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
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'
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
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 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
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
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 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
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