Legal Loopholes In Property – Part 2 – Rob Balanda

In a recent blog I began sharing my “Legal Loophole List”.  You know, that list that you pull out of the bottom drawer after a client consults you when they are trying to extricate themselves from a Real Estate Deal that they now regretted.

Here’s Part 2…

1. DEPOSIT

The first thing about the deposit is that it should not be more than 10% of the purchase price.  Insertion of an amount of more than 10% in Queensland will generally convert the Contract from one where the balance purchase price is payable in cash on settlement, to an instalment Contract.

By virtue of the fact that it is an instalment Contract, the Buyer will have additional rights and in particular the right to extend settlement for up to another 30 days.

This may be catastrophic to a Seller if he was unaware of this fact eg. he may be relying upon the sale proceeds to purchase another property.

A threat to exercise your rights and extend settlement for up to a further 30 days may put pressure on the Seller to reduce the price to a more acceptable level to you.

But how common is it really for Agents to accept more than 10% deposit.

And where these extra monies are mistakenly paid by a Buyer, how common is it for the Agent not to refund these overpaid monies to the Buyer.

It happens more than you think as a lot of Agents work under the misconception that it is a bonus to hold the extra monies as it commits the Buyer more to the sale.

This could not be further from the truth and the reality is, particularly where a development site is involved, that developers sometimes purposely set the deal up so that they pay more than 10% (usually as a round number like an extra $100 or $1,000 so that it is more easily overlooked) with the aim of keeping up their sleeve the right to later claim it is an instalment contract and they are entitled to another 30 days to settle.

Under most Contracts of Sale it is also a default by the Buyer to pay the deposit by way of a post dated cheque.

If you are the Seller, looking to extricate yourself from the transaction, call for the Agent to provide you with a copy of the deposit cheque.

If it shows a date after the date of the Contract then this will make it a post dated cheque, constitute a default under the Contract and possibly entitle you to terminate the Contract of Sale.

2. DEPOSIT BONDS

If you have paid the deposit by way of a Bank Guarantee or Deposit Bond then check your records to see whether you have actually given the original of this Bond to the Agent.

If you have only given them a photocopy then there is an excellent chance that the Bank or the Bond Provider will not allow the Agent to draw down against this Guarantee or Bond unless the original of the document is delivered to them.

If this is in your possession and the Agent only holds a copy, then this was a beginner mistake from the Agent’s perspective in not collecting the original and this whole sorry experience will be their funeral and not yours.

3. COOLING OFF

Most Australian States grant the Buyer of a residential property the right to terminate the sale within a certain number of business days of formation of the Contract.

Using Queensland as an example, a Warning Notice to this effect is required to be given bringing this right to the attention of a Buyer and failure to give this notice to the Buyer prior to formation of the Contract has powerful legal consequences. [sam id=32 codes=’true’]

Failure to give the notice at the correct time will mean that the Contract is of “no force and effect”.  That is, there is no Contract.

The Form given in Queensland is required to be signed by the Buyer acknowledging receipt of it and if you are looking for a loophole to terminate the Contract of Sale you should check to make sure that the Form is signed by the Buyer and is attached to the Contract of Sale.

In NSW a Buyer may terminate the Contract of Sale for the purchase of residential property, by 5.00pm on the fifth business day after the day on which the Contract was entered into.

Don’t forget however that with the right to terminate usually comes a financial penalty payable by you as the Buyer.

For example in Queensland terminating a Contract under the cooling off costs you as a Buyer a quarter of one percent of the purchase price eg. A $400,000 sale will cost you a termintation penalty of $1,000.

4. OTHER DOCUMENTATION THAT MUST BE GIVEN TO A BUYER

For example, in Queensland, if a vacant block of industrial or commercial land is sold and it is not lawful under the Town Plan for the area to erect a house on this vacant block of land, then notice must be given under the Property Agents & Motor Dealers Act to the Buyer of this fact and inform the Buyer that Council has the right to demolish any residential dwelling unlawfully constructed on it.

Failure to give this notice before the Buyer executes the Contract of Sale can have fatal consequences and entitles the Buyer to terminate the Contract of Sale and receive a refund of the deposit.

If you have purchased a vacant commercial or industrial block of land, check with the Council whether it is unlawful to build a residence on the land, and if that is the case, call for a copy of this Statement from the Agent.

By now readers who have ventured this far into this article might be getting the unsettling feeling that there is a moral question for you to deal with when looking to terminate Contracts of Sale on the basis of sheer technicalities.

This has certainly been my overwhelming experience with the sale of vacant, industrial or commercial land.

On every occasion, whether I was the solicitor for the Buyer or the Seller, where the Buyer terminated the Contract of Sale because of the failure to give this form discussions with other parties solicitor after the event revealed that it truly was immoral in the circumstances for the Buyer to withdraw from the Contract because of this technical breach of legislation.  In every case later discussions showed that the Buyer had simply had a change of heart and wanted out.

This is a moral question for you as an investor and not one that you should put to your solicitor whose job is to provide legal advice.

In fact, all of my clients in these circumstances who ring me to discuss any of the “loopholes” have already made the moral decision themselves.

5. PURCHASE BY A COMPANY

If the Purchaser is a company be aware that a company is a separate legal entity which stands apart and separate from its directors and shareholders.

Therefore, if you have not signed Personal Guarantees as the directors of the company (this will usually be on a separate annexure to the Contract) guaranteeing the company’s performance of its obligations under the Contract and there is only a small nominal deposit paid at that stage, then you may consider simply defaulting on your obligations under the Contract of Sale, forfeiting the deposit that has been paid and leave the Seller to consider whether they wish to pursue a company which probably has no other assets.

Directors of the company will need to take careful advice in these circumstances, as in some circumstances they may be personally liable where the company has been trading whilst insolvent or they may be guilty of misleading and deceptive conduct.

In many cases however the reality is that where the Buyer of a property is a company, there is a nominal deposit paid and there are no Personal Guarantees, Sellers will be very reluctant to take any action against a defaulting Buyer company .

6. PEST AND BUILDING REPORT

It is a standard provision in most Contracts of Sale for the purchase of a residential property, and even commercial properties, that the Contract is subject to a pest and building report from an Inspector of the Buyer’s choice.

There will often be something negative in the building report and you should carefully read the report in terms of the pest and building clause.

It may very well allow you the right to terminate the Contract of Sale because you are not satisfied with the contents of the report.

Beware the clauses that have been prepared by Real Estate Agents however which substantially water down your rights to terminate the Contract of Sale as they often go on to provide that the building defects must be structural (there are many serious building defects that are not structural) and the pest infestation must be manifest (what does that mean?).

7. FINANCE

It should also be appreciated that the standard finance clause utilised throughout the country provides that the Contract is subject to finance approval “on terms satisfactory to the Buyer”.

Therefore, even if the loan is approved, if it is not on terms satisfactory to the Buyer eg. the interest rate is too high or the repayment schedule too long or the fees and charges excessive, the Buyer can terminate the Contract of Sale.

Beware however if you have obtained a “pre approval” letter and the approval comes through on the same terms as the pre approval.

It would be very difficult in those circumstances for you to argue that you are not satisfied with the terms of a finance approval that you had already obtained before entering into the Contract.

The most vulnerable group in the community who fall into this trap are in my experience the young testosterone filled males who are so proud and boastful of their ability to obtain pre-approval of finance that they can’t contain themselves or stop bragging about this fact to the Agent at the time of negotiating the Contract.

An astute Agent will take advantage of this human failing and quietly take a copy of the pre-approval letter.  So for the young males who are reading this article, keep your ego in check.

Sellers might be also interested to know that under most standard finance clauses if the Buyer does not advise them in writing within the finance approval period that they have either obtained finance or not or they waive the benefit of the finance clause, the Seller can after the expiration of that period themself terminate the Contract.

8. POST SCRIPT

If after making it all the way to the end of this article you feel that property investment is no longer your cup of tea and is not for you because there are just too many loopholes and risks, then think of it this way.

Property investment may very well be the road to ruin – but at least it is the scenic route.

[post_ender]



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Rob Balanda

About

Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.
Visit www.ClausesMadeSimple.com


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