If you’ve ever signed a contract and then suffered from buyer’s remorse, this article could help you find a way out.
In a past life when I was a young man, just before the outbreak of World War 2, I taught night classes on real estate law at the local TAFE College. One evening I finished a segment on the legalities of real estate contracts, outlining the six essential ingredients of a legal contract.
I closed for the day and on my way out a young real estate salesman said to me, “That was just great Rob, but to be fair dinkum mate I could have read that in any law book. Why don’t you open up your filters of perception and present that topic next time to your class from our perspective as real estate salespeople. Why don’t you share with us your ‘loophole list’. You know, that list you pull out of the bottom drawer after a client consults you when they’re trying to extricate themselves from a deal they regret.”
Other students leaving the class overheard his comments and were all in agreement with his suggestion. That night I gave the suggestion some thought and the next time I presented the subject I took his advice and was surprised at the value that the students gained from the segment.
So if you’ve ever signed a contract of sale and not long afterwards had buyer’s remorse, then read on to find out what technical defects there may be in the contract that may allow you to walk away from the transaction.
THE STARTING POINT
Firstly, don’t share your regrets with the real estate agent.
If you do, then understand that they are the seller’s agent and it’s very likely you’ll be advised that you have “a watertight contract” and there’s no way you can walk away from the transactions.
Don’t be deterred, either by comments from the agent such as “I’ve been in this game for 20 years now so take it from me, you’ve got a watertight contract.”
The reality is they probably haven’t got 20 years’ experience and their advice to you is based on just one year’s experience 20 times over. It might be worth getting legal advice.
What are these loopholes then?
1. Is there a contract?
For there to be a binding and enforceable contract there are a number of essential elements that must be satisfied under contract law.
Firstly, there must be an offer. Secondly, there must be an acceptance of that offer (or in the case of a counter offer, acceptance of the counter offer). Finally, and most importantly, there must be communication of acceptance by the person who accepts the offer (or counter offer) to the other party. Without this fact being communicated to the other party or their solicitor then there isn’t a legal contract in existence.
If, for example, the contract of sale was signed by you as a buyer during the day and the agent collected it and visited the seller later that evening to attempt to persuade them to accept your offer, until you receive a copy of a contract signed by the seller or alternatively advice from his agent that they’ve accepted your offer and signed the contract, there is no contract.
If you don’t hear from the agent during the course of the evening and you have cold feet the next morning you to immediately instruct your solicitor to fax the agent with your instructions that as no acceptance of your offer has been communicated to you, your offer is withdrawn. In that situation there is no contract of sale.
This example also illustrates why a legally educated real estate agent will always ring you as a buyer no matter how late at night it might be to “congratulate” you on your successful purchase. You know now it’s more than just good PR to do so. It’s essential to you into the contract.
2. All parties to sign
With multiple buyers or sellers it’s vital to realize that if all parties haven’t individually signed the contract of sale, then there is no contract. For example, in the case of four sellers, namely two couples, each of the two couples (i.e. four people) must specifically sign the contract.
As an investor you should also scan all of the signatures and initials on the contract and if, say, there are four sellers who are selling the property, check there are four full signatures and four sets of initials alongside all of the alterations to the contract. Contracts usually also provide for there to be a witness to all signatures.
This, however, isn’t essential and failure to have a signature witnessed won’t be fatal to the legality of the contract. The purpose of having a witness is just to have back-up evidence or corroboration so that if one of the parties whose signature appears in the contract denies they actually signed it and claims forward to confirm they actually saw them sign it on the day.
Can a husband sign for his wife and vice versa? There is no law that says a spouse has authority to sign a contract of sale for their partner without there being in existence a registered Power of Attorney or specific written authority where, for example, mum authorizes dad to sign the contract on her behalf. An exception to this rule is where the parties have bought the property in partnership (a “partnership” is a legal term and simply a property jointly with someone else doesn’t by itself constitute that purchase as a partnership).
3. AREA OF THE LAND
Most contracts of sale contain a provision for the area of the property to be inserted.
Great care must be taken in completing this provision of the contract and in most cases, unless you’re perfectly certain what the area is, it’s best to leave it blank.
What licence does the law allow to forgive an error in the completion of the area? If, for example, the true area is 1000 square metres, however the contract was incorrectly completed as 1100 square metres, does this entitle the buyer to terminate the contract of sale or bring an action against the seller for compensation (or threaten to bring such an action in an attempt to lever down the price)? In Queensland, for example, the contract provides that where any area is completed in the contract of sale, the seller guarantees this is the area (more or less).
The case law allows a discrepancy of between two to five per cent and forgives an error of this magnitude, but not more.
The reality is that in practice the error is usually much greater than two to five per cent, so it’s worth checking any area shown in the contract with information on the title deed for the property contained at the Titles Office. It may give you the very lever you’re looking for to negotiate to reduce the purchase price.
A discrepancy of even well under two per cent of the area of a property can be fatal in some cases.
I was involved in the sale of a development site in Surfers Paradise where the area of the property shown in the contract of sale was in fact 40 square metres more than the actual area of the property registered at the Titles Office. That extra 40 metres meant the difference between having a six-storey building and a five-storey building and amounted to just all of the developer’s profit on the development. That is, the construction and sale of units on the sixth floor was where the developer made all of their profit on the project.
When you buy a property most standard contracts provide that you acquire the property free of encumbrances unless details of these encumbrances are noted in the contract of sale.
The main type of encumbrance that can affect the property is an easement. An easement is the right to use a property in a particular way without taking anything from it, for example the right to pass over the property where you’ve purchased a battle-axed property (i.e. the property has no road frontage itself and access to the property is via a right of way along a road in front of the property that you’re purchasing. Other examples of easements are rights of way granted to the electricity authorities, Telstra or the local council for drainage purposes.
If you are looking for a loophole in the contract of sale you should immediately carry out a title search to determine whether the property is affected by any easements.
Easements are what lawyers call “a classic defect in title” to a property. Even a humble drainage easement that may be situated along the boundary of the property may constitute an easement that gives you rights to terminate the contract.
The big thing to remember about easements and why they’re so important is that it’s unlawful to build over an easement.
A group of client companies purchased a large parcel of vacant land to construct a storage shed development. Diagonally through the land ran a drainage easement, for the benefit of a neighbouring property. It was the classic humble drainage easement. When they searched the title to the property and checked the terms of the easement that was registered on the title, the results revealed that the path of the easement was diagonally through the middle of the block and was much wider than originally represented by the selling agent.
The development could still have easily proceeded and been built around the path of the easements, however the configuration of the development that would have been built around the path of the easement would have drastically reduced the income yield from the storage sheds (less sheds could be constructed on the site if the path of the easement remained as is).
If you were the buyer of this property you may have the right to terminate the contract because the existence of this humble drainage easement materially affected the use of the property if the existence of this easement wasn’t noted on the contract of sale itself.
Once an easement is noted on the contract of sale, this has the legal effect of making the buyer’s purchase of the property subject to the burden of the easement. If you had been this buyer then the search of the easement would have sent you scampering off to your lawyer’s office to check the terms of the easement and your ability to pull out of the contract of sale.
In that real-life situation, however, the buyers successfully negotiated a re-routing of the path of the easement with the neighbour who had the benefit of the easement so everyone lived happily ever after.
5. Undisclosed leases and options
The standard contracts of sale used for the sale of real estate contain provisions that the property is sold with vacant possession unless details of tenancies and options to extend the tenancies are set out.
Many properties which are tenanted, however, are sold with vacant possession and without the details of the tenancies being noted on the contract of sale, on the assumption that the letting agent will terminate the lease before settlement so that vacant possession can be passed to the buyer.
Where, however, the letting agent is different to the selling agent, there may not be a lot of cooperation between the two agencies. If you were the buyer of such a property then it would pay you to make discreet enquiries to ascertain whether the tenant would be vacating on the completion date.
If they fail to do so then there’s a fundamental breach by the seller under such a contract, as they would fail to deliver vacant possession and this entitles you to terminate the contract of sale as the buyer.
If you sign a contract to purchase a property which is tenanted, call for a copy of the lease and carefully check that the terms of the lease are disclosed in the contract of sale.
If the lease is incorrectly described in the contract of sale as a periodic (i.e. month to month tenancy) and the lease document shows that the lease is for a fixed term and has, say, another six months to run, unless the tenant vacates the property on settlement, in most cases you’d have the right to terminate the contract of sale and receive a refund of the deposit.
Likewise, check the contract of sale against a copy of the lease (collect this from the letting agent) to ensure it discloses any options to extend the term of the lease that are contained in the lease document.
Options for the benefit of the tenants and it’s generally the tenants’ call about whether they exercise the option and stay on.
Ask your solicitor, too, to also carry out a title search of the property and check that the parties shown as the landlord or lessor on the lease are the same as the parties that actually own the property. Only last month did I come across such a scenario and my searches revealed that the property, owned by two companies, had been leased and lease documents signed by two individuals as the landlord rather than the two companies.
Rob Balanda 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. www.mba-lawyers.com.au
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