Most purchasers require their financier (a bank or other lending institutions) to approve their loan application so that they can proceed with their purchase. If you are not 100% sure that your bank will finance your purchase then the contract should be made subject to finance. This means that if you do not obtain approval to your loan application within the timeframe specified in the contract then you can pull out of the contract.
However, it is important to note that even if finance is not approved at the time you sign the contract, and the contract was made subject to finance, there is still a risk that you may be liable to complete the contract.
Normally these clauses state that the contract is subject to and conditional on a financier agreeing, by a particular date, to grant the Purchaser a loan to enable the Purchaser to complete the contract.
A properly drafted clause should set out the timeframe and the method that the Purchaser must inform the Vendor if their application for finance is successful or not. The clause should also give the Purchaser the ability to end the contract and for the deposit to be returned to the Purchaser.
The risks of ‘subject to finance’ clauses
If the subject to finance clause is not worded properly, or if the Purchaser does not comply with the terms of the clause then there is a risk that the Purchaser will be liable to complete the contract.
A Purchaser may assume that ‘subject to finance’ means that if they cannot obtain finance, then the contract automatically comes to an end and they are entitled a refund of the deposit paid. On the face of it this assumption is incorrect.
Subject to finance clauses may contain a condition that states that the Purchaser will use its ‘best endeavours’ to apply for and do everything necessary to obtain a loan to finance the purchase of the property. This could mean that the Purchaser must apply for a loan where the interest rate is higher than the standard rates offered by the big 4 banks.
It is important that Purchasers don’t ‘waive’ the ‘subject to finance’ clause unless they are 100% certain that the financier will fund the purchase of the property. For example, before the date for obtaining finance in the contract passes, you should either terminate the contract, obtain the agreement in writing from the Vendor (this is normally done between the Vendor and Purchaser’s solicitor) to an extension of the finance clause. Your lawyer should provide you with timely warnings when the critical dates are approaching.
What are your options and why you should use a lawyer?
When entering into a contract for the sale of property, it is very important that you ask your lawyer to check the specific words of the ‘subject to finance’ clause to ensure that you are adequately protected from the risks associated with not obtaining the required finance to complete your purchase.
It is also important that such clauses are properly explained so that you can make an informed decision as to whether or not you should enter into the contract.
For more information and advice on ‘subject to finance’ clauses, or any aspect of buying or selling property, please contact us on 03 6332 9353 or use our Contact Us form https://www.cormistonlegal.com.au/contact-us/
You can also request a conveyancing quote from us by using our conveyancing quote form - https://www.cormistonlegal.com.au/conveyancing-quote