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Legal loopholes part 1

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.

4. Easements
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.

Where an easement materially affects the use of a property a buyer has the right to terminate the contract of sale unless details of the easement are noted on the contract of sale.

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.

If details of the option aren’t included in the contract of sale then this may also give you the right to terminate the contract of sale or at least use it as a lever to renegotiate the price down.

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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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


'Legal loopholes part 1' have 14 comments

  1. Avatar for Property Update

    October 20, 2012 @ 10:56 pm Justin

    Hi Rob

    I bought an old factory 2years ago. There is a shop located on the rear street but they also access through our driveway to come to their back part.

    This might have been many years and they said more than 20 years

    We could not see any permit or licence from vendor statement.

    Does the driveway becomes an easement ? Or can we claim from the vendor?

    Redards

    Justin

    Reply

  2. Avatar for Property Update

    February 13, 2013 @ 2:10 pm anna

    Hi Rob,
    I like your segment on easements, as required to be included in S&P agreement: do you know if this is law in New ZEaland?

    Reply

    • Avatar for Property Update

      March 27, 2013 @ 3:51 pm Rob Balanda

      Anna,

      As I am not a New Zealand solicitor, I cannot answer that one for you. You will have to check with the local sheriff on this point.

      Regards,
      Rob Balanda

      Reply

  3. Avatar for Property Update

    March 27, 2013 @ 12:29 am Tom Xu

    Hi Rob,
    I signed an offer and already paid deposit for a property in West Australia , we did not know there was a drainage easement cross the property rear yard till my settlement agent searched the title to the property.

    The offer did not mention anything about drainage easement and the real estate personal did not tell us the drainage easement when we signed the offer. Can we terminate the offer and get my deposite back

    Regards
    Tom Xu

    Reply

    • Avatar for Property Update

      March 27, 2013 @ 3:51 pm Rob Balanda

      Tom Xu,

      I cannot give you definite advice about this as I do not have the Contract of Sale or related correspondence between solicitors, nor the searches of the property. The general principle however, is that if an Easement exists over the property and it is not noted on the Contract of Sale, a Buyer can terminate the Contract of Sale if the property is adversely affected by the existence of the Easement. You will need to take specific advice therefore, about whether the Easement over your property constitutes something that materially affects the use of the property, and whether you can terminate the Contract of Sale on this basis. You best move quickly to obtain that advice and make a decision about what to do before the settlement date looms upon you.

      Regards
      Rob Balanda

      Reply

  4. Avatar for Property Update

    March 27, 2013 @ 3:49 pm Rob Balanda

    Justin,

    I would need to look at the Contract of Sale which you signed and the correspondence on your solicitor’s file to be able to give definite advice about this, but I can discuss the general principles and give you advice in general.

    Easements or Rights of Way over someone else’s property do not always have to be registered on the Title. Many easements exist out there in the property world and not all of them are registered. Through passage of time and conduct of neighbours, they can be just as legally enforceable as those which are registered on the Title. In your case, this Right of Way has been operating with at least your acquiescence over the last 2 years and who knows how many more years before that by previous owners. My guess is that it is legal and would be binding upon you despite the fact that it is not registered.

    Regards,
    Rob Balanda

    Reply

  5. Avatar for Property Update

    July 13, 2014 @ 4:42 pm naresh

    Hi
    Rob
    I have just signed a contract of sale and put a deposit. Before signing a contract i wanted to make sure the property was free of any issue. I got my solicitor to review the contract. She said everything is fine except stormwater drainage easement which is not a big problem.This easement is situated at the corner of the front boundary wall.
    after signing the contract when I checked the contract of sale myself thoroughly it looks like a serious issue. There are long list of terms that I have to carry out on a regular basis regarding the easement .
    I am just wondering why my solicitor did not say anything about this terms and conditions.
    I don’t think I can recover my deposit.
    Could you give me some advice. My cooling off period finishes in 3 days.
    Thank you
    Naresh

    Reply

    • Avatar for Property Update

      July 13, 2014 @ 6:13 pm Michael Yardney

      This is much too important to get free advice over the internet when Rob or I can’t see the contract or terms and conditions.
      I suggest you seek proper legal advice form your solicitor. Tell her your concerns

      Reply

  6. Avatar for Property Update

    May 2, 2016 @ 10:12 pm Fran

    Simply thank you for sharing, this reading has helped me.

    Reply

  7. Avatar for Property Update

    July 18, 2016 @ 11:35 pm Bernadette

    Hi,

    I purchased a new house/land package/ property through a third party four years ago and just before completion my new realtor noticed there was an easement (and drop in level) on the property. The builder never disclosed this apart from drawing it on the floor plan (which I did not read), my “spruker” didn’t know about it and my lawyer (provided by the third party) admits to not disclosing and also admitting I wouldn’t know what an easement was if I saw it on a plan.

    Where do I stand? I do not want to keep this property. I’m more than happy to retain one in the same area through the sabe company but I want a level block with no easement.

    Thank you.

    Reply

    • Avatar for Property Update

      July 19, 2016 @ 7:03 am Michael Yardney

      Bernadette
      the easement on the block should have been disclosed – it was on the title, but the problem is you dealt with a lawyer representing the seller not you the purchaser.

      an easement generally means you can’t build on that portion of the land, but many blocks have easements to allow drainage and sewerage pipes to flow, once the house is built, an easement isn’t a real concern.

      I don’t know how much you block slopes, this may or may not be a concern – the problem is once you’ve signed a contract of sale for a particular property there are legal and stamp duty implications in swapping to a different property. If you have already settled it’s unlikely you can swap for another block – unfortunately you were “sold to’ rather than advised

      Reply

      • Avatar for Property Update

        August 11, 2016 @ 1:45 pm Bernsdette

        Thank you. Yes, settlement was three years ago but at the time I was told I couldn’t do anything. Three years on I see much nicer properties in the same area on a flat block with a nice backyard. My block drops down at the “alfresco area” to a reasonably level yard. Should I worry about re-sale value? Will other properties exactly like mine (sizes, bedrooms, etc) apart from the drop down yard with an easement go up in value more?

        Reply

      • Avatar for Property Update

        August 11, 2016 @ 1:47 pm Bernadette

        Ps. The lawyer represented me, not the seller. But they did provide it, so am I confused?

        Reply

        • Avatar for Property Update

          August 11, 2016 @ 3:21 pm Michael Yardney

          It’s unlikley you can do much now 3 years later. And the easement is unlikley to affect the property now that it is built on

          Reply


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