Purchasing a property isn’t as straightforward as making a simple purchase from a store. Typically, there’s a lot of back and forth between the parties involving the property’s price, condition, features, time constraint and other negotiations, which are stipulated in the contract of sale.
To fully grasp your responsibilities and rights as a property buyer, understanding the contract of sale is essential. In this article, we’ll break down the critical aspects of a contract of sale, offering guidance on how to protect yourself.
What is a contract of sale for the purchase of property?
A contract of sale is a legal document that governs the relationship between a property vendor and a purchaser (you).
This document includes the terms and conditions agreed upon between the buyer and seller, as well as all relevant details related to the sale of the property, such as:
- What the vendor is obligated to do
- What the buyer is obligated to do
- What will happen during the settlement process
- Consequences for parties who breach the contract
The document becomes legally binding once the buyer is satisfied with the terms and conditions and all parties have signed. Therefore, it is imperative that you have your contract reviewed by an expert Property Solicitor before you sign the contract.
What is included in a standard contract?
A contract comprises many parts that must adhere to prescribed legislation Conveyancing (Sale of Land) Regulation 2017 for the contract to be legally binding.
The primary components of a contract of sale include:
- Vendor and purchaser details: Their names and their addresses
- Property Details: Including the physical dimensions
- The purchase price, considerations, and date of payment: Considerations include the deposit and remaining balance. The percentage of the purchase price to be paid as a deposit depends on the figure agreed upon by both parties negotiation.
- Chattels included in the sale: Chattels are items not physically attached to the property, such as curtains, fridge, furniture, washing machine, and dishwasher
- Easement rights: An easement gives a property owner the right to use the property or land for a certain purpose. Some common examples of easements include the routing of drainage systems and electrical mains by government authorities.
- Cooling-off period: The period where the buyer is allowed to conduct due diligence and back out of the contract without penalties.
- Sunset clause: This clause sets certain conditions that could make the agreement null and void.
- Good & Services Tax (GST)- Analyse the contract of sale before signing to check whether GST is included in the purchase price.
What are prescribed documents?
Prescribed documents are the documents that are needed to be attached to the contract of sale. They are called prescribed since they’re required by the law.
In NSW, as a bare minimum a contract of sale needs to have the following prescribed documents:
- A copy of the title from the Land Titles Office in your state
- A copy of the plan of the land
- Zoning certificate from the local council
- A building and pest inspection report
- A statement of your cooling-off rights
- Drainage and sewer diagrams
- Documents showing any other registered interests in the property
- Any affectations, such as covenants and easements on the land
What happens if these prescribed documents are missing from the contract?
If these documents are missing from the contract, you as a buyer have a right to get out of the contract. You may also be able to claim compensation depending on when you discover that these documents are missing.
But it should never get to this stage since your lawyer should notice they’re missing when reviewing the contract.
These documents may sum up to 500 pages and may include a lot of legal terms. As such, it’s the work of your property lawyer to go through them and provide you with advice.
Understanding the special conditions of the contract
Aside from the standard conditions we’ve mentioned above, contracts of sale also have special conditions that are included to protect the vendor. This is where most of our attention as property lawyers goes because these are conditions that have been drafted by the vendor.
The special conditions of the contract will specify that it is the purchaser’s responsibility to check the risks and conditions of the property by performing their due diligence.
Remember, our role as your property lawyers is to protect your interests in the deal.
The common special conditions that we typically look out for in a contract of sale include:
- Penalties
- Disclosures by the vendor
- Events that must occur
- Tenancies
Penalties clauses
Nearly all contracts of sale have penalty clauses that outline what penalties will be imposed if the purchaser fails to settle on time.
The penalty may be interest charged at a particular rate or fees charged for delaying, rescheduling, or cancelling the settlement.
While the purchaser may be fully prepared and have financing in order, it’s important to know what penalties will apply in case of delays. This is also important so that you can take note of the timelines provided.
Your property lawyer can help you negotiate the penalty interest rate or fees down to help you avoid any expensive costs.
Disclosures by vendor
The vendor may make disclosures under the contract about the property and prevent you from making future claims against the vendor.
Example of a purchaser signing a contract without reviewing disclosures
We had a vendor client we acted for who included a disclosure regarding a work order made against the property. The property was sold via auction and the purchaser who won the bid didn’t get any legal advice.
Since there was no lawyer to review the contract and all crucial documents, they had no idea about the disclosure that was attached to the contract.
In the end, the purchaser had to comply because it was disclosed in the contract. It was quite an unfortunate scenario that would have been avoided if the purchaser sought legal advice.
This scenario further solidifies the importance of having a Property Lawyer and getting legal advice, especially if it’s a contract you haven’t seen, it’s too long, or you’re simply not familiar with the terms.
Subject to certain events
There are also special conditions in the contract that state that a certain event must occur before the property can be settled. This is common among deceased estates, where the vendor isn’t actually the owner of the property yet and certain events must occur before they become the owner.
Be wary of these types of special conditions, we often hear horror stories where purchasers expect to settle the property they’ve purchased within the standard 42 days. But because there’s a special condition that requires a certain event to occur, this can drag the settlement date to a further 6 months.
Lease agreements & tenancies
Another special condition to be on the lookout for is when the property being sold is subject to existing tenancies, whereby the property sold is currently leased out to existing tenants.
We often see a lot of first-home buyers get a nasty surprise when they purchase a property and realise that they can’t move into the house because there is an existing lease agreement.
Having a property lawyer in this instance can be ideal if you’d like to negotiate with the seller to have the property settled with vacant possession. However, if there is a fixed-term lease agreement, then you’ll have to wait until that lease has expired before you can move in.
When should I request a contract of sale from the vendor/seller?
You should request a contract of sale from the vendor immediately after you’ve thoroughly inspected the property and are satisfied with your inspections. Once you’ve requested a contract of sale from the seller, make sure you get a copy to keep and send it to your Property Lawyer.
When do I need to get the contract reviewed?
As mentioned, it’s recommended to get the contract of sale immediately after a successful inspection. But that doesn’t mean we’ll review the contract straight away. There are a couple of necessary steps that need to happen before you are ready for a contract review.
Some questions we’ll ask you before reviewing your contract are:
- Have you made an offer?
- Have you done your due diligence?
- Have you got your finance?
[.callout] It’s always better to get the contract of sale as early as you can, because the agent may delay sending you the contract which can further delay the contract review process. [.callout]
When should I sign the contract of sale?
You should only sign the contract of sale once you’ve gone through the following stages:
- Obtained finance approval
- Done your due diligence
- Reviewed your contract
Finance approval from the banks
Getting Finance Approval from the banks is a crucial step in the property buying process. If you’ve signed the contract and it becomes unconditional, and you are unable to proceed with the sale due to finance then it could result in you losing the full 10% deposit.
You can be protected as a buyer by including a “subject to finance” clause in the contract, which allows you to exit the contract without penalty if you’re unable to get finance within a specified timeframe.
Due Diligence completed on the property
Due diligence involves getting a building and pest inspection report, getting survey reports, obtaining building certificates from the local council, and generally conducting checks and analysing the deal.
It is even more important if you’re buying the property via auction. Auction deals have no cooling-off periods. If you win an auction bid, you must sign the contract and pay the deposit on the same day. You can’t back out of the contract.
This means you must do your homework before attending the auction.
Contract Reviewed by your property lawyer
Having the contract reviewed by your property lawyer is part of the due diligence process. The lawyer will help you understand any special conditions and disclosures, as well as explain the clauses in simple language.
The lawyer will also help you take a look at the prescribed documents. This way, you’ll understand the contract well and determine whether you want to go ahead with the deal.
Are there any exceptions if these three stages haven’t been completed before signing?
There are some specific scenarios where it might make more sense to sign the contract first before going through the three stages. For example, if the market is hot and there’s demand for the kind of property you’re interested in, it might make sense to sign the contract first to have it reserved for you.
You can only do this in private treaty sales because there is a cooling-off period as opposed to an auction sale (no cooling-off period). This will provide you with extra time to get finance, do your due diligence and have your contract reviewed in this period. This provides a safety net for purchasers, as you can still back out of the contract in this period.
Purchaser’s negotiations
As the purchaser, you can initiate negotiations to the Vendor before you sign the contract for sale. Whilst it can never be guaranteed whether the Vendor will agree to such negotiations, it is always worthwhile to propose first.
Some ways you may negotiate may include:
- Reducing the deposit from 10% to 5%
- Delaying the settlement date to best suit the purchaser’s needs
- an obligation for the Vendor to perform a particular action. some text
- For example, to leave behind a particular chattel like a loose cupboard, a dryer or a washing machine and include it in purchase. You can even negotiate for the vendor to perform works and repairs such as a leaking tap. However, it is quite rare for the vendor to accept.
What makes a contract of sale enforceable?
A contract of sale becomes enforceable when:
- Both parties have signed the contract. If the vendor or buyer hasn’t signed the contract, then contracts haven’t been exchanged and the property isn’t yours yet.
- The contract has been dated on the front page
At this stage, the contract becomes enforceable and is legally binding.
Case study: client exchanged contracts without knowing
We had one particular client who had a very unfortunate encounter. The agent told them to sign a remittance. But we came to realise that it wasn’t actually a remittance; it was the contract of sale.
In this case, the contract was exchanged and the client didn’t even know it. Thankfully we picked up on this early on and there was a cooling-off period.
Golden tip: Do not sign anything until you’ve gotten legal advice given to you from your property lawyer.
Getting out of the real estate contract of sale
We often get a lot of questions regarding whether you’re able to back out of a contract once it’s legally binding. So let’s explore some of these scenarios below.
Can you as a buyer get out of the contract once exchanged?
In most cases, especially for private sale treaties, you’ll have a 5-day cooling-off period. If you wish to get out of the contract within this period, you can do so while forfeiting the 0.25% holding deposit.
However, there are some situations where you can get out of the contract and still get a full deposit refund, especially when the vendor breaches the contract.
For example, you might reach the settlement date and realise the property still has tenants, yet the contract states vacant possession at settlement. In this case, the vendor has breached the contract and you have a right to back out of the contract, after providing 14 day’s notice.
Additionally, if the vendor is delaying the settlement and they’ve breached their notice to complete, then you can also get out of the contract and get your deposit back in full.
Can a vendor cancel the contract once exchanged?
The only time a vendor can successfully cancel the contract is when the purchaser has breached their end of the contract, such as failing to pay the deposit on time.
However, if you haven’t breached any terms in the contract, the vendor legally can’t cancel the contract once it’s exchanged. They must go forward with the sale.
Speak to Arver Law to bulletproof your purchase
A contract of sale is one of the most important aspects of the property purchasing process. Having a clear picture of what you’re signing into, what it makes you liable for, and how to protect yourself is crucial.
As such, speaking to a property lawyer is the best way to bulletproof the deal. We have a wealth of property experience to make your transaction as seamless as possible.
Book your free consultation with us today, or call us at (02) 7806 0632 to speak with one of our expert property lawyers.
