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Subject to Finance

Subject to Finance condition

Many contracts for the purchase of land in Queensland (but not all, and in particular often not contracts for the purchase of properties “off the plan”) contain standard conditions which – if completed – can make the contract subject to the buyer obtaining finance in order to settle.

The most commonly used standard form of contract, provides in its subject to finance condition that if certain details in the items schedule are completed:

(a)   The contract is conditional on the buyer obtaining approval for finance from a financier nominated in the items schedule in the amount nominated in the items schedule, and on terms satisfactory to the buyer.  It goes on to provide that the buyer must take all reasonable steps to obtain approval; and

(b)   If the buyer does not give notice that approval has not been obtained by the finance date and the contract is terminated, or in the alternative that the finance condition has been satisfied or waived by the buyer, then the seller can terminate the contract at any time until the buyer gives notice that the condition is satisfied or waived.

Commonly, the items schedule is filled out so that the finance amount is listed as “sufficient to complete” and the name of the financier is “buyer’s choice” or similar, with the finance date usually being somewhere between 14-21 days after the contract date.

Often a question will arise as to whether a buyer who terminates the contract because they have not obtained finance by the finance date is genuine in its termination.  The seller might believe that the buyer has simply changed its mind and is using the finance clause to escape the contract.  The seller may question whether or not the buyer has complied with the requirements of the finance condition and most importantly, whether they have taken reasonable steps to obtain finance.

This issue was argued and decided in the matter of Hauff & Anor v Miller [2013] QCA 48.  In that matter, the finance condition nominated ING as the financier, however the evidence suggested that instead of finance application being made to ING, the buyers had determined (through their broker) that their prospects were better in applying to a different institution given a perceived quicker turn around.  That institution did not approve finance.

The determination of the court was that there was no evidence to establish that an application to ING bank would have been futile, and in the absence of an application to ING bank (or that evidence), the buyer did not establish that all reasonable steps to obtain finance approval had been taken.

It was further found that in the absence of the buyer having taken all reasonable steps to obtain approval, the buyer did not have the entitlement to terminate.  This termination however was for the buyer’s breach of its obligation to take reasonable steps which then entitled the seller to treat the contract as having been terminated for the buyer’s breach with significant adverse consequences upon the buyer as a result.

The consequence of these matters is that not only would the buyer lose the deposit, but would also potentially be liable for damages arising from the breach of the contract.  In some cases, those damages could be hundreds of thousands of dollars.

The takeaway is that the finance condition must be strictly complied with and all reasonable steps taken to obtain finance even if there is strong doubt that those steps will achieve an approval and that the buyer is throwing good money after bad pursuing the approval.

For enquiries relating to finance conditions, please contact Peter Muller at peterm@qbmlaw.com.au or Sally Chipman at sallyc@qbmlaw.com.au

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