In negotiating the terms of the sale, agents are often required to present ‘subject to sale’ terms to the vendor. It’s important to understand that this single clause can put an entire chain of transactions – and a commission – at risk, writes Property & Commercial Law Senior Associate Mieke Elzer.
While it is not uncommon for vendors to agree to make their contract conditional upon the successful completion of their purchaser’s prior sale contract, a more cautious property market is also seeing purchasers seek to make their own purchase conditional upon first securing a sale of their existing property, and then having that sale successfully settle.
The ‘subject to sale’ clause is a tactic that helps many purchasers secure their next property without the financial pressure of owning two homes at once and potentially having to take on the high interest rates associated with bridging finance arrangements.
However, ‘subject to sale’ clauses don’t just protect the purchaser. They transfer a significant amount of uncertainty to the vendor.
Understanding how these clauses work – and the risks they create – can help real estate agents better advise their clients and manage expectations from the outset.
What is a ‘subject to sale’ clause?
An agent who receives a subject-to-sale offer should not assume that ‘subject to sale’ means the purchaser simply has to sell their property. The precise wording of the special condition determines what the purchaser must do, when they must do it and what happens if they don’t.
There is no standard form ‘subject to sale’ clause. Every clause is individually drafted, and seemingly minor differences in wording can significantly alter the parties’ rights and obligations.
Common variations include making the contract conditional upon:
- the purchaser entering into an unconditional contract for the sale of their existing property;
- the successful settlement of that sale;
- the purchaser having a right to bring settlement forward so that both the sale and purchase settle simultaneously; and
- provisions that deal with what happens with the deposit where a purchaser rescinds the contract under the condition.
Some contracts also include an escape clause (sometimes called an “offer notice” clause). This allows the vendor to continue marketing the property. If another acceptable offer is received, the vendor may issue a notice requiring the purchaser to waive the ‘subject to sale’ condition – often within 48 or 72 hours – or the contract will be rescinded.
Although these clauses attempt to balance the interests of both parties, they do not eliminate the underlying commercial risk that the purchaser’s prior sale may not ultimately settle, even where an unconditional contract has been exchanged.
Questions agents should ask before recommending a subject-to-sale offer
Before recommending that a vendor accept a ‘subject to sale’ condition, it is important that the agent understands exactly what each party’s expectations are. Before presenting a subject-to-sale offer to a vendor, agents should consider:
- Has the purchaser listed their existing property for sale?
- Is it already under contract?
- If under contract, is that contract unconditional?
- When is settlement scheduled?
- What happens if the purchaser’s sale is delayed?
- What happens if the purchaser’s purchaser defaults?
- How long does the purchaser have to satisfy the condition?
- Can the vendor continue marketing the property?
- Does the vendor have an offer/escape notice right?
- How much time does the purchaser have to respond to an offer notice?
- What happens to the deposit if the contract ends?
- Does the vendor have a reason to accept the conditional offer, rather than waiting for an unconditional purchaser?
The advantages
There are genuine benefits for purchasers. In some circumstances, these arrangements can work well, particularly where the vendor is not under time pressure and the purchaser’s property is already close to being sold.
A ‘subject to sale’ clause can reduce the risk of owning two properties simultaneously and minimise the need for bridging finance. It can also provide greater confidence when upgrading or downsizing and allow purchasers to avoid selling first before finding a replacement property.
The commercial risks
While these clauses may appear straightforward, they often create far more uncertainty than either party initially appreciates.
Every additional transaction increases the risk
One of the greatest risks is that ‘subject to sale’ clauses create a chain of dependent transactions.
For example: Vendor → Purchaser → Purchaser’s Purchaser
If the purchaser’s purchaser cannot obtain finance, terminates under another contractual condition, delays settlement or defaults altogether, the entire chain may collapse.
The vendor has no contractual relationship with the purchaser’s purchaser, yet their sale depends upon that transaction proceeding successfully.
Marketing momentum can be lost
One of the biggest commercial risks is the loss of valuable marketing momentum.
Once a property is marked “under contract,” many prospective purchasers lose interest or direct their attention elsewhere. Even where the vendor retains the right to continue marketing the property, sales agents may not be motivated to actively market the property, and in any case prospective purchasers may be reluctant to inspect when they see the property is already under contract. If the purchaser ultimately rescinds under the ‘subject to sale’ condition, the vendor may have lost weeks or even months of valuable exposure.
Escape clauses are not a complete solution
Escape clauses are often viewed as protecting the vendor. If another purchaser emerges, the vendor may issue an offer notice requiring the original purchaser to proceed unconditionally within a short timeframe. However, if the purchaser cannot satisfy the ‘subject to sale’ condition (which is often precisely why the clause exists), the contract ends and both parties incur legal expenses.
A hypothetical example of good intentions turning into costly consequences
Michael and Sarah agreed to purchase a property for $1.3 million. Their contract contained a special condition making the purchase subject to them entering into an unconditional contract for the sale of their existing home within 30 days; and settlement of that sale before settlement of their purchase.
The contract was signed in early December. As Christmas approached, purchaser enquiries slowed, offices began closing for the holiday period, and their property had still not sold.
Concerned about losing their dream home, Michael and Sarah spoke with their lender and discovered they qualified for bridging finance. The bank issued an approval just before Christmas.
However, by the time the vendor was notified the purchaser wished to rely on bridging finance, the deadline under the ‘subject to sale’ clause had already passed. The vendor, having received another more attractive offer, elected to rescind the contract. Michael and Sarah lost the property.
What began as a clause designed to protect the purchasers ultimately resulted in significant expense, stress and the loss of the property they had hoped to purchase.
These clauses need to be carefully drafted, actively managed and regularly reviewed as circumstances change. A purchaser’s financial position, finance options or ability to obtain bridging finance may evolve during the transaction, but contractual deadlines continue to apply unless the parties agree otherwise.
Because there is no standard form clause, careful drafting is essential.
Poorly drafted ‘subject to sale’ clauses have resulted in disputes over:
- whether the purchaser has genuinely satisfied the condition;
- whether the purchaser was required to use reasonable endeavours to sell;
- whether the purchaser’s contract needed to be unconditional;
- whether settlement, rather than exchange, was required; and
- whether the purchaser was entitled to a full refund of their deposit upon rescission.
While disputes of this nature are relatively uncommon, they demonstrate how critical precise drafting can be.
Alternatives to a ‘subject to sale’ clause
‘Subject to sale’ clauses are not the only way purchasers can secure their next property. Depending on the purchaser’s financial position, alternatives may include:
Bridging finance
For qualifying purchasers, bridging finance may allow them to purchase before selling. While bridging finance usually carries high interest rates, it can give a purchaser peace of mind to make an unconditional offer knowing that if their property does not settle in time, they will have the means to complete the purchase. This is a particularly attractive option for purchasers who are confident their property will sell, who can afford to service high interest rates in circumstances the prior sale has not settled by the time their purchase settlement is due, and who want to make a stronger offer in a competitive purchaser market.
Selling first
Many purchasers are understandably reluctant to sell their existing home before securing their next property. However, selling first provides certainty about the funds available for the next purchase and can put the purchaser in a much stronger negotiating position.
The main disadvantage is that the purchaser may need to arrange temporary accommodation between the settlement of their sale and the purchase of their new home. There may, however, be ways to minimise this gap.
For example, a purchaser may negotiate with the buyer of their existing property to remain in occupation for a short period after settlement under a licence agreement.
Alternatively, if the vendor of the property they are purchasing is willing, the purchaser may be able to move into their new property under a licence agreement before settlement.
These arrangements can provide some flexibility where settlement dates do not align, although they need to be carefully documented and should not be treated as a substitute for having the necessary funds available to complete the purchase.
Longer settlement periods
An alternative to making the contract conditional upon the purchaser’s prior sale is to negotiate an extended settlement period allowing the purchaser additional time to sell. This is a risky option for both parties and is only advisable where the purchaser has alternative means of settling in circumstances their property does not sell, for example sufficient liquid investments or other readily accessible funds.
Early advice
Obtaining advice from a mortgage broker or lender before making an offer may identify funding options that remove the need for a ‘subject to sale’ clause.
Encouraging clients to also obtain legal advice before signing can help ensure the contract accurately reflects the parties’ intentions.
For agents, the key takeaway is that ‘subject to sale’ is not a standard condition and should not be treated as a simple tick-box request from a purchaser. The precise wording can determine whether a vendor is tied up for weeks or months, whether the property can continue to be actively marketed and whether the vendor has a realistic way to exit the transaction if another buyer comes along.
Attwood Marshall Lawyers – your local property experts
Special conditions in contracts are designed to provide certainty, protection and peace of mind. As with many contractual arrangements, the success of a ‘subject to sale’ clause depends on whether it is the right commercial solution for the parties involved.
Attwood Marshall Lawyers works alongside real estate agents, brokers and accountants to keep transactions on track.
Our team are always available to offer advice on any special conditions prior to entering into a contract. For an appointment with our lawyers, please contact our Property and Commercial Law Department Manager Fleur Wallis on 07 5506 8233 or fwallis@attwoodmarshall.com.au, or free call the firm on 1800 621 071.
