In a past life, and when I was a young man (just before the outbreak of World War 2) I would teach night classes on Real Estate Law at the local Tafe College.
One evening I had just finished a segment on the legalities of Real Estate Contracts in a text book manner, outlining the six essential ingredients of a legal contract.
I closed for the day and on the 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 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”.
The other students that were leaving the class at the time who overheard his comments to me were all nodding agreeingly with his suggestion too, in my direction.
That night I gave the suggestion some thought. 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 have 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 contract.
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 is very likely that you will be advised that you have “a water tight Contract” and there is no way you can walk away from the transaction.
Don’t be deterred either by comments from the Agent such as “I have been in this game 20 years now so take it from me, you have got a water tight Contract.”
The reality is that they haven’t got 20 years experience and their advice to you is based on just one years experience, twenty 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 the counter offer) to the other party.
Without this fact being communicated to the other party or their solicitor then there is not 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 have 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 need 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 is more than just good P.R to do it so.
It is essential to lock you into the Contract.
2. ALL PARTIES TO SIGN
With multiple Buyers or Sellers it is vital to realise that if all parties have not 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.[sam id=32 codes=’true’]
As an investor you should also scan all of the signatures and initiallings on the Contract and if say there are four sellers who are selling the property, check that 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 is not essential and failure to have a signature witnessed will not 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 that they actually signed it, that is their signature was forged, the person who witnessed their signature could come forward to confirm that 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 eg. Mum authorises 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 buying a property jointly with someone else does not 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 are perfectly certain what the area is, it is 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 1,000 square metres however the Contract was incorrectly completed as 1,100 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 2 to 5 percent and forgives an error of this magnitude, but not more.
The reality is that in practice the error is usually much greater than 2 to 5 percent and so it is 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 are looking for to negotiate to reduce the purchase price.
A discrepancy of even well under 2% 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 meters more than the actual area of the property registered at the Titles Office.
That extra 40 metres are meant the difference between having a six story building and a five storey building and amounted to just about 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 on 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 eg. the right to pass and repass over the property where you have 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 are purchasing.
Other examples of Easements are rights of way granted to the Electricity Authorities, Telstra or the Local Council for drainage purposes.
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 to 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. In some cases even a humble Drainage Easement underground along the side boundary of the property may constitute such an Easement.
The big thing to remember about Easements and why are so important is that it is 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 went a drainage easement for the benefit of a neighbouring property. It was the classic humble drainage easement.
When you search the title to the property and check 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 still 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 was not 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 purchaser then the search of the easement would have been “brown trouser day” for you and 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. LEASES & OPTIONS NOT DISCLOSED
The standard Contracts of Sale utilised 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 in the Contract of Sale.
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 that 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 co-operation 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 is 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 6 months to run, unless the tenant vacates the property on settlement, in most cases you would 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 that it discloses any options to extend the term of the Lease that are contained in the Lease document.
Options are for the benefit of the tenants and it is generally the tenants’ call about whether they exercise the option and stay on. If details of the option are not 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 re-negotiate 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 whilst owned by two companies had been leased and lease documents signed by two individuals as the landlord rather than the two companies.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.