There are many misconceptions amongst Buyers, Sellers and Agents about the circumstances that allow a Buyer to terminate a standard REIQ residential Contract under the finance clause. One of the most common is the finance clause operating as a ‘get out of jail free card’ in the event the Buyer gets cold feet or finds a better deal elsewhere. Most Agents would agree that this happens daily. So why do Sellers ‘accept’ fishy finance terminations? Is it less hassle to move on? Or is it that the right advice simply isn’t reaching the Seller’s ears?
The clause reads as follows:
Here is a practical scenario which is all too common. A Buyer signs a Contract subject to finance and indicates to the Sellers agent that finance ‘will be no problem’. The Buyer conducted their building and pest inspection which raises many minor issues which together would not be reasonable to terminate on. A few days later the Buyer terminates on finance. I guess it’s back to square one for the Seller, but wait! The Buyer must take all reasonable steps to obtain approval. What does this mean? Generally speaking the Buyer must at the very least, take steps to make an application for finance.
In 2013 and close to home, the District Court of Queensland considered a case where a Buyer purchased a unit in Port Douglas subject to finance. The clause provided a finance amount of $400k and the financier was to be ING. Although the Buyer had a pre-approval with ING prior to signing the Contract, ING required a new application be submitted. Given a looming finance date, the Buyer was advised that in order to have finance in time, they should make an application to The Rock Building Society. This application was declined and the Buyer terminated by giving notice that they could not obtain finance approval. The Court found that because the Buyer had not even attempted making an application to ING, they did not take all reasonable steps to obtain approval and ‘did not instigate the process required of her. The deposit was forfeited.
The implication is that in instances where the Buyer terminates on finance and the Seller suspects that they have not made all reasonable steps, proof should be sought by the Seller through their Solicitor by way of a letter from their bank.
Of course, whether or not the Seller tries to hold the Buyer to the deposit must take into account a number of factors such as the deposit amount, the legal costs of dispute and the time factor of how long it may take to find another Buyer. If the Seller has another Buyer lined up, perhaps it is commercially better to move forward.
But what if the Buyer terminates on the basis that they have obtained finance approval, but not on terms satisfactory to them? Just one of many subjective conundrums we face every day.