By Jackson Barret
•
27 May, 2020
Where someone is considering buying property, however, have not received unconditional finance approval, they are often advised by their broker or solicitor to sign the contract of sale with the inclusion of a “subject to finance” condition. Whilst this is common practice, it is equally common that purchasers do not fully understand the meaning of entering into a contract of sale on the basis that it be subject to finance. Often, purchasers act under the misapprehension that they have carte blanche to do as they wish and believe that if their finance is not approved, the contract is automatically brought to an end. Such a misunderstanding can have serious consequences as a purchaser mightn’t proactively notify their solicitor that their finance has not been approved, and in turn their solicitor mightn’t proactively notify the Vendor or their solicitor that the contract is at an end. The result being that a purchaser may be contractually bound to complete the contract of sale, notwithstanding an unsuccessful finance application. In this article, we look at what a purchaser is obliged to do before they can rely on a subject to finance clause for the purpose of bringing a contract of sale to an end. General Condition 20 General Condition 20 (“GC20”) of the Contract of Sale of Land published by the Law Institute of Victoria & the REIV (August 2019) is the standard provision whereby a purchaser can enter into a contract of sale subject to finance. GC20 provides as follows: “ 20. Loan 20.1 If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor. 20.2 The purchaser may end the contract if the loan is not approved by the approval date, but only if the purchaser: (a) immediately applied for the loan; and (b) did everything reasonably required to obtain approval of the loan; and (c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor; and (d) is not in default under any other condition of this contract when the notice is given. 20.3 All money must be immediately refunded to the purchaser if the contract is ended.” Condition 20.1. "If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor.” In order to activate GC20, a purchaser must complete the details of their loan application in the particulars of sale. A purchaser is required to: tick the box marked “the contract is subject to a loan being approved and the following details apply if the box is checked; then, enter the lender they propose to apply to; then enter the maximum loan sum that they will be applying for; then enter the loan approval date. Only if these details are properly completed by the purchaser before the contract is signed will GC20 be enlivened. Condition 20.2 "The purchaser may end the contract if the loan is not approved by the approval date, but only if the purchaser: (a) immediately applied for the loan; and (b) did everything reasonably required to obtain approval of the loan; and (c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor; and (d) is not in default under any other condition of this contract when the notice is given.” The approval date is of critical importance and is the date by which the purchaser may end this contract provided that they have complied with the matters set out at items 20.4(a) – (d). When negotiating the approval date with the vendor, it is important that the date agreed between the vendor and the purchaser provides the purchaser with sufficient time to obtain unconditional loan approval. In some cases, the vendor may agree to extend the loan approval date, however, this should not become an expectation of the purchaser when entering into a contract of sale." (a) immediately applied for the loan The purchaser needs to have immediately applied for the loan. This, in most cases, is handled by their mortgage broker and is therefore in many ways out of the purchaser's control. Therefore, the purchaser needs to remain in constant communication with their broker. If the purchaser is not working with a broker and is handling their own finance application, they need to act immediately and ensure they meet all of the lender's requirements in a timely fashion. If the purchaser does not immediately apply for the loan, they may not be entitled to end the contract. The vendor may request evidence that the loan was immediately applied for. (b) did everything reasonably required to obtain approval of the loan; and Subsection (b) requires a purchaser to go above and beyond the requirement set out in subsection (a). Again, in many instances, a mortgage broker will act for the purchaser taking the control our of the purchaser's hands. In any event, the purchaser or their broker MUST proactively liaise with the bank and provide them with any information that they require in a timely fashion. To do otherwise will expose the purchaser to an argument by the vendor that the purchaser has not complied with subsection (b). A purchase must bear in mind that if they fail to comply with any part of GC 20 due to the conduct of their broker, the purchaser will be deemed to have not complied with GC20 and will be unable to benefit from the condition. “(c) serves written notice ending the contract, together with written evidence of rejection or non-approval of the loan, on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor” If on the approval date, the purchaser has not received unconditional finance approval, they may bring the contract to an end provided that they give to the vendor written evidence of the rejection within 2 clear business days. In practice, it is usually the solicitor who will notify the vendor or their solicitor that the contract is at an end accompanied by the required evidence. The evidentiary requirement is critical and is easily overlooked by a purchaser or their solicitor. The problem with the evidentiary requirement is that the lender will need to provide this evidence which again takes control out of the vendor's hands. Given subsection (c) provides a purchaser with 2 days from the loan approval dates expiry, the purchaser needs to proactively contact their lender to obtain written evidence quickly. If a purchaser does not obtain written evidence of non-approval within 2 days as and from the loan approval date, they will be unable to provide the vendor with written evidence and will have failed to comply with subsection (c). “(d) is not in default under any other condition of this contract when the notice is given.” The final subsection – (d) is a catch-all provision. If a purchaser is in default of any condition in the contract of sale, they will not be able to benefit from the operation of GC20. Therefore, a purchaser needs to understand its contractual obligations so that they can ensure compliance and avoid a default. The approval date is usually a date within 2 weeks of the contract of sale is signed and so falls at the beginning of the conveyancing process. A contractual obligation of the purchaser which usually materializes before the loan approval date is to pay to the vendor the deposit. If the purchaser has failed to pay to the vendor the deposit, they are in default of General Condition 14 and will be unable to rely on GC20 to bring the contract to an end. Conclusions GC20 is of great benefit and allows purchasers to secure a property in circumstances where they otherwise would not be able to – due to the risk that their finance is not approved yet they are contractually bound to complete. However, a purchaser needs to understand the operation of GC20 and in what circumstances it can be relied on to bring a contract to an end. A contract is not automatically brought to an end in the event finance is not approved. It is critical that a purchaser understands and remains in regular communication with their solicitor and broker/lender to ensure that GC20 is complied with. Jackson Barrett 27 May 2020 Liability limited by a scheme approved under Professional Standards Legislation