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The property buyers guide to Cooling Off

The high hurdle to purchasing a property is an unconditional loan approval. What if the real estate agent is threatening that unless you sign straight away, they will sell the property to someone else?

Do you take the risk and sign the contract, without an unconditional loan approval?

The problem: property contracts in NSW do not contain finance clauses

You will find many clauses in a NSW property purchase contract, but there is one clause I can guarantee you won’t find: it is a finance clause which allows the purchaser to change their mind and walk away if they don’t obtain finance approval to purchase the property. In fact, the contract contains a warning to purchasers to hold finance approval before signing the contract (see photo).

Why are there no subject to finance clauses in NSW? The reason is that in NSW, conveyancing practice has always been that a property contract should be unconditionally binding the moment it is exchanged. There is no ‘escape
clause’ if loan approval is not received. Solicitors
and conveyancers acting for vendors in NSW
simply refuse to agree to finance clauses.

In Queensland and in Victoria it is different. There is a loan finance clause in the standard purchase contract which can be activated to give the purchaser time (usually 14 or 21 days) to obtain unconditional finance approval for the purchase. If not, the purchaser can terminate the Contract and receive a full refund of the deposit. In Western Australia, the period is set at 28 days.

Finance clauses are often necessary in Queensland and Western Australia because financiers will not approve finance unless and until they are given a signed purchase contract. Financiers in NSW do not need to have a signed contract.

Because there is no subject to finance clause in the NSW Contract, is there another way that a purchaser can safely sign a purchase contract straight away so as to not miss out on buying the property, but still have the ability to walk away if they don’t obtain unconditional loan approval?

The solution: use the Cooling Off Period to tie up a property while waiting for finance approval

Cooling Off is legal protection for purchasers under the NSW Conveyancing Law against what is known as ‘gazumping’. During the Cooling Off Period, a purchaser can walk away from a legally binding Contract within 5 business days without giving any reason. If they do, they lose their cooling off deposit, which is 0.25% of the price. But while the purchaser can walk away during the Cooling Off Period, the vendor’s hands are tied in that they cannot sell the property to anyone else.

To illustrate, a purchaser signs a contract to buy a property for $500,000. They pay a cooling off deposit of $1,250. They have a Cooling Off Period of 5 business days to obtain their unconditional loan approval, and also building, pest and strata inspections and searches. During those 5 days, the purchaser can walk away from the contract (the legal term is to rescind) while the vendor is locked in. If they don’t rescind, the rest of the 10% deposit is payable by 5 pm on day 5, and the contract becomes unconditional.

Of course, what is given can also be taken away. Cooling Off Periods are taken away in two circumstances: the first is when the property is sold at auction or on the day of the auction; the second is when a solicitor or conveyancer signs a section 66W Certificate which removes the Cooling Off Period because they have explained the Contract. This partially explains why auctions are so popular with real estate agents – a sale by auction results in an unconditionally binding contract.

Speaking of Cooling Off Periods, is 5 days the most you can get? The answer is no. While the standard Cooling Off Period in NSW is 5 business days, it can be extended by agreement. Currently, many purchasers ask for and receive 10 day cooling off periods when signing Contracts (not at auctions!). Many real estate agents have ‘cooling off extension’ pages for insertion into the Contract to give 10 day Cooling Off Periods.

In this way, purchasers in NSW can use the Cooling Off Period to tie up a property for 5 or 10 days while waiting to receive an unconditional loan approval, the same as if they had a subject to finance clause in the purchase contract.

What about off-the-plan purchasers?

Off-the-plan purchasers are exposed to finance risk. They cannot obtain unconditional loan approval before they sign because the building is under construction and cannot be valued until it is finished; and in any case, a loan approval is valid for only 90 days. They cannot ask for a 1 or 2 year cooling off period until the building is built because vendors do not agree to it.

Off-the-plan purchasers should obtain pre-approval at least three months before the estimated settlement date, then hope and pray that the property values up and they can obtain finance approval when the time comes for settlement. This applies not only in NSW, but all around Australia.

Note: Cooling off protection exists in other states (except in Western Australia). But it is not used in other states to cover loan approvals because the contracts contain loan finance clauses.

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