Buying Property Explained: "Subject to Finance"
My client sold his property to a buyer on 12 July 2020, they signed a contract of sale with a ‘subject to finance’ condition with loan amount of 90% of the purchase price, and loan approval date of 24 July 2020. This condition means that if the buyer cannot obtain a loan approval of 90% of the purchase price on or before 24 July 2020, then he can choose to cancel the contract and take back any deposit that he has paid. He must serve a written notice within 2 business days from 24 July. The buyer has paid a small holding deposit of $1,000. The full 10% deposit is due on 24 July 2020.
Yesterday (21 July 2020), the buyer’s conveyancer informed me that the buyer wants to cancel the contract because he was unable to obtain a 90% LVR (loan to property value ratio). The conveyancer attached a letter from the broker that stated briefly that the buyer has limited serviceability to obtain a 90% LVR loan. I requested for evidence that the buyer has applied for the loan and the bank rejected his application, the conveyancer requested for extension of the approval date from 24 July 2020 to 7 August 2020 so that his client can “attempt to apply through another lender for the home loan”.
Do you think he is entitled to cancel the contract?
The answer is no – provided that the contract contains a general condition governing this sort of situation. This general condition is commonly found in all sale and purchase contract in Victoria.
Many said that adding subject to finance clause offers protection to the buyers, in other words, more time for the buyers to change their mind. This clause has been widely used, many were genuine, but some by indecisive and inexperienced buyers to allow them more time to change their mind.
Yes, the buyers can cancel the contract if they cannot get the loan amount that they wanted to get. But there are two important requirements that the buyers must met before exercising their right to cancel the contract using this clause.
First, the buyer must have immediately applied for the loan.
Second, the buyer must have done everything reasonably required to obtain approval of the loan.
Let’s have a look at the relevant condition -
1. If the particulars of sale specify that this contract is subject to a loan being approved, this contract is subject to the lender approving the loan on the security of the property by the approval date or any later date allowed by the vendor.
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.
3. All money must be immediately refunded to the purchaser if the contract is ended.
Back to the case scenario – the buyer obviously did not apply for any loan, nor he has done everything reasonably required to obtain an approval.
How did the case end? My client refused to grant an extension which I think he rightly did. The refusal was slapped with unreasonable response from the buyer’s conveyancer, insisting that the contract is at an end with explanations that do not make any sense. I am not sure how to respond to her illogical explanations.
My proposed actions are to issue a notice of default and rescission on 29 July 2020 (3rd business day after 24 July) giving the buyer 14 days to pay the full 10% deposit, if the buyer fails to do so, cancel the contract and move on. This gives my client a right under the contract to recover from the buyer the full 10% deposit under another general condition titled ‘Default not remedied’ within one year of the contract ending. It is entirely up to my client whether he wants to do so.
The lesson of this story is, don’t take this clause lightly. Once you have signed a contract, you have an obligation to do what you are contracted to do.
This article is not intended to be or taken as legal advice. The author of this article disclaims any liability for any action or omission on the information provided or not provided in this article. You should always consult a lawyer.