The pros and cons of buying property “subject to finance”
Often, the purchaser will want and need the extra precaution of having the contract made “subject to finance”, so that they can pull out of the contract if they are unable to obtain the finance necessary to proceed with the purchase of the property.
This is always wise and prudent where there is some doubt about the purchaser’s capacity to borrow, which is often the case in the current tight financial market post the Global Financial Crisis.
But beware: if finance is not approved at the time the purchaser signs the contract, and the contract was made “subject to finance”, the purchaser may still be at serious risk of being liable for the purchase price if that clause is breached.
What is a “subject to finance” clause?
These clauses usually state that the contract is “conditional” or subject to the lender agreeing by a particular date to grant to the purchaser a minimum loan amount for a specific period of time at an agreed interest rate.
The clauses also set out the procedure by which purchasers must inform the vendor if their application for finance is unsuccessful and, in effect, provide purchasers with the option of ending the contract and getting their deposit returned to them by the vendor.
If worded properly, and followed to the letter, a “subject to finance” clause can be an important protection for the property purchaser.
If not worded properly, or if the purchaser’s conduct is contrary to the terms of the finance, then a “subject to finance clause” can, on the contrary, be weapon that may be used by the vendor.
The risks of “subject to finance” clauses
Purchasers occasionally assume that “subject to finance” means that if they cannot obtain finance at all, then the contract is automatically cancelled and that they are entitled to having their deposit refunded to them. This assumption is incorrect.
Subject to finance clauses usually contain a “special condition” that states that the purchaser will use its “best endeavours” to apply for and do everything necessary to obtain the loan.
If the purchaser does not meet this special condition, for example by not using their best endeavours to obtain the loan or the finance condition has expired, then the contract may become unconditional (that is, not dependent on any conditions), in which case the purchaser will be in default of the contract if they do not settle, which may enable the vendor to sue the purchaser for breach of the contact.
Purchasers have to also be very careful that they do not “waive” the “subject to finance clause” unless you are absolutely certain that you are able to settle pursuant to the terms of the contract. For example, if the date by which you are to obtain finance approval passes, it is important that you either terminate the contract, or agree in writing to an extension or variation of the finance clause. If you do not do so, and still try to settle without success, the vendor may allege that you have “waived”, or given away the right to rely on, the finance clause.
What happens if you breach the “subject to finance” clause?
This is a common area of dispute between vendors and purchasers.
If the purchaser has paid the vendor a deposit, the purchaser forfeits the deposit, but more concerning for a purchaser is that a purchaser in default may be forced to proceed with the purchase of the property as well as being sued by the vendor for damages for breach of contract and be liable for any additional costs.
Similar risks apply for purchasers who enter into sales contracts without obtaining “unconditional finance”, that is, complete approval for the loan from their lender or “pre-approval”, that is, in-principle approval for the loan that is not a formal approval. In the event that the lender does not provide the purchaser with complete approval for their loan, and the sale ultimately cannot proceed, the purchaser is exposed to being sued by the vendor for breach of contract.
What are your options and why you should contact us?
When entering into a contract for the sale of property, it is very important that you ask us to check the specific words of the “subject to finance” clause to ensure that you are adequately protected from the risks associated with not obtaining the necessary finance.
It is also important that such clauses are properly explained so that you can make an informed decision as to whether or not it is in your best interests to enter into the contract.
Anecdotal evidence suggests that purchasers have been caught out in the past by relying on what they have been told by real estate agents, namely that “these are standard clauses which are typical in all property sale contracts and really nothing to worry about.”
As a purchaser, it is fundamental that you realise that relying on such comments are very risky, especially because the real estate agent does not act for you!
For this reason, it is imperative that you ask us to prepare or check the wording of such clauses. We will also confirm with the purchaser’s bank or lending institution how long it will take to arrange finance.
It is also important that you are conscious that if you become aware that finance will not be approved in time, as specified in the “subject to finance” clause, then you will need to obtain a finance extension in writing from the vendor and/or their agent.
Rather than attempting to deal informally with the vendor or their agent to arrange an extension of time, it is wise to involve us in formally drafting and documenting such extensions, in the event that the contract goes awry, and to ensure that any such extensions do not render the contract unenforceable.
For more information and advice on “subject to finance” clauses, or any property law and conveyancing advice, please do not hesitate to all us on 8354 2233 or send us an email at firstname.lastname@example.org.