Buying a property can be one of the biggest and most important transactions you make during your lifetime and it is important you seek professional advice to protect your interests.

A decision of the Victorian Supreme Court1 handed down on 5 August 2021 demonstrates the potentially disastrous consequences when a subject to finance clause is not complied with.

Why is this case important?

This case provides a useful reminder of the applicable principles, and what can happen when things go wrong.

Purchasers should:

  • Not assume they have an automatic right to walk away from the contract if they cannot obtain finance to settle the property within the loan approval period.
  • Seek professional advice before making an offer subject to finance.
  • Carefully understand and comply with the requirements of the contract and keep records.
  • Be aware lenders' loan approval timelines can be longer than anticipated and take these into account when making an offer that is subject to finance.
  • Apply for any extension to the loan approval period well in advance of its expiry and make sure there is a legally enforceable agreement to extend the period.
  • Actively follow up brokers and lenders as to the status of the loan application.
  • Seek specialist advice as soon as it becomes apparent there may be issues.
  • Ensure that if finance is not able to be obtained, the contract is brought to an end correctly to ensure they are entitled to return of their deposit.

Vendors should:

  • Consider adding special conditions to bolster their rights when a contract is subject to finance.
  • Seek professional advice as to whether a subject to finance clause (and any associated special conditions) have been complied with prior to agreeing to return a deposit. You may be entitled to retain the deposit, or in a strong position to negotiate to retain some of it.
  • Think carefully before accepting a part payment of a deposit when a contract is to be subject to finance.

Facts

The plaintiff (vendor) was the owner of a residential property in Albert Park (property). In March 2020 the defendants (purchasers) entered into a contract of sale (contract) to purchase the property for $1.68m.

The deposit payable by the purchasers under the contract was $168,000. The purchasers made a part payment of $10,000 towards the deposit and the parties agreed the $158,000 balance would be paid 'once finance [was] approved'.

The contract included a subject to finance clause, which stipulated that finance was to be obtained by 10 April 2020. The lender named in the contract was HSBC.

General condition 14 of the contract provided:

  1. Loan

  2. 14.1 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.

    14.2 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 on the vendor within 2 clear business days after the approval date or any late date allowed by the vendor; and

    (d) is not is default under any other condition of this contract when the notice is given.

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

The purchasers were unable to obtain finance by 10 April 2020, but were granted an extension of time by the vendor until 20 April 2020. The purchasers sought, but were not granted, an additional extension of the loan approval date to 4 May 2020.

On 28 April 2020 the purchasers purported to terminate the contract by email (the Termination Email) and demanded repayment of the $10,000 payment made towards the deposit.

On 4 May 2020 the vendor served a default notice on the purchasers in relation to their failure to pay the balance of the deposit.

Subsequently the vendor notified the purchasers he accepted their repudiation of the contract – the purchasers having shown an intent to no longer be bound by the contract by purporting to terminate it.

The vendor then commenced the proceeding seeking orders that the purchasers pay the balance of the deposit and forfeit the $10,000 already paid pursuant to s 49(1) of the Property Law Act 1958(PLA).

The purchasers argued at the hearing the vendor had represented, in correspondence sent on his behalf, that he was prepared to extend the loan approval period, and consequently, the vendor was estopped from treating the Termination Email as out of time.

The outcome

His Honour Justice McDonald held:

  • The Termination Email was sent outside of the strict timeframe provided by General Condition 14.2(c) and could not terminate the contract.
  • The purchasers did not apply to HSBC, the lender named in the contract, for finance but applied (through a broker) with another lender, and therefore did not comply with their obligations under 14.2(b) to do everything reasonably required to obtain approval of the loan.
  • The contract became unconditional on or after 22 April 2020 (2 business days after the loan approval date as extended by express agreement).
  • The vendor did not make any 'clear' representation to the purchasers that the loan approval date would be extended. All that the evidence established was that the purchasers believed that negotiations were ongoing. This was not enough for the vendor to be estopped from treating the Termination Email as out of time.
  • The vendor was entitled to accept the purchasers' repudiation of the contract.
  • The balance of the deposit was due and payable by 20 May 2020 when the vendor accepted the purchasers' repudiation of the contract.

Exercise of discretion to return the deposit

By the time of the trial, the vendor had resold the property for $20,000 less than the amount payable under the contract.

In considering whether to exercise his discretion under s 49(2) of the PLA and order that the purchasers were entitled to return of the deposit notwithstanding their failure to comply with the subject to finance clause, His Honour held:

  • The purchasers must "do more than establish that forfeiture of the deposit would result in a financial windfall to the vendor, as will usually be the case".
  • The exercise of the discretion to return a deposit is "the exception rather than the rule", and is conditioned by recognition of the "critical function of a deposit being an earnest for contractual performance".
  • In all of the circumstances the purchasers had failed to establish the exercise of the discretion was justified.

Accordingly, the purchasers were ordered to pay the sum of $158,000 to the vendor and will likely have to pay interest and the legal costs of both parties in addition to that amount.

Had the purchasers applied for finance with the lender specified in accordance with the provisions of the contract, been rejected and terminated the contract within the specified period, all of this may have been avoided.

Pointon Partners' property and disputes teams are well place to provide advice in relation to disputes regarding the sale of land.

Footnote

1Pearl v Nannegari & Ors [2021] VSC 468

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.