Australia: Brokers: Beware Of Subject To Finance Clauses

September Legal Updates: Commercial Dispute Resolution
Last Updated: 29 September 2011
Article by Tom Darbyshire

When prospective home buyers make an offer to purchase a property, they often make it conditional on a successful finance application; in other words the contract is 'subject to finance'.

The standard Contract for Sale by Offer and Acceptance, published by REIWA, contains a clause that regulates contracts which are subject to finance. The clause requires the buyer to use their 'best endeavours' to obtain finance. If their finance application is unsuccessful, the clause sets out a procedure for the buyer to inform the seller of this, bringing the contract to an end. The buyer gets their deposit back and the parties move on.

If a buyer does not comply with the provisions of the subject to finance clause, they can find themselves unable to terminate the contract in this way – in other words they can be obliged to proceed with the sale even though they don't have the finance. A recent decision of the WA Court of Appeal suggests that this disastrous result can happen very easily due to the current wording of the standard 'subject to finance' clause.

The Contract

In April 2008, Mr and Mrs Dodds offered to purchase a house in Hillarys for $672,500 from Mr and Mrs Kennedy. They signed a contract, in which they nominated the ANZ Bank as the lender from which they would be seeking finance, and paid a deposit of $3,000.

The Dodds then met their finance broker, who was accredited by ANZ. The broker, who was very familiar with ANZ's lending requirements, told them that they would not meet ANZ's criteria for a loan. He said that if they made an application, which was rejected, it might affect their ability to get finance in the future. The broker provided them with a letter saying that he was "unable to arrange a loan for you to assist with the purchase", which the Dodds forwarded to the Kennedys before asking for their deposit back.

The Kennedys not only declined to return the deposit, they demanded that the Dodds proceed with the purchase. When they failed to do so, the Kennedys terminated the contract, sold the property to someone else for $615,000, and proceeded to sue the Dodds for the difference, plus interest, fees and costs.

The Trial

The matter first went to the District Court, where the argument focused on the wording of the subject to finance clause and whether the Dodds had done enough to satisfy their obligations under it.

The Kennedys argued that an application for finance could not be made to a mortgage broker, as the mortgage broker had no power to grant or reject finance. The Trial Judge did not accept this argument; he found that the definition of 'Lender' clearly allowed an application to be made to a mortgage broker as an intermediary.

However, the Trial Judge also found that the application had to be submitted to an entity that had authority to approve the loan, in this case the ANZ bank.

The broker had not done this, as he knew the application would fail. Nonetheless, it meant that the Dodds had not complied with the relevant parts of the clause. Therefore, the contract had not come to an end. They were obliged to settle with the Kennedys and they had failed to do so.

The Trial Judge held they were liable for damages, interest and costs amounting to nearly $80,000.

The Appeal

The Dodds appealed but were unsuccessful. All three Judges agreed that it was necessary to rewrite the "clumsy and ambiguous" wording of the subject to finance clause but they had very different views on how it should be done.

One of them held that a finance application did not have to be made to a specific lender even if the buyer nominated one, provided that an application was actually made to a lender with the power to grant or refuse a loan and the lender carried on business in Western Australia. In essence he agreed with the Trial Judge.

However, the other two Judges took a stricter view. They found that if a buyer nominated a specific lender in the contract, they were obliged to apply to that lender. A rejected application made to a different lender would not necessarily allow the buyer to walk away from the contract.

The case has serious implications for real estate agents, mortgage brokers and anyone using their services where the standard form REIWA contract is applicable and highlights the urgent need to reword the subject to finance clause. In the meantime, buyers should be very careful to ensure that, if they nominate a particular lender to provide finance, the application is made to that lender.

The decision is reported as Dodds v Kennedy [No.2] [2011] WASCA 131. To read the Court of Appeal's decision click on the following link:$FILE/2011WASCA0131.pdf

For further information, contact Tom Darbyshire on (08) 9321 3755 or or Tim Lethbridge at

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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