Our clients often assume that a ‘subject to finance’ clause is a standard matter whereby if the purchaser’s finance falls through, the purchaser can end the Contract of Sale. Unfortunately, it is not always as clear cut as this and these types of clauses have been at the centre of plenty of disputes.
Now, in these uncertain economic times, it is important that you understand these clauses if you wish to use them in your purchase. We answer some frequently asked questions below.
1. Does my Contract of Sale automatically end if my finance is not approved?
No! The subject to finance clause gives a purchaser the right to end a Contract of Sale before the date specified if their finance has been denied by the lender (named in the Contract of Sale). If you do not tell your lawyer that your finance has been rejected and you do not give written notice that you are terminating the Contract of Sale, it will continue on an unconditional basis and you will then have the obligation to settle.
2. Does my conditional letter from my bank mean finance is approved?
A conditional letter does not mean that finance is approved. It means that if you satisfy the conditions set out in the letter, your finance will be approved. During COVID-19, we have seen an increase in lending requirements and these conditions can be onerous. In some circumstances, you may receive a letter of conditional approval only to have finance denied after the bank has valued the property.
3. What if I change my mind on my purchase and let my finance fall through by my inaction? Can I still end the Contract using my ‘subject to finance’ clause?
There is still some ambiguity on what requirements a purchaser must satisfy to enable them to utilise a subject to finance clause. The case of Zieme v Gregory in the Supreme Court provides that a purchaser must take all reasonable steps to obtain a loan in accordance with the condition set out in the Contract of Sale. Whilst often there are special conditions in a Contract of Sale that deal with finance clauses and these can vary from contract to contract, at a minimum, you should use reasonable endeavours in pursuing your finance with your lender before you can rely on your subject to finance clause to end your Contract.
As each Contract of Sale and personal circumstances differ from case to case, you should seek legal advice to understand your rights and prior to giving notice to end a Contract of a Sale.
4. What if I am using a mortgage broker and not a lender?
If you have engaged a mortgage broker, receiving a letter or email from them advising that you are unable to obtain finance will generally not be sufficient to terminate using a ‘subject to finance’ clause.
You must have a letter from your specific lender listed in the Contract of Sale. This letter must expressly state that your finance has not been approved. Although, as each Contract of Sale and personal circumstances differ, you should always seek legal advice in this regard.
5. What if my finance is conditional on circumstances outside of a standard loan, like the sale of my business or the sale of my other property?
Contracts of Sale for land in Victoria ordinarily have a general condition for a standard ‘subject to finance’ clause. However, if your finance is conditional based on unique circumstances, it is critical that you advise your lawyer so that a special condition can be prepared and included that accommodates your position. This will protect you to a greater degree than the standard clause.
6. Have you got any tips on how to navigate a ‘subject to finance’ clause?
We recommend that you obtain legal advice prior to signing any Contract of Sale. If you require a ‘subject to finance’ clause, your lawyer can advise you based on your own personal circumstances and draft any necessary special condition to ensure your interests are protected. This will also ensure that you do not forfeit any deposit already paid or, risk having a claim brought against you by the vendor.
It is also important to keep your lawyer informed on your finance application and progress with your lender after a Contract of Sale is signed. If you let your lawyer know that your bank requires more time before it will give unconditional approval, your lawyer can seek an extension to the finance date on your behalf.
Keeping your professional advisors informed at all times allows you to correctly understand your rights and obligations when you need to make critical and important decisions.