Subject to finance requires strict compliance

LPLC sees claims when clients don’t understand their obligations and practitioners don’t appropriately manage the time frames.

In the Law Institute of Victoria/REIV Contract of Sale of Land (copyright January 2024) (the contract), details of the specific loan required by the purchaser are completed in the particulars of sale including the name of the lender (or other lender chosen by the purchaser), the loan amount (no more than) and approval date. These details should be considered carefully as the client is bound by and must comply with them. For example, a client should not seek approval for a larger loan amount or expect additional time to obtain approval from what is provided in the contract. The terms of the contract are binding and cannot be changed without the vendor’s prior agreement. All agreed changes to the contract should be confirmed in writing.

General condition 20 sets out specific obligations of the purchaser and provides:

20.1 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.

20.2 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, together with written evidence of rejection or non-approval of the loan, 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.

20.3 All money must be immediately refunded to the purchaser if the contract is ended.

Under this Condition, critically the purchaser must

• Immediately apply for a loan of not more than the specified amount
• Do everything reasonably required to obtain approval of the loan
• Serve written notice on the vendor, with written evidence of rejection or non-approval of the loan, within 2 days after the approval date, to end the contract.

If this condition is included in a contract, purchasers are obliged to pursue finance and are bound by the contract (subject to all other conditions and requirements) if finance is approved. The clause does not give purchasers the opportunity to change their mind or hold the property while they pursue other options.

Practitioners should, at the earliest opportunity, discuss the subject to finance clause and provide written advice to their clients about the client’s obligations and completion dates so the client understands what they must do and by when. Purchasers need to be aware that a failure to comply with General Condition 20.2 and their other obligations may prevent them from relying on the clause to end the contract if they cannot obtain finance. They also need to understand the consequences that may result from non-compliance such as loss of the deposit and a potential claim for damages by the vendor.

Practitioners should diarise and monitor the finance approval dates carefully. Any requests for an extension of time should be made clearly in advance of the due date, and any notice to end the contract must be in writing in clear and unequivocal terms and served within the required time frame.

In the case of Putt v Perfect Builders Pty Ltd [2013] VSC 442 and [2013] VSC 600 the court confirmed that a purchaser who enters into a contract ‘subject to finance’ must act reasonably and without delay in fulfilling their contractual obligations.

In Putt’s case, old general condition 14 of the contract applied. The particulars of sale specified that the contract was subject to a loan of $475,000 being approved by 4 June 2013 from AGF Home Loans. However, the purchasers applied for a loan of $476,000.

The court refused to grant an order for the return of the deposit to the purchaser for several reasons. First, the court was not satisfied on the evidence that the plaintiffs had applied for a loan of $475,000. Secondly, the court was not satisfied that the purchasers had “…fulfilled their obligation under general condition 14.2(b) to do everything reasonably required to obtain approval of such a loan…”. The purchasers had exhibited correspondence indicating that their lender required certain information to consider their loan application. There was no evidence as to exactly what those requirements were and how the purchasers had attempted to meet them.

In Stoilas v Mazzocchetti [2013] SADC 74 the purchaser’s application to NAB was rejected. The purchaser also approached Commonwealth Bank and used a mortgage broker with no success. The purchaser successfully obtained judgment for return of the deposit on the basis that the purchaser had validly terminated the contract having failed to obtain finance.

In Pearl v Nannegari [2021] VSC 468, in this case, old general condition 14 of the contract applied. The purchaser applied for a loan with a lender other than the one specified in the contract, and the notice of termination was served 6 days outside of the required period for the service of such a notice. As the notice was served outside the required period, it would not have terminated the contract.

In Umbers v Kelson [2008] VSC 348, a contract for the sale and purchase of a business contained a subject to finance clause in similar terms to general condition 20. It required the purchaser to serve written notice ending the contract on the vendors within 2 days after the approval date. The approval date was 17 July. On 18 July, the purchaser wrote to the vendors, advising that finance had not been approved. The purchaser requested an extension to 17 August and said that, if that extension to the approval date was not granted, then the vendors ‘may treat this letter as written notice ending the contract’. The vendor did not grant an extension. The Court held that the 18 July letter was not a ‘written notice ending the contract’. The contract remained on foot, and it became unconditional.

Providing advice and keeping records

Practitioners acting for purchaser clients should explain and confirm in writing how the ‘subject to finance’ clause works and the client’s obligations, including:

• the requirement to apply for no more than the specified loan amount
• the requirement to do everything reasonably required to obtain approval of the loan
• that it is the purchaser’s obligation to serve written notice on the vendor within two days of the approval date if they want to end the contract because finance is not approved (along with clear evidence of non-approval of the loan)
• the consequences that may result from non-compliance with these requirements, including that the contract may become unconditional, the loss of the deposit and a potential claim by the vendor.

Action dates and keep records

Practitioners should:

• identify, record and monitor important dates, (loan approval date and the last day on which the purchaser may provide written notice)
• if required, seek extensions to the approval date as early as possible
• if required, take decisive action in writing to end the contract in clear and unequivocal terms before the deadline
• proactively follow up with their clients ahead of these important dates, confirm advice in writing and keep detailed records.