Subject to finance - not as simple as it seems

In summary...

With the recent slowdown in the property market, we are seeing an increase in the number of contracts signed subject to finance approval, an increase in loans being declined, and also an increase in vendors who resist when the purchaser gives notice to cancel due to finance not being obtained.

If push comes to shove, it is up to a purchaser to sue the vendor for a return of deposit, and satisfy the Court that they complied with their obligations under the finance clause.  So if you are purchasing subject to finance, make sure you understand what those obligations are and that you can produce that evidence if required.

Introduction

Back in the boom years, we rarely saw problems with buyers withdrawing from a contract when the finance application failed: the property price probably remained steady or even increased in the interim, and the vendor had no problems finding another buyer.

Now that the market is cooling, we have had several recent cases of vendors dragging their feet on releasing the deposit after the purchaser's finance application failed.  Though none have ended up in court and the purchasers all eventually got (most) of their money back, a bit of extra care with record keeping could have saved a lot of anxiety.

In this article, we will cover:

  1. The standard subject to finance clause

    What a purchaser is required to do when purchasing subject to finance.

  2. Examples

    A few examples from our practice and published court cases of it going wrong for buyers.

  3. Our recommendations

    How to comply with your obligations and avoid the uncertainty of getting your deposit back.

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The subject to finance clause

Almost all Victorian property contracts use the general conditions prescribed in the Victorian regulations.  If subject to finance, this section of the particulars of sale must be filled in properly:

Loan (general condition 14)

The following details apply if this contract is subject to a loan being approved:

Lender:  ___________________

Loan Amount:  $____________

Approval Date:  __/__/____

The general conditions of sale then provide at 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.

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Examples

As you can see, there are actually quite a few requirements, and if the vendor or the selling agent suspects that the buyer has not met all of them, they can put you to the test before returning the deposit.  

In the 2013 case of Putt v Perfect Builders Pty Ltd, the contract was subject to loan approval for $475,000.  The purchaser applied for a loan of $476,000, and that was declined.  The court found that this was not enough to satisfy the buyer's obligations to do everything 'reasonably required' to obtain approval of a loan for $475,000, and refused to order the return of deposit.

We had a recent matter where the contract was subject to loan approval from one particular bank, but the buyer got advice from their broker that they would have a better chance at another bank, so they applied through the other bank and was still declined.  This was not enough to get them out of the contract.

In another matter, the contract was subject to finance approval within two weeks, and the buyer only got all their application materials together a few days before the deadline.  This allowed the vendor to argue that the application was not made 'immediately'.

Conditional contracts often provide that only a small deposit is required on signing, and then the rest of the deposit is payable on a certain date (generally the same day that the finance is due).  Buyers often think that means they do not need to pay the rest of the deposit unless the finance is approved.  But if you do not pay the rest of the deposit on time, you are technically in breach of the contract and general condition 14.2(d) would not prevent you from cancelling the contract.

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Avoiding these issues

Our advice when buying subject to finance is:

  1. speak to your bank or broker before you even start house hunting, so you know what documents they will need and roughly what budget you have;
  2. if possible, get pre-approval first so that a lot of the work is already done before you sign;
  3. fill in the loan section in the particulars of sale in full: the bank, the amount of the loan and a realistic date by which your bank or broker can give you an answer.  If you are undecided on the bank, you can write 'any financial institution';
  4. try to negotiate for only a small deposit to be payable on signing ($1,000 to $5,000), with the balance payable 2 business days after the finance clause due date;
  5. apply for the loan the next business day.  Make sure that the amount applied for is what you wrote on the contract or less, and at the right bank;
  6. keep a copy of the finance application: some banks and brokers have a policy of not keeping a copy of that for privacy or security reasons, so make sure to have your own copy;
  7. if the financier has further requests for you, respond promptly, and keep copies of all requests and responses;
  8. keep your lawyer or conveyancer up to date on your progress, and let them know well ahead of the due date if your loan is declined or you need an extension.  If you seek an extension, try to also get the balance of deposit due date extended too;
  9. make sure to pay the balance of deposit on time, and to not breach the contract in any other way;
  10. if your application is declined, get a formal letter from the bank on letterhead, setting out your full name, property address and reasons for the refusal.
  11. Doing all this will ensure you meet all the requirements in the contract, and have a paper trail to back that up in case the vendor or agent is reluctant to release you.

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About the author

Lucy Dong, property and tax lawyer, former State Revenue Office senior compliance officer

Growing up in a family of property developers, real estate is in Lucy’s blood. It’s that experience and her time at her previous commercial and property law practice that allows Lucy to cut to the chase, identify the real issues, give you practical advice alongside the legal, and help you with anything from the smallest purchase to your next major development project.

Find out more

Call us on +61 3 9041 7733 if you would like to find out more.

Or check out our self-directed guide on purchasing property for more tips.

About this publication

Kai Legal publications provide general information, and are not legal advice. These are not complete summaries of the law, and only touch on select points and scenarios that may be relevant to our readers.

This fact sheet is current as of 6 July 2018.

© Kai Legal 2018