A recent matter has prompted us to write an article warning of the dangers of entering into a contract for the purchase of a property without being absolutely sure that you are ready to do so.
We recently received a call from a client who told us that they had signed an unconditional contract for the purchase of a property the previous day, but after a night of contemplation, the client had decided that the contract made them nervous, as they were waiting on their current property to sell. The client called to ask for our advice on whether they could terminate the contract.
We have found that although many clients are aware that the standard contract for residential purchases in Queensland (the Real Estate Institute of Queensland Contract) contains a statutory clause enabling them to terminate under a five-day cooling off period, they are not aware of the fact that a 0.25% termination penalty applies. On the face of it, 0.25% does not sound like much, but in this instance, when the purchase price was $900,000.00, the termination penalty was $2,250.00.
The client chose to terminate that same day and the seller issued the penalty as anticipated. The issue of the penalty was not changed by the fact that the property sold the following day to another purchaser. The fact that this scenario seems unfair does not change the rights of the seller to impose this penalty.
The worst part of this situation was that it would have been easy for the client to have inserted one special condition into their contract making the contract conditional upon the sale of their current property if they had first sought legal advice (in this instance, there would have been no penalty in the event of termination and the client could have purchased their ideal home without the stress encountered in our client’s situation).
If you need assistance in drafting special conditions into your Contract, please feel free to contact our office on 07 5574 3560.
It comes as a surprise to clients when, on occasion, they find themselves either subject to, or trying to enforce, “informal agreements”. Informal agreements may come in the form of an exchange of discussions in respect to an arrangement, or a signed Lease Offer. It may be that the informal agreement is a sword for a client (for example, the client wants to push the arrangement in the absence of a written contract signed by the parties), or a shield for a client (for example, the client wants to avoid the arrangement because there was no written contract signed by the parties – or the terms were not finally agreed).
Whether the arrangement relates to a supply of goods, services or a commercial leasing arrangement – a legally binding arrangement may be determined by way the conduct of the parties (such as one of the parties completing a condition agreed to start the arrangement (for example, supplying a service), or an exchange of emails about an arrangement), even in the absence of a formal contract – whether or not the contract is ultimately signed.
When are negotiations binding?
Courts look at the objective intention of the parties when determining whether there is a legally binding agreement. That is, whether a reasonable person would consider the agreement to be legally binding, and not the parties’ subjective intention.
Courts have found a legally binding agreement in the following situations:-
When a vendor and purchaser of commercial property agreed to the essential terms of the agreement over email, noting that the agreement was “subject to contract” and “subject to execution”. A court found that this was essentially an “agreement to contract” and made judgement against the vendor (who attempted to withdraw from the transaction due having found a more favourable third party purchaser);
Negotiations between a tenant and landlord whereby the essential terms of the lease were agreed upon were found to constitute an agreement to lease. This was the case even though the negotiations began with “subject to formal lease documents being signed” and that not all (minor) terms were agreed. The landlord was ordered to pay damages to the tenant for failing to countersign the formal lease document; and
A tenant who, after negotiating and signing a letter of offer with a landlord, proceeded to obtain council approvals (with the landlord’s assistance) and took steps to fit-out premises without a formal lease in place was found to be bound by an agreement to lease.
When determining the intention of the parties, regard will be to the surrounding circumstances of the negotiations, the relationship of the parties, subject matter of the agreement and other relevant factors.
What can you do to ensure no binding agreement is in place until documents are signed?
Parties who do not wish to be bound by negotiations or pre-contract documents (e.g. heads of agreement) must ensure that they clearly and consistently reiterate to the other party in all correspondence that no legally binding agreement will be formed until formal and final documentation has been signed. As the above cases reveal, merely stating “subject to contract” is not enough.
Further, prospective tenants should not enter into possession and pay rent until the lease is signed as this may constitute acceptance by conduct. Conversely, a landlord should not accept rent until they are in a position to be bound. More generally, parties should not begin performing their obligations under the agreement before the documents are signed.
However, the risks of making an agreement conditional is as a sword which can be used against you – as the other party to a transaction may similarly withdraw from the arrangement if there is no legally binding agreement. This may mean that you could lose a commercially advantageous deal if it is not locked in.
In any negotiation, you should always seek legal advice before accepting the terms of an agreement (whether by email, orally or otherwise) and before signing any preliminary document.
Nautilus Law Group has a team of professionals experienced in commercial and property agreements. It may be that our team can give you a “thumbs up” or recommendation for variations in a short meeting, or for more complex matters – the engagement may be extended.
Engaging a lawyer to advise on an agreement is an investment in certainty, as the costs of remedying a failed arrangement greatly outweigh the costs savings of avoiding advice.
We welcome you to contact our Property and Commercial Team to discuss your arrangements. Please free to contact Vicki by clicking her name, or by phoning to arrange an appointment with Vicki on (07) 5574 3560.
When entering into a Contract in Queensland, it is critical the Buyer’s and Seller’s names are complete, and correctly spelt. Any omissions or errors can cause significant headaches and incur significant cost further on in the conveyancing process.
The Seller is the first party listed on the Contract. The Seller’s details are the easiest to get right, as these must exactly match the title of the property (which can be discovered from a title search of the property, which your agent or solicitor can conduct before the Contract is signed). If, for some reason, you are selling the property and the entity registered on the title is incorrect (say, for example, the title is registered in the joint name of two people, one of whom is deceased), please speak to your solicitor before the Contract is signed about the Seller’s name that should be reflected on the Contract, and any special conditions that must be inserted to address the variation between the Seller’s name on the Contract, and the name registered on the title of the property.
It gets a bit trickier when inserting the name of the Buyer. If you are purchasing the property in your individual name, then your full legal name must be inserted (no nicknames, assumed names, or initials). If the purchaser is a Company, the full company name and A.C.N. of the Company must be inserted (e.g. SMITH NOMINEES PTY LTD A.C.N. 123 456 789). If you are purchasing the property as Trustee, then the full name of the Trustee and Trust must be entered (e.g. SMITH NOMINEES PTY LTD A.C.N. 123 456 789 AS TRUSTEE FOR THE SMITH FAMILY TRUST).
Firstly, if you sign a Contract that does not reflect the correct entity, leading to a change of the Contract, the Office of State Revenue may determine that any variation to the Contract to change the entity is a separate transaction, and may impose Transfer Duty on both the transfer reflected by the Contract, and the subsequent transfer to the correct Buyer. At a minimum, your solicitor will need to make additional submissions to the OSR to enable a cancellation of the incorrect Contract – and generally you will have to pay the Seller’s solicitor fees as well.
For example, Mr Bob Jones sells his property to Mr John Smith, and an unconditional Contract is executed indicating these names (and Mr Smith does not provide any instructions to his solicitor indicating that the Buyer is a company or trust) (this is Transaction One). One week before settlement, Mr Smith’s bank observes that the transfer documents do not indicate the name of the Trust purchasing the property. Further discussion with Mr Smith reveals that he did indeed intend to purchase the property as Trustee, and didn’t realise that his solicitor needed to know this. His solicitor approached the Seller’s solicitor, who agreed that the Contract could be amended to reflect the Buyer as Trustee. However, Mr Smith signed the Contract in his own right, and then (it appears) decided that the purchaser would be the Trust. As the Contract signed is immediately unconditional, the Office of State Revenue can determine that the change of Buyer from Mr Smith to Mr Smith as Trustee is a second, and separately assessable, transaction (Transaction Two). Whilst the ultimate outcome is that both transactions are effected and the property is held in the name of the intended party (i.e. Mr Smith as Trustee), the effect of such a determination by the Office of State Revenue is that the respective Buyers have to pay transfer duty on each of the transactions – meaning that Mr Smith has to pay Transfer Duty on Transaction One, and Mr Smith as Trustee has to pay Transfer Duty on Transaction Two. The double-payment of Transfer Duty would be entirely avoidable had the correct purchasing entity been inserted in the Contract from the outset. Your lawyers may be in a position to apply for a cancellation of the first contract, nullifying Transaction One in terms of duties – but the process will incur additional costs – usually including costs payable to the Seller’s solicitor and the Buyer’s solicitor.
Secondly, indicating the correct entity on the Contract from the outset creates less potential for issues to arise as the transaction progresses. An incorrectly listed entity requires amendment on the Contract, which can be made only if both parties agree. It is also important to note that, if purchasing the property as Trustee of a Trust, a certified copy of the Trust Deed (and any variations) is required to be lodged with the Transfer documents after settlement. As you may not have these easily accessible, it is best to allow sufficient time to locate these documents prior to settlement in order to avoid a last minute rush.
If you have any questions about the name that should be indicated on your Contract, please contact our office on 07 5574 3560.
