In this blog we discuss everything you need to know about the FINANCE CLAUSE when buying a property in QLD...
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Hi everybody - George Sourris, Empire Legal.
Today's topic: Everything you need to know about the finance clause!
Okay, so Standard Term 3 of REIQ Contracts in Queensland are all about the finance clause.
So what is the finance clause?
The finance clause is there to allow a buyer a safety net to obtain finance. So here in Queensland, how it works is if there's a finance clause in play, you have a certain amount of time, which is completely negotiated - usually 14 days is an average amount. Sometimes you see 7 days, sometimes you see 21. It's all subject to negotiation.
So what does that look like?
The whole purpose is to obtain an unconditional approval from the lender. So, the bank being on the hook to say, yes, we'll give you the money to purchase this property. That involves a whole lot of things like: looking through your finances, your income, a valuation on the property you're looking to purchase, ete.
The goal is for the lender to say yes, we will unconditionally approve you and give you the money.
What happens if you can't get that approval? The whole point of the clause is there so that in the event that you can't, you can terminate the contract and your deposit monies are returned to you, and the contract is at an end.
The most important part of the finance lies on Page 3 of the contract - the finance section. All three sections MUST, I repeat, MUST be completed, otherwise, there's no finance clause. Below is an extract of the finance clause from an REIQ Contract:
The first section is the "finance amount". So how much money is the bank going to bring? Usually that is filled in with "sufficient to complete", so that you don't have to apply for a specific dollar amount. It can be whatever's required to complete settlement.
The second section is "financier". So which bank are you using? Commonly, this is entered as "buyer's choice", which allows the buyer free reign to pick any lender or financial institution that they please.
And the third section is "timeframe". So this is where you'll see 7 days, 14, 21 days, etc. Again, there's a little notice next to this saying that if all three sections aren't complete, then the contract is NOT subject to finance.
Now this is a trap for new players, so you want to make sure you check every time all three sections are complete or there is NO finance clause.
When you pick apart the standard terms of the finance clause (extract at the end of this blog for convenience), there's a couple of things we need to quickly look at.
Firstly, there is an obligation for the Purchaser to the ability to take "reasonable steps" to obtain finance.
So there was a famous case, Hauf & Anor vs Miller back in 2013, where on the contract the financial institution was specifically listed as ING. Now what happened is this Buyer went and applied for a loan, not through ING though, didn't get it - terminated under finance.
The Seller sued the Buyer, and the whole point being they were meant to go through ING as their lender, as per the contractual obligations. The Buyer did not even lodge an application with ING, so they were found to have not validly terminated, and were not acting reasonably. Consequently, when you don't validly terminate a contract, Deposits can be forfeited and you can be sued for any losses suffered.
Another thing I want to bring to your attention when looking at the finance clause is that the approval is on "terms satisfactory to the buyer".
Now, what does that mean?
Well, some things such as an interest rate change, or the term of a loan may no longer make that loan satisfactory to you. But again, remember before, we said you have to act reasonably. So you have to take all reasonable steps that you can to obtain finance.
You cannot just terminate under this clause if you haven't taken reasonable steps. You are at risk - your Deposit could be taken and you could be sued for any losses suffered.
Another thing to keep in mind is just because you've got an approval from a bank doesn't mean it's an unconditional approval. You need to be 100% sure that that bank is going to give you the money unconditionally, before you satisfy the finance clause. Because once you've satisfied that clause, you can no longer exit the contract if you can't find the funds to settle - you must settle. Otherwise, you're in breach of your obligations, and you can get sued.
If you have any feedback or topic suggestions, I want you to email me, george@empirelegal.com au.
Thank you everybody.
See you next week.
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Note: all information is general in nature and as each matter is unique please contact our office for tailored advices: the above does not constitute legal advice.