that finance approval has been obtained. Buyers should carefully consider the terms of the offer of finance to ensure it is what they need and what they applied for. For example, an approval subject to valuation or on normal bank terms is not an unconditional approval contemplated by the contract. Once a buyer advises that approval has been given, they may be in difficulties if the lender does not proceed with the loan. In these circumstances, a buyer could lose their deposit or be sued for any loss incurred by the seller (beyond the extent of the forfeited deposit).
Clause 4.1 of the REIQ contract provides that the contract is conditional upon 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. Like the finance clause, clause 4 is only activated if the inspection date is completed in the Reference Schedule. Again, the buyer must take all reasonable steps to obtain such reports (subject to the express right of the buyer to elect to obtain only one of the reports).
Clause 4.2 of the contract allows a buyer to terminate the contract if, acting reasonably, an inspector’s report is unsatisfactory to the buyer. If requested by the seller, the buyer is required to provide the seller with a copy of each report without delay.
If a buyer fails to give notice under clause 4.2 by 5 pm on the inspection date, the seller may terminate the contract by notice to the buyer. This is the seller’s only remedy for the buyer’s failure to give notice.
Many types of special conditions can be added to the standard REIQ contract. For example, a buyer may require the contract to be subject to the sale of another property or the completion of certain work on the property before settlement.
These clauses should be prepared carefully to avoid any uncertainty. Ideally, a solicitor should draft an appropriate clause to suit the particular situation.