Beware of conveyancing traps

ADAM wants to buy a property but has not obtained finance approval.

He instructs his solicitor to add a ‘subject to finance clause’ into the contract which will allow him to secure the property, but also terminate the agreement if he is unable to obtain finance.

The clause states that if Adam fails to obtain finance, he will only be required to pay the vendor 0.25 percent of the purchase price.

Liz, the vendor of the property, agrees to the subject to finance clause, if Adam waives his right to the usual five-day cooling-off period.

However, shortly after exchanging contracts, Adam finds another property close to the beach and he falls in love with this property.

Adam instructs his solicitor to terminate the contract on the exchanged property, hoping to forfeit just 0.25 percent of the purchase price.

Liz gets wind that Adam has found another property and believes that he did not take reasonable steps to secure finance, instead he has simply changed his mind about the purchase.

Liz asks Adam to provide evidence that he took reasonable steps to secure financing (such as loan applications or meetings with a financial advisor), which he is unable to do.

Liz issues proceedings against Adam to recover damages due to Adam’s breach of contract. Unfortunately, Adam has no alternative but to settle the proceedings on the basis that he pays Liz ten percent of the original purchase price.

Had Adam not agreed to waive the five-business day “cooling-off” period, he could have safely exercised his cooling-off rights within that time for any reason and Liz would not have been able to bring action against him.

Subject to finance clauses and cooling-off periods are now becoming more commonplace in contract negotiations, due to the housing market and the lending policies of financial institutions.

It is important to obtain legal advice before exchanging contracts and that the contracts contain well-drafted clauses, to provide proper protection and clarity for the parties.

Thank you to Anthony Fogarty for his assistance with this column.

Email Manny Wood, principal solicitor at TB Law at manny@tblaw.net.au or call him on (02) 66 487 487.

By Manny WOOD, Solicitor