October 29 2015
Conditional property agreements can turn around to bite you
In a bustling real estate market, significant pressure is often placed on purchasers to make an offer in a short timeframe, often with few conditions (if any). We often hear about the purchase once the parties have signed and have already incurred legal obligations that may be difficult to satisfy. The moral of the story is to talk with us before you sign the agreement. We outline below a situation that we hope you won’t ever experience.
Rob and Jess Brown¹ submitted an offer to buy their first home. The real estate agent had assured the Browns that the property was built in the 1950s, and it was solid. They made an offer of $310,000 which was conditional on a satisfactory building report being obtained. Rob and Jess decided a finance condition wasn’t necessary because their banker had said they were pre-approved to purchase up to $350,000. The agent told the Browns they should make a quick offer to secure this property; they decided there wasn’t enough time to consult their lawyer, Paul, before signing.
The offer was accepted; lawyer Paul advised Jess to contact a certified builder for a pre-purchase report. Against Paul’s advice, Jess decided to take a cheaper option and asked her brother, Alan, an apprentice builder, to prepare a report in exchange for a box of beer.
The night before the condition was due to be satisfied, Jess was still waiting for the report. Alan promised he would inspect the property after work and email Jess once it was done.
When lawyer Paul called Jess, she told him that only the previous night Alan had identified that the property’s electrical wiring was outdated. Although Alan hadn’t emailed a report, Jess had already advised the agent that the building report condition wasn’t satisfied and that the agreement was cancelled.
Paul told Jess and Rob that they had an obligation under the building report condition to provide the vendor with a written copy of the report. Alan quickly emailed Paul explaining the electrical issues, but Paul had concerns about Alan’s report.
Paul wasn’t surprised when the vendor’s lawyer raised issues with the form and content of Alan’s report and asked Rob and Jess to rethink their cancellation of the contract. The vendor’s lawyer indicated that Rob and Jess hadn’t done all they reasonably should have to satisfy the building report condition. The written report (email) was obtained after their notification of cancellation, was very informal (email only) and wasn’t from an experienced builder. Paul also advised that they risked being sued for the vendor’s loss on resale and were fortunate not to be sued already.
Rob and Jess realised they couldn’t cancel solely due to the electrical issues, as this was not a condition of their agreement. They confirmed that the building report condition was satisfied, and they would complete their own electrical work. They then went to the bank and asked for loan documents to be prepared. Their banker was surprised because the bank hadn’t approved the property as security for the loan; the pre-approval only approved the Browns for servicing a loan. The bank also required an insurance certificate prior to drawdown.
The insurance company refused to cover the property without an electrical report due to its age. Rob called an electrician to arrange an urgent electrical report, which confirmed the property had old wiring. The insurer refused to cover the property until it was rewired. Paul advised Rob and Jess that there were significant risks involved with renovating a property before settlement, but they had few options. The electrical work took an additional week to complete, causing penalty interest for late settlement of $90/day.
In the end Rob and Jess successfully purchased their new home. Although they love their new house, they agreed that next time they buy a property they will talk with their lawyer before signing an agreement or attempting to satisfy any conditions.
¹ Not their real names.