Contract out on house sales

The most important document when buying or selling a home is the sale contract.

This outlines the conditions of sale and the responsibilities that both parties must fulfil before settlement takes place.

When both buyer and seller have signed the contract, it becomes a legally binding document, so both must be certain about the terms it sets out. There is no cooling off period and problems can be difficult to resolve once settlement has occurred.

In WA, the standard document consists of the Contract for Sale of Land by Offer and Acceptance, and the Joint Form of General Conditions for the Sale of Land (known as the General Conditions). These are jointly released by the Real Estate Institute of WA and the Law Society of WA.

The General Conditions covers standard items such as how the deposit and balance are to be paid, what happens in the event of settlement delay, possession and tenancy, the property’s boundaries, connection of underground power and sewerage, and outgoing costs such as shire rates. The seller’s real estate agent is obligated to provide the purchaser with the most recent form of the General Conditions (currently the 2012 version).

Buyers and sellers also have the option to make the contract subject to special conditions.

Conveyancing expert Koo Lloyd-Kane said these were a vital part of the sales agreement because they covered commonly encountered issues as well as any conditions specific to the property.

The special conditions that should always be written into the contract were a satisfactory building report, electrical and plumbing checks, and if necessary a pest inspection (although, for example, a white ant certificate is not essential for a third floor apartment).

Unless the home is new, there is likely to be something in need of repair — whether something minor such as a faulty tap or a major issue that could eventually cost the new owner money or even cause them to reconsider buying.

Ms Lloyd-Kane said the building inspection should be carried out by at least one independent expert such as a registered builder, structural engineer or independent valuer. The report should comprehensively detail what checks were carried out, any defects found and the projected cost of the repairs.

Inspections are at the purchaser’s expense and the contract should specify who is responsible for the cost of any repairs. If the seller refuses to act on the report, the buyer can cancel the contract.

The General Conditions stipulate that the seller must allow the buyer a final inspection within five working days of settlement, to ensure the home is in the same condition as when it was originally inspected. The buyer can seek compensation from the seller if the property has deteriorated.

Ms Lloyd-Kane said that if there had been improvements or extensions made to the home such as sheds, patios, pools, kitchen or bathroom renovations, the buyer should ask the real estate agent for a copy of the building licenses (at the seller’s expense) to ensure any changes had council approval.

This condition was especially important with older homes and should be written into the offer, as should a requirement that all zoning and planning certificates be provided, particularly if the buyer planned to redevelop.

There should also be Home Indemnity Insurance in place. In WA all home improvements over $12,000 required indemnity insurance cover to protect future owners against substandard workmanship. In addition, if the home was built by an owner-builder, there may be restrictions on selling the property.

“These situations should be clearly disclosed by the seller to ensure they take the appropriate action before settlement takes place, ” Ms Lloyd-Kane said. “Time frames may need to be longer to accommodate these conditions.”

The contract should also cover the vendor’s representation of the property — that is, that the property will be in the same condition as it was when the contract was entered into. This includes any items that will be excluded from the sale. Generally, items deemed to be a fixture (anything nailed down or fixed) should be left to the new owners. This includes floor coverings, light fixtures, television aerials, dishwashers, window dressings and plants. The homeowner has the right to exclude items if they choose but they must inform potential buyers early on.

Unless the buyer intends to pay for the property with cash, the contract will require them to declare the name of their financial lender and a deadline for obtaining finance approval.

Ms Lloyd-Kane said failure to secure finance within the specified timeframe could result in the sales contract being terminated so it was vital that a reasonable time be given to allow the lender to complete the new mortgage formalities.

Extra time should be allowed for non-bank lenders such as superannuation and perpetual trustee institutions. Ms Lloyd-Kane said the best option was pre-approved finance and it was wise not to be tempted to minimise the settlement period as an extension could be difficult and costly.

The General Conditions states that if the seller is ready to settle but the buyer cannot settle on or within three working days of the agreed date, they are liable to pay the seller penalty interest.

Similarly, if the seller delays settlement for more than three days, they are required to pay compensation.

Craig Bradley, Real Estate Institute of WA’s director of agency practice, said another common special condition was that the contract was made subject to the buyer being able to sell a defined property within an agreed period.

Often the seller would agree to this condition — often referred to as a 48-hour clause — provided they had the right to continue marketing their property to other prospective buyers.

If the seller receives another offer, they must give the first buyer two days to decide whether to remove the subject to sale condition, after which the contract will be terminated or the sale will proceed with alternative financing.

When it comes to insurance, Mr Bradley said the home was generally at the risk of the seller until the settlement date, but once the contract was signed by both sides the buyer had what was known as “insurable interest” in the property, and could arrange their own cover.

If any damage incurred between the contract date and the settlement rendered the property substantially uninhabitable or unusable, the buyer had the right to terminate the contract.

When all the terms have been agreed to by both parties and settlement has been reached, the seller is generally required to give the new owner vacant possession of the property, along with all keys and other access devices such as security system passwords.

They must remove all vehicles, rubbish and household items before they hand over possession.

The General Conditions provides that if the home is owner-occupied, the seller may occupy the property until noon on the day after settlement.

Ms Lloyd-Kane added that it was vital when putting in an offer, that the contract state the purchaser’s name as it appeared on their birth certificate — not a nickname, shortened or assumed name — because this would be the name the property would be in once the sale was finalised.

She said properties bought via auction required extra considerations because there was no facility to outline special conditions.

“If you’re going into an auction contract, often there can be variations and it’s really important that anytime you see variations to the General Conditions, you seek some advice because often what those variations are doing is taking away the consumer rights, ” she said.

Auction contracts could exclude privileges such as the three-day grace period and may even waive basic conditions such as the vendor being responsible for any representations about the property.

Advice on Offer and Acceptance contracts is available from the Real Estate and Business Agents Advisory Board, the Department of Consumer and Employment Protection’s Real Estate branch and the Australian Institute of Conveyancers WA.