CONDITIONAL STAGE – BUYER
There are essentially four stages that cover the breadth of the conveyancing process:
- Pre Contractual Stage;
- Conditional Stage;
- Unconditional Stage; and
- Settlement/Post Settlement Stage.
The importance of this stage, which occurs after the signing of the contract but before the contract becomes unconditional, cannot be overlooked as it is during this stage that the buyer under a contract can elect not to proceed with a purchase, usually without penalty, so long as they can come demonstrate that a condition of the contract has not been met.
As a matter of law, this is an example of a “condition precedent” as the condition must be met, unless its failure to be met is excused, before performance under a contract becomes due and before any contractual duty exists.
Types of Conditions
The most common examples of such conditions are set out below.
Under the Property Occupations Act, a buyer may, within a five business day period commencing on the day that they receive a copy of the contract signed by the seller, terminate the contract but will be subject to a 0.25% termination penalty.
The Finance Condition sets out whether the contract is subject to finance, whether the buyer is free to seek finance from any financial institution, what finance amount is required to meet the condition and when the Finance Date is due. Where the contract has a Finance condition the contract is conditional on the buyer obtaining the financial assistance required to settle and the buyer may elect not to proceed if they cannot do so.
However, buyers should note that the standard REIQ contract specifies that unless Finance Amount, Financier and Finance Date are all completed then the contract is NOT “subject to finance” and failure to be able to pay for the purchase is not a ground for termination.
There is no termination penalty payable here.
Building and Pest
The Building and Pest Condition provides that the contract is conditional on the buyer receiving a satisfactory report from a Building and Pest inspector on the state of the property being purchased but again it is important to note that if the Inspection Date is NOT “subject to Building and Pest” and issues that would not be covered by such an inspection are not grounds for termination.
There is no termination penalty payable here.
However, these conditions are not a “general” power to get out of a contract because you have changed your mind.
Other conditions can be included in a contract and it is for this reason that it is important that you consider the need for such conditions before signing the contract.
One such condition, whose power is frequently overlooked, is a Due Diligence condition that allows a buyer to terminate the contract if their investigations reveal a matter that causes them sufficient concerns to want to do so.
APPLICATION TO BUY
The buyer must, by 5 pm on the due date determined pursuant to the contract, advise the seller that:
- they have received a satisfactory finance offer/inspection report or waive the condition and that they wish to proceed with the contract; or
- they have not been able to obtain a satisfactory offer of finance/inspection report and are electing to terminate the contract; or
- they are requesting an extension of the due date for the relevant condition, although the seller is under no obligation to grant such requests.
Failure to do so does not mean that the buyer loses their right to terminate but it does give the seller the right, until the buyer provides one of the above advices, to terminate the contract.
However, the buyer’s deposit would be refundable.
Important Lessons for Buyers
Buyers should ensure that they adequately protect themselves by undertaking the following important three activities:
- include, as far as the seller will accept, that they include in the contract appropriate conditions to allow them to address all matters of concern and terminate the contract if their investigations reveal adverse matters;
- ensure that the periods set out for conditions in the contract are sufficient to allow them to conduct all necessary investigations, including making their finance application and organising a building inspection; and
- ensure that they act quickly within the specified period to apply for finance/organise an inspection so that they are in a position to determine whether they want to proceed with the contract at expiry of this period.
On many occasions we are approached by client buyers who have not allowed sufficient time/acted quickly enough and are now unsure as to what they are able to do and as a result are exposed to the risk that the seller may terminate the contract.
Buying a House will for most people be the most important financial decision that they make – we cannot recommend highly enough the importance of understanding all contract conditions and ensuring that you meet all due dates and promptly advise your solicitor if you consider that you may encounter difficulties in doing so.
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