General Condition 14 of the standard contract sets out the terms of the finance condition.
If you are making an offer to purchase a property or signing a contract subject to finance it is worth exploring the key features of this Condition.
That Condition provides:
14.1 If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor.
14.2 The purchaser may end the contract if the loan is not approved by the approval date, but only if the purchaser:
(a) immediately applied for the loan; and
(b) did everything reasonably required to obtain approval of the loan; and
(c) serves written notice ending the contract on the vendor within 2 clear business days after the approval date or any later date allowed by the vendor; and
(d) is not in default under any other condition of this contract when the notice is given.
14.3 All money must be immediately refunded to the purchaser if the contract is ended.
The first key point to note is that the Condition only applies if the right details are inserted into the Particulars of Sale section of the contract. In most auction contracts, this section has been removed as the vendor does not intend for the contract to be conditional on finance. Make sure that the finance details are inserted into the Particulars of Sale to trigger the finance condition. If the section isn’t there or the details are not filled in the finance condition won’t apply and the contract will be unconditional.
The second point is that the purchaser’s right to terminate the contract is conditional. The purchaser must apply for the loan quickly and genuinely make every reasonable effort to get the loan. A Purchaser who is slow to apply for a loan or who doesn’t make a genuine effort to get approval may not be able to terminate the contract if his or her finance is declined. An interesting question is whether a purchaser of vacant land who applies for a loan for the land and to build a house would be entitled to terminate the contract if the vendor argued that the only loan referred to is the loan to buy the land….
Thirdly a purchaser can’t rely on the finance condition if the purchaser is in default. The most common default is failing to pay the deposit. This may happen if the purchaser doesn’t pay attention to the date the deposit is due or because the purchaser doesn’t see the point of paying the deposit when the purchaser is starting to think their finance will be declined. The best solution is to make sure the deposit is due the same day the finance condition expires – and if you ask for an extension of the finance condition also ask for an extension of the date the deposit is due.
Fourthly, the purchaser does have two business days grace to provide notice to the vendor to terminate the contract. While it’s not something we like to rely on, it can be useful in cases where the bank is promising that finance approval is imminent. Also, as with all things relating to buying real estate – your notice needs to be in writing (email is fine).
Finally, you should double check that there isn’t a special condition which overrides the finance condition or provides that it doesn’t apply. The grace period described above is often removed – or can be removed if you ask for an extension of the finance condition.
Naturally, our free contract review service will highlight these sorts of special conditions for you.