Once you have obtained your finance and found a suitable house, you can make an offer to purchase the property. There is usually a bit of haggling before you and the vendor (see glossary at the end) will come to an agreed price. This blog will look at what usually happens after the price is agreed when buying a property and everyone looks to exchange contracts.
Accepted Purchase Offer
From the point where an offer to purchase has been accepted, one of two things can happen, either:
(a) contracts will be exchanged with the real estate agent on the day that your offer is accepted (or soon thereafter). This is an exchange of contracts with a cooling-off period; or
(b) the agent will send a sales advice to your solicitor. No contracts are signed or exchanged with the real estate agent in this instance.
Exchange with cooling-off period
When you exchange with a cooling-off period you will be given a period of 5 business days (ie. not including weekends and public holidays) in which you will need to complete your due diligence enquiries. The cooling-off period starts from the day following the day that contracts are dated. For example, if you sign the contract on Friday 8 November 2013, the cooling-off period will expire on Monday 15 November 2013 at 5pm.
This period can be extended but only if the vendor agrees. It is at the vendor’s sole discretion as to whether to permit the request for the extension of the cool-off or not. When the cooling-off period expires (ie. Monday 15 November 2013 at 5pm in the above example), the exchange of contracts will be unconditional and both you and the vendor will be bound to complete the contract.
If you exchange contracts with a cooling-off period you will be required to pay a holding deposit of 0.25% of the purchase price. If you rescind the contract, for whatever reason, during the cooling-off period you will forfeit that holding deposit to the vendor. For a house worth $400,000 the 0.25% holding deposit will be $1,000.
Are there times when a cooling off period does not apply?
You should be aware that there are a few times when an exchange of contracts for residential property in NSW will not have a cooling-off period, those are:
(a) when you bid at an auction;
(b) when you make an offer that is accepted and you sign contracts on the day of the auction after the auction was passed in;
(c) when you purchase a property with land area greater than 2.5 hectares;
(d) when you exercise an option to purchase from an existing option to purchase contract; and
(e) when your solicitor signs a section 66W certificate.
What are the advantages and disadvantaged of cooling off period?
There are advantages and disadvantages of exchanging contracts with a cooling-off period. The advantages are that, after contracts are exchanged, the vendor cannot withdraw from the contract, only the purchaser has the right to rescind. It is potentially a good way to get the property off the market so that no one can make a higher offer.
You would look to exchange contracts with a cooling-off period if you believe that there are likely to be other purchasers who will want to exchange contracts (unconditionally) before you. Only take this step if you are pretty sure that there won’t be any problems with the property. If you think that there will be some potential issues you shouldn’t exchange with a cool-off because, remember, you will lose you holding deposit if you rescind.
Exchange without cooling-off period
The other way that contracts can be exchanged is where you make an offer which is accepted and the agent forwards a sales advice to the solicitors for the purchaser and vendor. Where that occurs, you will undertake your due diligence during the period before contracts are exchanged. There is no time limit to you completing your due diligence. In theory, you could take 100 years before exchanging; however, in practice, a vendor is unlikely to want to wait too long.
With this method, after you have completed your due diligence you will sign the contract with your solicitor, your solicitor will sign a section 66W certificate and the contracts will be exchanged unconditionally (that is, there will be no cooling-off period). Both the vendor and the purchaser will be immediately bound to complete the contract.
If you withdraw from the contract after the contracts are exchanged unconditionally, you will lose your 10% deposit and the vendor will be entitled to sue you for their losses which might include the real estate agent’s fees, the vendor’s solicitor’s fees and if the vendor sells the property for $10,000 less to the next purchaser the vendor will be entitled to claim that amount from you as well. Clearly, at the time you exchange contracts unconditionally you will need to be absolutely sure that you’re happy with the property and your finance is unconditionally approved.
Due diligence – These are enquires to make sure that there is nothing wrong with the property. It includes obtaining unconditional loan approval, discussing the contract with your solicitor, making sure that all the structures on the land have been approved by council and all relevant authorities, making sure there are no outstanding notices, orders or litigation affecting the property and making sure that there is nothing physically wrong with the property.
Exchange of contracts – This is where you and the vendor will each sign a copy of the contract for sale and the contracts will be dated and then handed to the solicitor for the other party. So the vendor’s solicitor will hold the purchaser-signed contract and the purchaser’s solicitor will hold the vendor-signed contract. This is because, if there is a breach of contract by the vendor, the purchaser and their solicitor can then go to court with the contract signed by the vendor and say, “Hey, look, the vendor agreed to do XYZ, as evidenced by his/her signature on this contract, and they didn’t.”
Option to purchase contract – These are agreements whereby a potential purchaser pays a premium to a vendor for a right to elect to buy a property at some time in the future. It can also be for a vendor to elect to require a purchaser to buy a property. This is very rare for residential properties.
Rescind – To withdraw from the contract.
Sales advice – This is written advice from the real estate agent to the solicitors for the vendor and purchaser advising them of the full details of the purchaser and vendor and the agreement reached. The solicitors will then be able to either draw contracts and/or will be up to speed with the transaction when they start talking to their client.
Section 66W certificate – This is a one-page document signed by the purchaser’s solicitor confirming that they have explained to the purchaser that, if the contracts are to be exchanged without a cooling-off period, the purchaser will be immediately bound to complete the contract.
Vendor – The seller.
Ryan & Ryan Lawyers
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The above is not intended as legal advice. You should obtain legal advice in relation to your own specific circumstances.