Many property purchases in Queensland will include a standard finance clause. A contract that is subject to finance allows a buyer time to apply and obtain unconditional finance approval in order to purchase a property. If they are unsuccessful in obtaining formal approval, they also have the right to validly terminate the contract under this clause.
Any buyer who is relying on a loan in order to purchase a property should have a finance clause. It's important to note that if you do not require a loan and are paying for the property with cash, there is generally no need to include a finance clause in the contract.
What Is The Finance Clause?
The finance clause allows the Buyer an opportunity to obtain finance from a lender (generally a bank or other financier).
Contracts should always be made subject to finance where the Buyer requires a loan for any part of the purchase price.
Before securing a property, it is also recommend that a buyer obtain a finance pre-approval (also known as conditional approval) from their lender so they can understand what their borrowing power is when looking for a property, and to assist in obtaining formal approval once they have secured a property.
How Do I Know If My Contract Is Subject To Finance?
Whilst the finance clause can be set at any time as agreed between the parties, they are generally due within 14-21 days from the Contract Date. This is because lenders often need time to review your finance application, prepare and make necessary enquiries, and formally approve you. All lenders are different in their requirements and timeframes, but it is rare to move from an application to an unconditional finance approval in under 14 days.
In a standard form REIQ contract, the finance amount, financier and finance date must be specified on Page 3, as can be seen below.
If the Finance Amount, Financier or Finance Date is not entered, the contract is likely not subject to finance. Note that all three details must be entered.
Note that even if these above details are left blank, a buyer may still need funds from a third-party in order to purchase the property. This is where further special conditions may be required, such as relying on funds from a deceased estate, where there are multiple lenders involved, or the contract is conditional upon the sale of the Buyer's existing property. We always recommend that in these circumstances, you have a solicitor review a draft contract before signing it, to ensure it meets your needs and any special conditions have been worded correctly.
In a standard REIQ Contract, standard term 3 provides specificity on the rights of the Buyer and Seller, and the strict timeframes in which these rights can be exercised.
In most circumstances, we would recommend buyers who are relying on finance enter the Finance Amount, Financier and Finance Date as below:
Even where a Buyer has pre-approval from a specific lender or for a specific amount, placing these explicit details on the contract means you are bound to that institution and finance amount. You should always keep your options open in case your circumstances change through your transaction.
If you're looking for an example of where listing a specific financier or finance amount can be disastrous for a buyer, we recommend reading Hauff & Anor v Miller [2013] QCA 48.
A Pre-approval Is Not Finance Approval!
Most buyers are aware of the importance of getting pre-approval (also known as conditional approval) before securing a home. It can help you understand your borrowing power, and can guide you in your house-hunting.
Unfortunately, we encounter many buyers who also falsely believe that because they have pre-approval that their finance is guaranteed. This is not the case, and can be disastrous should you satisfy or waive the finance clause only to find your lender will not provide unconditional finance approval.
What Is The Difference Between Pre-Approval and Unconditional Finance Approval?
A finance pre-approval (also known as conditional approval) means that your loan has been assessed and approved in principal, and a lender needs more information or action to be taken before granting a formal unconditional finance approval. Generally, the additional information may include evidence of income, a valuation of a property, consolidation or payout of loans or outstanding debts and so on. Importantly, at any time when assessing outstanding information or tasks, your lender can withdraw their offer.
An unconditional finance approval means that the lender has received your application, assessed all of the relevant paperwork and supporting documents, and has decided to offer a home loan based on the property that has been chosen.
You should be aware that both conditional and unconditional finance approvals do not last indefinitely, and often have a timeframe associated with them. In most cases, this is around three months, subject to what your lender has set out or otherwise informed you.
If the timeframe lapses, a lender still has the right to withdraw any offer prior to settlement, especially if your circumstances change.
This is very important when purchasing Off-The-Plan, which may sometimes take years to register with council and ultimately settle. In these situations, it's important to regularly review and renew your finance approval to ensure that when settlement is called, both you and your lender are prepared.
I Want To Proceed But Do Not Have Unconditional Finance Approval
We always recommend that unless you have an unconditional finance approval that does not lapse before the settlement date set out in your contract, you should never satisfy or waive the finance condition.
This is because the risks are far too high. If you are unable to satisfy the conditions of the finance approval, or your circumstances change, and the lender withdraws the offer and/or declines to finance your loan, and you have satisfied or waived the finance clause, you cannot withdraw from the contract as you have negated your termination rights under this condition.
If this happens, and you do not have sufficient funds to complete settlement, the Seller can elect to either affirm the contract or terminate.
If the Seller elected to affirm your contract, they can sue you for their loss or damage and/or an order of specified performance (compelling you to make the purchase).
If the Seller elected to terminate your contract, they can keep your deposit, and can sue you for loss or damage (including their legal costs on indemnity), take possession of the property and even sue you for the difference in the resale value of the property (if less than what you were prepared to buy it for).
I Didn't Receive Satisfactory Finance Approval, What Do I Do?
Whilst disheartening for some buyers, it's important to ensure you exercise your rights under the finance clause.
If you don't receive satisfactory finance approval by the due date, you have the right to terminate the contract (provided the contract is subject to finance).
The key word here is 'satisfactory'. You may still be approved for a loan by a lender, but its terms or finance amount may not be satisfactory to you. In other instances, you may be rejected for a loan altogether.
Additionally, under standard term 3.1, you must take all 'reasonable steps' to obtain finance approval. Where you have not done this, and are unable to secure finance, you may not have valid grounds to terminate the contract. This is to prevent a Buyer using the finance clause as a way to terminate the contract due to another reason, such as change of mind or other personal circumstances.
Where you are not able to obtain satisfactory finance approval, and have taken all reasonable steps to do so, you should terminate the contract by 5:00PM on the due date. You should also provide a copy of the rejection or unsatisfactory finance terms to your conveyancer or solicitor for their records.
It's important to remember that solicitors are not accountants or financial advisors. They cannot advise you whether loan terms are satisfactory and appropriate for you. If you receive an approval, but are unsure if it meets your needs, you should speak with a broker, accountants and/or financial advisor to obtain the appropriate advice.
I Have Unconditional Finance Approval, Can I Satisfy Finance?
Firstly, congratulations! You've been unconditionally approved by your lender.
If you receive unconditional finance approval, it's important to firstly ensure you are satisfied with the terms of that approval. This may involve speaking with your broker and/or financial advisor to ensure it is in your best interests.
If you are satisfied with your unconditional finance approval, you must notify your solicitor or conveyancer, who will then satisfy the Seller or the Seller's Solicitor by 5:00PM on the finance clause due date.
If the due date passes for finance, which is 5:00PM on the due date, the contract is still on foot, but the Seller now has a right to terminate the contract for the Buyer's failure to provide notice.
For many standard contracts that do not involve special conditions or other unique clauses, we are often asked by the buyer or the real estate agent if the contract is now unconditional. Where a buyer has satisfied the finance clause, this simply means the contract is unconditional in that regard. Whether the contract is unconditional will depend on if there are any further deposit payable, the cooling off period has passed, and/or building and pest condition has been satisfied. Your conveyancer or solicitor can confirm with you once your contract is unconditional.
If I Terminate The Contract, Will I Get My Deposit Back?
If the contract has been validly terminated by the buyer under a finance clause, the buyer will be entitled to a refund of the full deposit.
If you are unsure if your contract includes any further conditions, your conveyancer or solicitor can confirm what your rights are prior to terminating under finance.
Still Have Questions?
If you still have questions, don't hesitate to contact our solicitors to see how we can help.
Disclaimer: This publication is not intended to be comprehensive, nor does it constitute legal advice. We are unable to ensure the information is current and there is no guarantee in relation to accuracy. You should seek legal or other professional advice before acting or relying on any of the content of this publication. The views and/or opinions expressed in this publication is that of the author and may not necessarily represent the views and/or opinions of RHC Solicitors.
RHC Solicitors ©Â