Common mistakes in property transactions

In summary...

In our experience, most property transactions are straightforward and unremarkable. However, every so often, easily avoidable problems appear and cause unnecessary headaches for everybody.

Read on and make sure to avoid these in your next transaction!

Introduction

The most common legal mistakes that we see in real estate transactions are:

  1. Misunderstanding the finance approval

    Thinking that financing ‘pre-approval’ or ‘approval-in-principle’ is actual approval.

  2. Not getting promises in writing

    Verbal promises, like that repairs will be made before settlement, are usually not enforceable until they are added to the contract.

  3. Relying on the cooling-off rights

    The cooling-off rights are really not as good as they sound.

  4. Not understanding what is being sold

    You need to check that the contract includes all the land and fixtures you expect to get.

  5. Letting special conditions expire

    Conditions with a time limit, like the finance condition or a building inspection condition, can easily lapse and have no effect.

  6. Relying on ineffective special conditions

    Conditions that are designed to protect the purchaser, for example a building or pest inspection, are often less useful than you think, especially if they are drafted by the vendor's agent or solicitor.

  7. Misplacing the title

    An oldie but a goodie, vendors sometimes fail to have all the titles on hand for settlement.

  8. Not doing a final inspection

    As a purchaser, this is your last chance to make sure that the property is how you expect it. Don't pass it up.

These are just the legal mistakes that can be made. We haven’t covered the financial aspects, which are often much more significant!

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‘Approval in principle’

Some buyers mistake a bank’s ‘approval in principle’, ‘pre-approval’ or ‘conditional approval’ for actual final approval. Others hastily rely on their mortgage broker’s assertion that there won’t be any problems in getting a loan.

Different banks have different pre-approval procedures and check different things in this first step, but one thing is common: they haven’t agreed to lend you a cent until you get written final approval!

As a common example, a bank may end up approving a significantly lower loan than you expected because there is a valuation condition, and the bank’s valuation of the property is lower than your agreed price.

If you don’t have final approval, then:

  • be very careful about bidding at auction, as there is no cooling-off period at auctions, and it is almost unheard of to have a finance condition inserted into a contract concluded at auction; and
  • when buying by private sale or making an offer before auction, make sure there is a clear financing condition that sets out where you’re applying for a loan, the amount of the loan, and the date by which you can pull out of the contract if your loan is not approved.

If you enter into a contract of sale but cannot complete it because of lack of financing, you will lose at least your deposit, and may be liable for further damages suffered by the vendor.

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Get it in writing

Most contracts of sale contain a ‘whole of agreement’ clause, which essentially say that the written contract contains the whole of the agreement between the parties, and anything not written into it has no effect.

If the agent told you that you could pay a lower deposit, or the vendor said that they would fix the back door before settlement: those statements count for nothing unless you get them added to the contract.

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The cooling-off period

A cooling-off period sounds like a nice safety net, but when you look closer, it has a lot of holes in it:

  • it does not apply at auctions, or to contracts signed 3 days before or after an auction;
  • the cooling-off time starts counting when you sign the contract, not when the contracts are completed or exchanged with the vendor. So if you make an offer on a property by signing the contract and leaving a deposit, a vendor or vendor’s agent might deliberately wait until the last possible moment before signing, to avoid you being able to cool-off;
  • it still costs 0.2% of the sale price: well over $1000 for most properties!

Don’t rely on the cooling-off rights. Make sure you’re fully comfortable with a contract before signing it.

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Not understanding what is being sold

This is where it gets a little bit technical and you need the help of your solicitor or conveyancer. Once contracts are exchanged, you are entitled to nothing more and nothing less than what is described in the contract. We see alarmingly often:

  • significant assets like a car space, storage locker or long-term lease over a common area not being included in the contract; or
  • disagreements over whether some fixtures or decorations were part of the purchase (eg, light fixtures, curtains, garden ornaments and statues). If there is any doubt at all over particular fixtures or goods, list it out clearly in the contract!

It is not uncommon for lawyers and conveyancers to miss these issues too, so it pays to check this for yourself.

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Expired conditions

Purchasers insert conditions into contracts of sale to give them ways to back out of the contract. Generally, these conditions don’t automatically cancel the contract: generally, one party (usually the purchaser) needs to give notice cancelling the contract by a certain time, or else the contract ‘goes unconditional’.

Making sure that conditions do not unintentionally lapse is one of the most important jobs of your lawyer or conveyancer. But missing a condition deadline can be so costly that you should keep an eye on them yourself too.

The most common misconception is that a ‘subject to finance’ condition automatically cancels a contract if the purchaser fails to get finance. In fact these conditions require the purchaser to act very promptly in applying for a loan, and if unsuccessful, give notice strictly before the deadline in the way set out in the contract to the vendor, to successfully cancel the contract. It is very easy for these contracts to accidentally become unconditional.

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Ineffective special conditions

Special conditions, especially those not drafted by solicitors or conveyancers, can be next to useless when applied in practice.

The classic example is a building inspection condition that reads:

The Contract is conditional upon the Purchaser(s) obtaining a written report from an independent registered builder or qualified structural engineer, certifying that the dwelling on the property is structurally sound within 14 days of the date of this Contract.

At first glance, this sounds pretty good for the purchaser. But note that ‘structurally sound’ does not mean ‘good condition’. Pretty much every house is structurally sound!

An inspection that reveals a major termite problem, rusted gutters, or leaks through the roof will not be enough to withdraw from the contract under the condition above. It pays to read conditions closely, and get a lawyer or conveyancer who is looking after your interests to draft them.

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Misplacing the title

Most of the time, there is a mortgage over the relevant property, there is only one title, and the lender holds it and will bring it to settlement. When this is not the case, sometimes one of the titles is misplaced and the settlement ‘crashes’.

In some properties, the driveway, yard or car-parking spot is on a separate title, and the bank might only hold the primary title. In other cases, there is no mortgage over the property, so the title could be anywhere.

As the vendor, you have to track down where all the relevant titles are. Common places are the bank, a solicitor, a safe deposit box or stashed away in the drawers at home.

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Not doing a final inspection

As a purchaser, you have a right to inspect the property in the week before settlement. This allows you to make sure that there has been no damage to the property since sale, that all the included fittings and goods have remained, and that the previous owner is able to move out in time.

If you do find a problem during your final inspection, you could negotiate to delay the settlement, reducing the purchase price, or going ahead with the settlement, but getting the vendor’s legal representative or agent to retain a sum of money to secure the repairs / rectification works.

If you settle without an inspection, you lose a lot of your bargaining power because you will have already handed all of the money over to the vendor.

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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.

Lucy can also draw from her years of experience at the Australian Tax Office and Victorian State Revenue Office to help you structure your property transactions in the most tax-effective way.

Find out more

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

The Fitzroy Legal Centre’s law handbook is a good reference for the legal aspects of a purchasing transaction.

There are many helpful resources on the web to help property buyers. Always check when they were written, as the law and industry practices change frequently, and many articles are outdated.

You can see our related services for property purchases on our services page.

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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 17 March 2015.

© Kai Legal 2015