If you intend to borrow money from a bank or lending institution prior to purchasing a property, it may be advisable to make the contract of sale “subject to finance clause Vic”. This will allow you to rescind the contract of sale and recover your fill deposit in circumstances where you are unable to obtain finance.
It is a wise move to sign the contract “subject to finance” as there is always a doubt about the purchaser’s capacity to borrow money or whether the valuation of the property meets market standards. The subject to finance clause Vic specifies that the contract is conditional, or “subject”, to the purchaser being able to borrow money from the bank.
General Condition 14 of the pro forma contract of sale details the subject to finance clause. Below are the particulars and terms of the subject to finance clause:
If the subject to finance clause Vic is not included in the contract of sale, and the purchaser is unable to borrow money from the bank, they face the risk of losing their deposit. If the finance is not approved, the clause sets out the procedure by which the purchaser can end the contract of sale.
Terms of the subject to finance clause
Standard practice is to put a seven (7), fourteen (14) or twenty one(21) day subject to finance period from the date of signing of the contract of sale. Further finance extensions can be requested if there are delays in obtaining the finance approval. If the vendor is not agreeable to any extension the contract of sale can either be terminated or the purchaser can decide to proceed unconditionally without securing the finance.
In terminating the contract of sale the purchaser must use their best endeavours to obtain the finance. They should be able to show that made a genuine attempt to obtain finance with a formal decline letter from the lending institution.
If the finance has been declined the purchaser’s conveyancer, or lawyer, should write to the vendor’s conveyancer, or lawyer, notifying them the finance has not been approved and requesting a full deposit refund.
When can the subject to finance clause be used?
The “subject to finance” clause is only applicable to private sales and not public auctions. In both instances you should have pre-approval already in place. A pre-approval is an indication that you can borrow funds from the bank subject to certain conditions. Once these conditions are met the bank or lender will issue an unconditional finance approval.
Pre-approvals are subject to valuation and in most cases the lender will perform a valuation of the property to find out its current market value before agreeing to lend
Once you have got your unconditional finance approval your lender will send you loan or mortgage documents to sign and return. You will need to sign the documents and get them back to the bank as soon as possible as lenders need time to certify these documents and be in a position to proceed with settlement.
The risks of using a finance clause
Purchasers on occasion assume that the subject to finance automatically entitled them to end the contract of sale and have the deposit refunded in full. However, there is a procedure that needs to be followed and the purchaser must take the necessary steps outlined in general condition 14.
If the purchaser has not made attempts to obtain the loan or contacted the vendor of their position, the contract may automatically become unconditional the purchaser may have a risk losing their deposit or expose themselves to being sued.
If the subject of the finance clause lapses and the contract becomes unconditional, the purchaser has no option but to proceed with the purchase. If the purchase does not settle, the purchaser will lose their deposit and may be sued by the vendor for damages for breach of contract and be liable for any additional costs incurred by the vendor.
Why you should engage a qualified property lawyer?
Before signing the contract of sale, it is very important that you confirm whether the purchase is in fact “subject to finance”. This will ensure that you are protected from any risks associated with obtaining the finance.
It is also important that the particulars of sale, the general condition and the special conditions are properly reviewed. The purchase should make sure they understand the contents of the documents before making a decision to proceed with the purchase.
Incorrect legal advice or relying a real estate agent, who does not have the purchaser’s interest at heart, may expose the purchaser to significant financial loss. As a purchaser, it is important that you realise that relying on the real estate agent can be very risky, when in fact the real estate agent doesn’t act for you.
In conclusion, the subject to finance clause Vic can be an important protection for the purchaser. To utilise this clause and for further information on property law do not hesitate to contact us on 8590 8370.