Signing a contract outside of your solicitor's office? Be wary of last minute added clauses

In NSW, real estate agents are authorised by law to exchange contracts for the sale of residential property.  That authority is not unlimited however.

The law provides, paraphrased,  that a real estate agent may, presumably after a buyer has been found and a sale negotiated between the buyer and seller:

• complete parts only of a proposed contract (usually one that’s already been prepared by the seller’s solicitor or conveyancer) by inserting details of the buyer’s name and address, the name and address of the solicitor/conveyancer acting for the buyer, the price, and the date;
• insert in or delete from a contract description of any furnishings or chattels to included in the sale; and
• as stated, and providing they’re authorised by the seller or their solicitor/conveyancer “participate in the exchange or making of contracts”.

Despite these clear and limited provisions, it isn’t uncommon to find agents that regularly do more, sometimes much more, than this. 

It’s also not uncommon for contracts ending up in court litigating the meaning of clauses apparently quickly drafted and added very late to contracts; though well intended, ended up being difficult to understand or to make workable.

Regardless of their outcome, court cases are expensive and stressful.  If you find yourself in a situation negotiating the buying or selling of a property and clauses being drafted and added to a land sale contract by anyone other than through negotiations via the parties’ lawyers, think about what’s stated above.  You need to be aware of the risks.  If in doubt, it may be easier to just not sign, and to consult your lawyer.

First time property investor? Beware; ensure the premises are safe!

Buying a residential property is a popular investment strategy for many Australians.  In my experience it continues to be a first time venture for the many buyers I meet.

Properties range from old to brand new, from “studio” or “bachelor” units to multi-bedroom houses.  No matter.  If you’ve bought, or are just about to buy, your first residential investment property, even if you’re a landlord already, take care!

Your managing agent and your accountant can advise you on the business side of things, but as a landlord, the law imposes duties on landlords that they must still take reasonable care concerning the dangers that might exist on premises they rent out, even hidden ones that aren’t readily apparent on inspection.

For example, is there safety glass installed where it’s required  that meets current standards?  Is there any defective electrical wiring?

Real court cases emphasise the need for landlords to carry out detailed inspections before properties are rented out – it’s usually not enough to just leave it to the agent.

It’s also not enough to claim that a tenant accepted the property “as is”, or that you just bought the property and “didn’t know” of a defect. 

The High Court stated the landlord is in the best position to control the state in which premises are let and therefore owed a duty to tenants to eliminate defects in the premises before tenants move in.  So, inspections are necessary before the new tenants move in.  Ensure full records are kept showing that obligations have been met regarding these inspections.

Here’s a curly one.  You just bought an investment property and your first tenant is the seller of that property, certainly not an unusual occurrence.  Who’s responsible if a short while later your new tenant has an accident falling through the glass front door suffering severe injuries because the door was fitted with the wrong glass?  You don’t want find out then that perhaps your insurance policy doesn’t cover you!

This case emphasises the necessity of landlords carrying out detailed inspections before premises are let.

With judgments of in the order of $1.2m and over $840,000 in these types of cases, don’t chance it!  They highlight the necessity of landlords to carry out proper inspections before properties are rented out.   If in doubt, have a chat with your lawyer.

Business franchising can be good, but is it all good?

As a method of getting a foothold into starting, owning and running a business, business format franchising is a well regarded and popular method.  Indeed, on a per capita basis, Australia is said to be the “franchise capital of the world”, even more so than the USA.

There are plenty of good-news stories and guides about the advantages of business format franchising.  A timely article in today’s Sydney Morning Herald, however, highlights what many consider an often neglected downside, for franchisees, in many franchising systems.  Even after allowing for any rights to renew for additional terms, most franchise agreements have a final end date, be it 5, 10 years or even 20 years from the start date, for example.

 

Once the franchise term is at an end, typically there is no right for the franchisee to obtain a new agreement from the franchisor.  Or as the article puts it, if you’re at the end of your franchising contract, the franchisor can do whatever it wants.

Unlike typical non-franchise businesses, towards the end of the franchise contract, the franchisee can find themselves with no rights, no asset... you have nothing at all; there’s no goodwill, there’s nothing.  You pick up your kit bag and go home. 

Metaphorically, and possibly quite literally, once you lock the doors for the last time, the keys are just simply handed back to the franchisor.  No reward, no payment and no return for the goodwill that was probably built up over years of hard work.

On the other hand, if one has an independant, non-connected and successful small business enterprise, the owner usually has a valuable asset to sell; the years’ worth of built up goodwill adding value and hopefully providing a decent return when the business is sold.

It’s not all bad.  If you’re thinking about starting or buying a franchise business, it's vitally important you just need to be aware of these sort of issues.  As always, make an informed decision after obtaining professional advice, particularly from your accountant and your solicitor.

Buying and “cooling off” – know this

Well first, why have this? It mostly results from attempts to reduce the practice of gazumping in real estate transactions.  More on this practice in a previous post. 

If you’re a buyer, there is information here that may be useful to you but always seek the advice of your own solicitor or conveyancer when looking at your own particular circumstances.

The law requires sellers of residential property to have a copy of the proposed contract available for inspection by any purchaser (link to relevant NSW law here).  The proposed contract here means the full proposed contract will all relevant documents, not a “draft” that’s still waiting for compulsory attachments yet to arrive.

Take a situation where, typically through a real estate agent, a buyer has negotiated a purchase of a house, the seller agrees to price and perhaps other terms.  The buyer hasn’t yet consulted their solicitor, they’ve heard something about pest and building inspections, and the bank loan still has to be organised.

Say you’re the buyer and you’re keen on the house – dare I say, you love it!   Understandably you’re also worried about signing a contract with these other things still to attend to.  Importantly, you’re also worried about losing the chance, especially because you’ve worked out that the sales agent, and other in his/her office are keen to sell to anyone else, even though you’ve done a deal while you’re off doing the other important things.

Where a buyer signs the contract with a real estate agent and the agent does the exchange of contracts, by law the buyer has a minimum 5 clear business days cooling off period – so weekends and public holidays are excluded.  If contracts are exchanged on a Tuesday afternoon, the cooling off period expires at 5.00pm on the following Tuesday; if the agent exchanged on a Sunday, the cooling off period expires at 5.00pm on the following Friday.

Now the buyer is meant to do what they have to do, for example consult their solicitor, arrange pest and building inspections, and ensure they obtain their unconditional loan approval for the funds they’ve applied to borrow.

The buyer is entitled to pull out of, or rescind, the contract for any reason whatsoever anytime during the cooling off period.  There is a relatively small cost; if the buyer exercises their right to withdraw from the contract, they forfeit 0.25% of the agreed sale price – typically this amount has already been paid to the agent at the time of signing.  The seller however, can’t rescind for any reason, even if they receive a better offer – see the same earlier post.

These days, many lenders are taking somewhat longer to approve loans.  If the 5 day cooling off period is too short and the buyer needs more time, before the cooling off period ends, the buyer can request and extension to the cooling off period.  To ensure problems are minimised, this is probably best done by the buyer well before the expiry time, and through your solicitor.

The cooling off gives buyers some peace of mind and a period of time to attend to and finalise matters relating to contract, secure in the knowledge sellers can’t change their mind or accept other offers, and goes some way in minimising gazumping.

Beware too.  Once the cooling off period comes and goes, unless the buyer has rescinded before the expiry time, the contract becomes binding and unconditional.

Are there any disadvantages?  Yes, there are some.  The first one is the cost of rescinding.  There are legal, inspections and other like fees the buyer incurs.  In addition, the buyer forfeits the 0.25% of the price to the seller.  On a $600,000 price, that’s $1,500 – it’s form of compensation to the seller.

Another disadvantage is that while terms of the contract can still be negotiated during the cooling off period between the parties’ solicitors, the bargaining advantage remains with the seller.  They know they have a keen buyer – the buyer has already committed a part deposit and incurred expenses. 

With this knowledge, sellers are generally less inclined to negotiate away terms compared to if the negotiations were taking place before contracts are exchanged and the seller wants to encourage a buyer to commit.  In my experience, I have found that there are now many more contracts drafted for sellers with numerous additional generic clauses to cover many contingencies in favour of the seller, sometimes even taking away or changing already very reasonable clauses in the “standard” contract.

Selling through a real estate agent? Talk to other agents first!

Most people who sell real estate do so using the services of a real estate agent.  For many of us, the buying and selling of real estate property is something that we do very few times; for that and other reasons, the process can be daunting.

This post is not another on “how to sell your house” or “… how to sell without an agent…” article; you find plenty of those elsewhere. 

I’m still consulted by seller clients who choose an agent at random and then don’t even consider speaking to more than one!

If you’re a seller, my advice simply is: speak to more than one agent!  At least two, preferably a few more.

Some years ago a client couple retained an agent to sell their home, agreeing to the agent’s commission of 6%!!  I asked why they hadn’t at least contacted another agent, if only to compare charges.  Their reply was that “…but he was so nice to us”!  At that time, other agents in that area were typically charging commission of around 2.5%.

More recently another seller client was quoted a commission charge of 4.1% plus GST!!  Unlike the other one, this client did talk to other agents and in the end, the first agent reduced his commission to 2.2% inclusive of GST.  The typical agents’ charge in this seller’s area is between 2 to 2.5% inclusive of GST.

Think about it.  On a $500,000 sale, the commission difference, coming straight out of the sellers’ pocket can be around $11,000 or more!

Obviously these are not common cases.  If you’re inexperienced or unsure, the best advice is that you first speak to your professional advisers.  As an absolute minimum, talk to more than just one agent, shop around, compare charges and sale methods, ask questions.  It’s only a small precaution when we’re talking of figures like $11,000.

First homebuyer? Stressed? Trust your solicitor.

In recent weeks I’ve noticed a spike in first home buyer related inquires, sales and purchases, which appeared to have some connection with the stamp duty exemption benefit ending soon that I’ve referred to recently.  

This article yesterday reports a surge in recent auction sales for the same reason, consistent with my office’s experience.

First home buyers range from the well prepared to the no so well prepared.  The common trait though is stress, anxiety and sometime anger – not uncommon emotions in the home buying experience.

No wonder, as a fair proportion of this results from the different advices, sometimes contradictory, buyers receive from numerous others, including from real estate agents, from families and friends, and from finance brokers.

My advice: trust your own solicitor, above all others, that have some connection with your transaction. Your solicitor is the one person that always offers unbiased help, guidance and advice.

If you’re feeling the pressure during your home purchase roller-coaster-like ride, your solicitor is the only professional that’s retained by you specifically to guide you, advise you, especially to protect you and your interests.  Remember that.

Tick, tock... the NSW first home buyer’s clock!

Are you a first home buyer in NSW?  If so, remember a major benefit ends at the end of 2011.  That’s just 8 weeks away.  After you factor in the usual Christmas/New Year closures or winding down of staff in the offices of many lawyers, real estate agents, mortgage brokers, conveyancers, property inspectors, and banks, not to mention your own holidays, there’s even much less time to act.

In addition to the Commonwealth’s $7,000 grant, in NSW since 2004, eligible first home buyers have been entitled to some additional very valuable stamp duty benefits under the First Home Plus Scheme.

These included exemption from paying any stamp duty on homes up to $500,000, and a sliding scale of discounts on stamp duty for homes from $500,000 to $600,000.   Even for vacant land on which you intended to build a home, stamp duty exemptions applied to such land up to $300,000 and the concessions on land between $300,000.00 and $450,000.00.

On a $500,000 house, that’s a saving on nearly $18,000.  Even for a $350,000 house, the saving is more than $11,240.

This about to change in a major way.

For contracts made from 1 January 2012 in NSW, all that will be replaced by the First Home – New Home Scheme.

Essentially, eligible first home buyers will only be entitled to the stamp duty exemption and concession benefits when buying a first home that is a new home, or a vacant block of land intended to be the site of a first home.  The benefit will no longer be available when purchasing an existing home.

If you’re a first home buyer, or soon will be, consider not only the above, but also whether the clock ticking away, as well as the recent official interest rate reduction, could combine to add a little heat in this market over the next few weeks. If you're under a little under pressure, unsure about different advices you're getting from many people, think about seeing your solicitor.

Is your will "valid"? Or, does your will achieve what you want it to?

A will is a document in which the will-maker (the “testator”) chooses who receives their belongings and assets after they die.

A will can also do other things, such as expressing wishes about cremation or burial, funeral arrangements, appointing guardians for children, and in some cases setting up simple or elaborate trusts.  A will can also be used to appoint a guardian to look after children until they can look after themselves.

Sounds fairly straightforward?  Here’s a link to A Test of Wills, an article well worth a read that appeared last week in the Sydney Morning Herald.  It adequately summarises many issues about what can go wrong and some of the challenges.  If a contested matter ends up in a courtroom, I'd suggest that the figures in the article are a little on the conservative side though.

In my many years of practice, I've acted in many deceased estate cases involving home-made wills and wills prepared from a Do-It-Yourself kits. Amongst these, I cannot recall a single instance where there wasn't some issue or problem resulting from the will not being properly prepared.  Some were minor, and some were quite serious. In the most serious, the convoluted wording in the home made will, using a will kit, meant that a rural property was to go to a charity, while everything else pointed to a contrary intention.

The starting position for will makers is that a person who isn't suffering from mental incapacity, isn't unduly influenced, under duress or the victim of a fraud, is entitled to leave their estate to whoever they choose.

This position however is modified by family provision laws, where certain classes of people can apply to the court for orders that, despite an otherwise valid will where they "miss out", provision be made to them from the estate's assets. As a will maker, this may not be your desired result.

So, as the article suggests, get good professional advice and use a lawyer to draft your will.

If your finance isn't arranged & approved, don't bid, don't buy!!

Buying real estate is a BIG deal for most of us, so don't screw it up!

Most solicitors and advisers will strenuously advise their clients buying a property to ensure their finance is unconditionally approved before committing to a purchase.

It's important to also realise that "indicative approval" or "pre-approval" for your home loan application is NOT the same thing.

Entering a purchase contract is the real thing. If you can't afford to complete your purchase, you may end up losing more than what you bargained for. The story in this article in today's Sydney Morning Herald is a simple but clear example of the possible consequences.

The buyer breached the contract they entered because they couldn't get the funds, borrowed or otherwise, to buy the property they bargained for. The seller subsequently sold the property to another buyer for significantly less than what the first buyer had contracted. The seller successfully sued the first buyer for the loss suffered resulting from the first buyer's breach of contract, being largely the difference between the price in the first contract and the lesser price in the second contract.

Take care!

Will Awareness Day - 19 August 2011

The Law Society of NSW today launched Will Awareness Day.  It is what it says!

Far too often I've been consulted regarding will and estate issues where there's a problem that could've easily been avoided or managed if only a will had been properly made, or even just made!  For example, there are many will kits, both online and paper based, available for people to make their own wills.  Usually they come with accurate and often very good instructions.  Yet, of all the matters I've been consulted about in my career that involved a home made will, I've never seen a home made that didn't have some issue or concern, many times very serious ones.

Will Awareness Day is a great opportunity to learn just a little bit more about wills and estate planning matters. There are many free talks and programmes scheduled in many places in New South Wales; if you'd like to try to attend one, here's the list on the Law Society's website.

If you prefer, for now, to read some general information, here's an informative Law Society article Should I make a will?  Also, here some links to some general information I've previously written about Wills and Estate Planning, and Deceased Estates, Probate and Estate Claims.

Do you have a will?  Or, has it been a while since you made one? Just don't leave it for too long to do something about it.