Think Nicholsons

Oct 28

What you need to know before signing a residential purchase contract


So you’ve saved for a deposit, found your dream home and you’re ready to take the leap into home ownership.

But you’ve got no idea what happens next; all you need to do is sign a contract, right? And that’s easy – all contracts are ‘standard’ aren’t they?

Wrong – not every contract is (or should be) the same.  Before you ‘sign your life away’, here are some helpful tips and suggestions to make your life a whole lot easier.

Is the Contract OK to sign?

You’ve negotiated a purchase price and the agent has produced a contract, but how do you know that it’s “OK to sign”?

Below is a discussion of the key components of an REIQ Contract of Sale which you need to consider before signing (NB: The following does not apply to “off the plan” contracts):

Buyer Entity

  • Make sure the buyer entity on the contract is correct before you sign (i.e your personal name, company or trust – seek advice from an accountant, if necessary, as to the best entity).
  • Changing the buyer after the contract is signed is problematic and could attract double ‘transfer duty’ (imposed by the Office of State Revenue) if not done correctly.

Property

  • Check the real property description and the registered plan to ensure you are purchasing the correct property!  If you don’t have anything to check it to – ask for a title search and registered plan, or get advice.

Included Chattels

  • List all ‘included chattels’ in the contract. By doing so, the seller is obliged to hand these over to you at settlement, free from encumbrance.
  • Even if you’re not sure whether an item is a ‘chattel’ or not (usually, they are things that can be easily removed e.g. blinds, light fittings and pool equipment), it’s best to be thorough and identify all possible items, to ensure no surprises at settlement.

Title Encumbrances

  • Ensure this part of the Contract is specified as “NIL”. Otherwise, the seller may not be obliged to provide you with a clear title at settlement. This is critical.

Purchase Price

  • Make sure this is correct. Any rebate or incentive must be disclosed to your financier!

Deposit

  • There’s no hard and fast rule about the amount of the deposit payable, only that it can’t be more than 10% (without matters becoming more complicated).
  • It’s a good idea to negotiate a smaller amount payable once the contract is fully signed (say, $1,000) and a larger amount payable “within two business days from the date that the finance [and/or building and pest] condition has been satisfied or waived by the buyer”.
  • That way, you don’t have to pay the full deposit up front. 

Finance clause

  • Usually a finance clause of at least ‘14 days’ is inserted in the contract.
  • You must ensure that notice of satisfaction or waiver is given to the seller before the end of the finance period, otherwise the seller may terminate the contract.

Building and Pest

  • A building and pest inspection clause of at least 7 days is ideal. This allows you to obtain your own building and pest inspection report.

Due Diligence

  • If you have any concerns about the property or the contract, then it’s recommended that a due diligence clause is inserted as a special condition.
  • That way, you can sign the contract without delay and address any concerns during a due diligence period (at least 14 days).
  • Examples of possible concerns might be:
  • Ensuring that any recent renovations have received proper approval and final building certification;
  • If purchasing a lot within a community titles scheme (i.e. body corporate):
  • Being satisfied with the body corporate’s records search;
  • Ensuring that any exclusive use areas are properly allocated to your lot; or
  • Obtaining approval for a pet from the body corporate committee.
  • If you’re not sure whether there is any reason for concern – then we recommend inserting a due diligence clause as a special condition anyway.

Settlement Period

  • Typically, this is 30 days from the Contract Date, however longer or shorter periods can be agreed between the parties.
  • Bear in mind that for a longer settlement period (for example 90 days), transfer duty may be payable before the settlement date. In that event, you need to have these funds available otherwise ‘unpaid tax interest’ may apply.

Pool (if applicable)

  • If the seller does not have a pool safety certificate, and you proceed to settlement, you (or the body corporate, if the pool is a ‘shared pool’) will be liable to obtain a safety certificate within 90 days after settlement.
  • Substantial fines could apply if a certificate is not obtained within this timeframe.

What else do I need to know?

As a first time buyer, it’s also handy to be aware of the following:

Cooling Off Period

  • You are given a 5 business day cooling off period to cancel the contract if you change your mind.
  • This period starts once you or your solicitor receives a copy of the fully signed contract.
  • But beware – if you cancel the contract under the cooling off period, you must pay a penalty of 0.25% of the purchase price to the seller from the deposit (e.g. $1250 for $500,000 purchase price).

Initial Searches

  • It’s a good idea to undertake some initial searches before you sign (title search, survey plan and contaminated land search amongst others).
  • These will confirm that the seller is the registered owner and discover any nasty encumbrances which are registered on the title.

Insurance

  • If you’re buying a house, then you need to get an insurance cover note over the property as soon as you’ve signed. This is because risk under the contract passes to the buyer at 5pm on the next business day after the contract date.
  • However, if you’re buying a lot within a community titles scheme (i.e unit or townhouse) that is created under a building format plan (or created under a standard format plan and your dwelling shares a common wall with a dwelling on an adjoining lot), the body corporate is obliged to obtain building insurance. You should check that this policy is in place and what it covers. You will need to obtain contents insurance.

Hopefully the above hints have assisted in calming the nerves, and have given you increased confidence in signing a contract for one of your most expensive lifetime commitments.

We, at Nicholsons, are happy to help you every step of the way – so don’t hesitate to contact us with any questions.

Matthew Russell

Partner
Matthew is experienced in a wide range of property and commercial matters and has a particular interest in leasing, management rights acquisitions and community titles law.