If you are buying a property in NSW, you must sign a contract of sale which includes details about the property and the terms and conditions associated with the purchase.

What is an exchange of contracts?

A property is considered sold at the time contracts are exchanged and a deposit (normally 10% of the purchase price) is paid. Ideally, the exchange of contracts takes place once the purchaser’s solicitor has reviewed the contract and made any necessary amendments.

Two identical contracts are signed by each of the purchaser and the vendor, and are then dated. The purchaser retains the version of the contracts signed by the vendor and vice versa. Up to that point, the agreement is not legally binding on the purchaser or the vendor and either party can change their mind about buying or selling the property. A contractual relationship comes into effect as soon as the contracts are exchanged.

What is a cooling off period?

Every purchaser of a residential property in NSW is entitled to a 5 business day cooling off period. Section 66Q of the Conveyancing Act 1919 defines residential property.

A vendor often insists on receiving a section 66W certificate at the time of exchange. A purchaser who signs a section 66W certificate waives their right to a cooling off period and can no longer back out of the contract without forfeiting the 10% deposit.

Note: if a property is purchased at auction (or on the same day as an auction after the property was passed in), the purchaser has no cooling off rights.

A purchaser can extend the cooling-off period by written agreement with the vendor. To do that, you must provide the vendor with a written request, and ensure that you have a written reply, before 5pm on the fifth business day after exchange. If you do not have a written reply from the vendor agreeing to an extension of time before then, it will be deemed that the cooling off period expired at 5pm on the fifth business day and you will be bound to the terms of the contract.

A purchaser who decides not to proceed with the purchase must provide the vendor with written notice of that decision during the cooling off period. In that event, the purchaser forfeits 0.25% of the purchase price to the vendor, and the balance of the 10% deposit paid on exchange is returned to them.

Why should a purchaser make a colling off period a condition of their offer?

A purchaser benefits from an exchange of contracts with a cooling off period for the following reasons:

1. A cooling off period allows a purchaser the opportunity to secure a property risking only 0.25% of the purchase price;
2. A cooling off period gives the purchaser 5 business days to consider any pest, building or strata inspection reports they order without fear of another purchaser securing the property. If a problem is uncovered, the purchaser can get out of the contract, forfeiting only 0.25% of the purchase price to the vendor;
3. upon exchange, the property goes off the market. Even if another prospective purchaser comes offers the vendor more money, the vendor is unable to accept that larger offer;
4. the purchaser has extra time to secure finance for the purchase without competition from other purchasers. If the purchaser obtains conditional loan approval before exchange, the incoming mortgagee should be able to issue unconditional loan approval during that time; and
5. If the incoming mortgagee does not issue unconditional loan approval during the cooling off period, vendor is unlikely to refuse the purchaser’s request for an extension to the cooling off period to give the purchaser more time to secure unconditional loan approval. If however the vendor denies the request for an extension, the purchaser must decide whether to proceed with the purchase without the incoming mortgagee’s unconditional approval.

Why is the vendor insisting on a section 66W certificate?

Although cooling off periods are generally in favour of the purchaser, their actual existence could work in favour of the vendor. In a sellers’ market where the supply of property cannot meet the demand by purchasers, a vendor can demand that a purchaser waive their cooling off rights. This would ultimately mean that neither the purchaser nor the vendor have a right to rescind the contract.

It has been argued that there is an imbalance of power in this scenario. As the property stays on the market until the exchange of contracts, the purchaser may be forced to decide between waiving the cooling off period (and skimping on their due diligence) or possibly missing out on buying the property. Nonetheless, the vendor is within their rights to insist on the section 66W certificate.

A quick contract exchange is often necessary to secure a property. A purchaser who agrees to waive their cooling off rights (and therefore be bound by the full terms of the contract from the time of exchange) could make their offer more attractive to a vendor. Of course, it is not recommended that a purchaser make this offer without first obtaining all the necessary building/ pest/ strata reports and unconditional loan approval from their incoming mortgagee.

Best practice is for a prospective purchaser to obtain a pre-approval from the incoming mortgagee before even starting to inspect properties. From then on, once you find a property, rely on your solicitor to guide you through the negotiation of contract terms and the subsequent exchange of contracts.

What now?

Contact us for a free initial phone consultation if you or someone you know needs advice or assistance concerning any stage of the process of purchasing a residential property.