The high hurdle to purchasing a property is an unconditional loan approval. What if the real estate agent is threatening that unless you sign straight away, they will sell the property to someone else? Do you take the risk and sign the contract, without an unconditional loan approval?
The problem: property contracts in NSW do not contain finance clauses
NSW property purchase contracts do not contain a ‘subject to finance’ clause which allows the buyer to change their mind and walk away if they don’t obtain finance approval to buy the property.
Why aren’t there subject to finance clauses in NSW?
In NSW, conveyancing practice has always been that a property contract should be unconditionally binding the moment it is exchanged. Solicitors and conveyancers acting for sellers in NSW simply refuse to agree to finance clauses: there is no ‘escape clause’ if loan approval is not received.
In Victoria and Queensland, there is a loan finance clause in the standard purchase contract which can be activated to give the buyer time (usually 14 or 21 days; 28 days in Western Australia) to obtain unconditional finance approval for the purchase. If the buyer does not obtain unconditional finance approval within that period, they can terminate the contract and receive a refund of the deposit.
Finance clauses are often necessary in Queensland and Western Australia because financiers will not approve finance unless and until they are given a signed purchase contract. Financiers in NSW do not need to have a signed contract.
With no subject to finance clause in the NSW Contract, is there a way that a buyer can safely sign a purchase contract immediately to avoid missing out on buying the property whilst retaining the ability to walk away if they don’t get unconditional loan approval? Yes – use the cooling off period to tie up a property while waiting for finance approval.
Cooling off is legal protection for buyers under the NSW conveyancing law against what is known as ‘gazumping’. During the cooling off period, a buyer can walk away from a legally binding contract within 5 business days without the need to give a reason. If the buyer rescinds, they lose their cooling off deposit, which is 0.25% of the price. But while the buyer can walk away during the cooling off period, the seller’s hands are tied – they cannot sell the property to anyone else.
Although cooling off protection exists in other states (except in Western Australia), it is not used to cover loan approvals because the contracts contain loan finance clauses.
For example, a buyer signs a contract to buy a property for $1,000,000. They pay a cooling off deposit of $2,500. They have a cooling off period of 5 business days to obtain their building, pest and strata inspections and searches and their unconditional loan approval. During that period, the buyer can walk away from (i.e. rescind) the contract while the seller is locked in. If the buyer doesn’t rescind, the rest of the 10% deposit is payable by 5 pm on day 5, and the contract becomes unconditional.
Of course, what is given can also be taken away. Cooling off periods are removed when:
- a solicitor or conveyancer, having explained the contract to the buyer, signs a section 66W certificate which removes the cooling off period; or
- the property is sold at auction or on the day of the auction. This partially explains the popularity of auctions with real estate agents – a sale by auction results in an unconditionally binding contract.
Is 5 business days the longest cooling off periods you can get?
No: while the standard cooling off period in NSW is 5 business days, it can be extended by agreement. Many buyers request and receive 10 day cooling off periods when signing contracts (not at auctions). Many real estate agents have ‘cooling off extension’ pages which they can insert into the contract to extend the cooling off period to 10 days.
In this way, buyers in NSW can use the cooling off period to tie up a property for 5 or 10 days while waiting to receive an unconditional loan approval, as they would have if the contract contained a subject to finance clause.
What about off-the-plan buyers?
Off-the-plan buyers are exposed to finance risk. They cannot obtain unconditional loan approval before they sign because the building is under construction and cannot be valued until it is finished; and in any case, a loan approval is valid for only 90 days. The seller would not agree to a request for a 1 or 2 year cooling off period until the building is built.
Off-the-plan buyers should obtain pre-approval at least three months before the estimated settlement date, then hope and pray that the property values up and they can obtain finance approval when the time comes for completion.
What now?
Contact us if you or someone you know needs advice regarding cooling off periods in contracts to purchase land in NSW.
