Recent client experiences in the current competitive housing market made us think it was a good time to write an article about the importance of wording on Sale & Purchase contracts when buying or selling property. While most people are aware of details such as the price (Strange how important that is to everyone!), finance and settlement dates and the location of the property, it is important to remember that the Sale & Purchase document is a legally binding contract and as such needs to be looked at in detail before any signing is done.
Licensed Real Estate agents will be aware of the importance of different aspects of the contract and will guide you through many of the clauses and conditions which are part of the document, but we thought it would be beneficial to go through some of the important things to be aware of in order to avoid possible pitfalls as buyer or seller.
The first thing to make sure is covered is that the contract is able to be viewed by your solicitor, so that they can give their approval to the form and content of the contract. We have seen a lot of contracts where the buyers have had a clause requiring approval by the solicitor regarding certificate of title, but this is only an acceptance that there are no issues with the legal aspects of the nature of the property, such as boundaries or plans on the council file. One phrase which is used in most commercial purchases and is starting to be seen in some residential contracts is “Due Diligence”. This is described as “The process by which careful consideration of every aspect of a proposed purchase is reviewed including in-depth financial, legal and physical investigations”. This is a much wider clause but your solicitor will be able to advise you whether they think this is a condition you need to put in place.
When choosing the conditions that are to be included on the contract you need to be aware that they are there for the protection of both parties. These can include such things as the purchaser obtaining a LIM (Land Information Memorandum) report which is available from the council and details items such as the zoning of the property, building consents, storm water arrangements, rates owing and any potential hazards. Another report recommended is a building inspection. This can be as simple as getting a builder to take a look at the property to determine whether there are any issues which may need to be addressed at some stage, or as detailed as a full house inspection report which goes into fine detail about the condition of the home.
There can also be conditions out of your immediate control that have to be finalised before the sale can proceed, such as the sale of another property or the arrangement of suitable finance. While it is fairly straight forward to say that if finance needs to be arranged, then it is important to have it done by the date specified on the contract, it is important to know that the lender is going to be happy. To approve a loan for the purchase, the bank needs to be satisfied with the location, condition and value of the property being purchased and offered as security against a loan. It is important for the person selling to know that the price agreed is going to allow sufficient funds to clear any debt owing (Including break costs if the loan is on a fixed rate), as well as covering real estate and legal expenses. As lenders policies may have changed since you originally took out the loan it pays to contact your home loan adviser so that they can make the necessary enquiries to make sure you are able to sell the property at the price agreed, especially if you are looking to purchase another property and require a new loan.
Even if you have previously obtained a loan pre-approval from a lender it is vitally important to enter the phrase “Subject to Finance” on any contract allowing sufficient time to provide additional background information that the bank may require. It could be that the lender that you have approval with may not like the type or location of property you have found and may change the level of finance approved or withdraw the offer based on the new information provided. Consequently it is important that any requirements to get finance approval should be considered as part of the general conditions of the contract.
There are many more conditions that can be entered on a Sale & Purchase document, but obviously the more clauses that are placed on a contract, the weaker any offer is going to be. There is a way that the vendor can still accept an offer with conditions yet keep their sale options open. This is known as the Cash out or Escape Clause. This allows the seller to accept another offer without conditions and provides the original purchaser an agreed period of time (Usually 5 days) to meet the conditions noted on the contract or lose out on the property.
So, whether buying or selling, know what is required on the contract and get the right advice to avoid any disappointments. Your successful sale or purchase will be conditional on it.
