Securing your dream home can be one of the most thrilling and lifechanging purchases many people ever make. Getting legal advice when reviewing real estate contracts is often underestimated, but the devastation that can unfold when buyers skip this integral step.
The importance of a subject to finance clause
Due to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, lenders are continuing to crack down on home loan applications. Applications that would have been approved in a just few days in 2020 are now being put under the microscope for much longer periods, which could cause significant financial loss to potential home buyers if they get ahead of themselves.
In addition to tighter lending restrictions, the prudential regulator has also ordered banks to lift the “buffer” they add to market interest rates when assessing a borrower’s capacity to repay their home loan. This means people may be surprised to find out they cannot borrow as much as they intended under the new rules.
Recently, a family with three young children who moved to Australia with ‘big dreams’ have lost $320,000 of their life savings after a seller kept their house deposit when a Contract of Sale fell through.
Sam Gayed and his wife were looking to relocate from Bendigo to Melbourne in 2019 for the education of their young children.
Since arriving in Australia from Egypt over a decade ago, the family diligently saved their money over a 10-year period to pursue their dream of securing their perfect family home. They found the ideal house in which to raise their family, which was a $3.2 million four-bedroom, four-bathroom house in Balwyn.
Mr and Mrs Gayed made their offer to the sellers, secured the house, and paid the $320,000 deposit. The property was intended to settle in December 2019 when the deal collapsed.
Before signing the final contract, the sellers had removed a section in the contract’s fine print that a standard home sale agreement would usually contain, the ‘subject to finance’ clause. This clause usually allows the contract to be voided and the deposit returned if the buyer’s bank loan is not approved.
Mr Gayed applied for the same loan he got to buy his first house – a Doctor’s Scheme Loan that would cover 90 per cent of the house value without having to pay lender’s mortgage insurance.
But after he had signed the contract, the bank informed him there was a $2 million ceiling on this type of loan – which completely blindsided him.
This meant that Mr Gayed could only secure a maximum of 85 per cent of the house value by way of a home loan, leaving him $160,000 short plus another $160,000 on stamp duty.
Mr Gayed asked the vendor if they could come to an agreement allowing him to have more time to pay the remaining five per cent off the property, but the vendor refused his offer, which they were entitled to do. The due date on the contract arrived and the vendor cancelled the contract and kept the $320,000 deposit.
In the following months, the Mr and Mrs Gayed maxed out their credit cards and overdrew their bank account trying to stay afloat after losing their life savings.
When can a seller legally back out of a Contract?
A seller who gets cold feet after entering a Contract of Sale has several options if they wish to back out of a real estate agreement after it has been signed. To avoid committing breach of contract and incurring legal penalties, it’s important to understand the available options:
- Home sale contingency: If you have a new home contingency that allows you to back out of a deal if you can’t find a suitable new home for yourself or your family written into the purchase agreement, you may wish to invoke it.
- Cooling off period: When purchasing a residential property in Queensland, unless you buy at auction, the standard Contract of Sale provides you with a five-business day cooling-off period, commencing on the date you or your solicitor receives the signed Contract. The cooling-off period grants you the right to terminate the Contract for any reason including changing your mind. You must provide written notice to the seller, or their solicitor, prior to 5pm on the 5th day of the cooling-off period if you wish to terminate the Contract. Upon receiving notice of your decision to terminate the Contract, the seller must refund the deposit to you within 14 days.
If you elect to terminate the Contract, the only setback you may face is the seller’s right to impose a financial penalty of 0.25% of the purchase price, usually taken from your deposit. This penalty is imposed at the discretion of the seller and they can elect to return the full deposit amount to you. If the seller elects to take a penalty of 0.25% of the purchase price, the balance of the deposit, less the penalty amount, must then be returned.
- Pest and Building Inspection: A building and pest inspection is completed after signing the contract . The inspection can be done by one expert, or this can be two separate experts. The building specialist will check the structure of the roof, walls, floors, fences and any adjoining buildings, and look for issues such as cracks, faults, asbestos and movement in the foundation. The pest expert will check for termites, white ants, borers and other pests. If these inspection reports contain findings that are unacceptable, buyers may request that sellers issue credits to deal with cited issues or address these concerns by making repairs. Should you refuse to do so as a property owner, and the buyer be unwilling to accept these terms, it could end negotiations and, in turn, the deal itself, with the buyer pulling out of the Contract.
- Buyer agreement: A sympathetic buyer who understands and empathizes with your situation may be willing to let you out of the deal without penalty.
- Breach of contract: Should a buyer not comply with the terms of the purchase agreement and fail to correct this breach of contract within the time limits of any mandated cure period (aka grace period), you may also back out of the agreement.
- Full disclosure: Sellers who wish to back out of a real estate contract may also inform buyers regarding additional concerns than those legally required during the disclosure process in hopes of dissuading buyers from following through. Be careful if you choose to go this route though; anything disclosed to a single buyer may be legally required to be disclosed to future buyers as well.
It is important to seek the advice of an experienced property lawyer BEFORE anyone signs the Contract of Sale. Whether you are the buyer or seller, you will want to ensure that the special conditions within the contract are in your best interests and cover you if the unexpected does happen.
If you have any questions concerning the terms of a real estate contract, and potential legal recourses that you might pursue, be sure to discuss your circumstances with a qualified property lawyer who can advise you of your rights and the next steps you can take.
Consequences of cancelling a contract outright
Tempting as it may be to pull the trigger and back out of a contract when you’ve decided to end a deal, it’s wiser to pause, take a step back, and consider alternate legal recourses. That’s because while buyers may only forfeit the earnest money that they’ve put down as a deposit on a home purchase by backing out of a purchase agreement, sellers may face additional consequences.
Some things to be aware of include:
- Suit for specific performance: A seller who breaches contract may be sued and taken to court by the buyer in hopes of obtaining a court order requiring the seller, as a breaching party, to go forward with the agreement and complete the sale. If such an award is granted, the seller would be paid as agreed and title transferred to the buyer, even against the seller’s wishes.
- Damages: A buyer who feels that they have been subjected to unreasonable and unwarranted expenses because of a seller backing out of a purchase agreement may also sue for damages. Monetary damages may be awarded for several commonly incurred costs including, but not limited to, expenses such as storage costs, temporary housing costs, lost deposits, legal fees and more.
- Agent sues for compensation: If you’re a home seller who’s hired the services of a real estate agent, and suddenly and unexpectedly back out of a deal, you may find yourself in breach of contract with the listing agent. A real estate agent who puts in legwork to find buyers and promote a home for sale (and expects to be paid at sale via commission) may sue for payment of this commission.
Backing out of a legal agreement is not something that should be taken lightly in any circumstance.
Attwood Marshall Lawyers – providing trusted property law advice to mitigate the risk of disputes arising when buying and selling real estate
If a home seller desires to end an agreement, and finds themselves in potential breach of contract, we have dedicated commercial litigation lawyers who understand the complexities of property and commercial law and the wide range of issues that can arise during the process of buying and selling real estate.
Our team can investigate the matter and provide helpful, practical advice on the options available if you have been impacted by a Contract of Sale falling through. No matter the type of dispute you are faced with, we can provide support and help guide you through this challenging time.
If you are involved in a property dispute, please contact our Commercial Litigation Department Manager, Amanda Heather, on direct line 07 5506 8245, email email@example.com or free call 1800 621 071 to find out where you stand.
Alternatively, it is always best to have a property lawyer on your side from the very start so that contracts can be drafted comprehensively, and all parties can understand their rights and obligations under the contract.
Our property lawyers offer free pre-signing advice for all Queensland contracts and are always happy to review contracts to give you peace of mind before you commit to anything.
If you need contract advice, contact Property and Commercial Department Manager, Jess Kimpton, on direct line 07 5506 8214, email firstname.lastname@example.org or free call 1800 621 071.
We have conveniently located offices at Robina Town Centre, Coolangatta, Kingscliff, Brisbane, Sydney, and Melbourne. If you can’t see our team during business hours, our Robina Town Centre office is also open Thursday night until 9pm and Saturday morning until 12noon.