Estate Agent’s Finance Clause
OPINIONby Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd
Consumers should take care if they find that this estate agent’s “Conditional On Finance” clause has been inserted into the real estate contract.
Ian Reid is a Melbourne estate agent whose “Ian Reid Vendor Advocacy Australia” website boasts:
“Ian Reid’s career in real estate spans almost 30 years…Over those years, many thousands of clients have come to rely, time and time again, on Ian’s advice, profound real estate knowledge and warm, personal approach.Within the real estate profession itself, Ian has also come to be recognised as an accredited trainer and coach. Ian’s focus has been directed at both individuals and real estate corporations across the country, in delivering new age marketing strategies designed to improve the real estate industry standards.”
We have previously discussed Mr. Reid’s “Gazumping Clause“, and now we have discovered his “Conditional On Finance” clause. And it’s awful!
We believe that the Ian Reid “Conditional On Finance” condition has the potential to set the purchaser up for failure, as the likelihood that the purchaser will breach the contract is greatly increased.
In such a situation the most likely winner would be the estate agent, whose chances of taking a commission from a forfeited deposit are greatly increased.
The purpose of the finance condition
The purpose of a finance condition in a real estate contract is to allow a purchaser to buy a home, “subject to finance”.
This means that the vendor and purchaser agree that if the purchaser is unable to obtain a home loan, the contract can be cancelled.
Of course, the vendor doesn’t want a purchaser to “cheat” on the deal by using the finance condition to cancel the contract if the purchaser has a change of heart,
and so the finance condition is quite strict.
See our full explanation on the operation of the standard “Subject To Finance” clause.
Estate agents don’t like to miss out on commission
Estate agents don’t like finance conditions. If the purchaser’s finance fails, and the contract is ended, the estate agent misses out on a commission.
It is in the interests of the estate agent that a finance condition should be as limited as possible.
Also, it doesn’t do the estate agent any harm if the purchaser breaches the contract. If the finance condition is
prepared so as to increase the likelihood that a purchaser will breach the contract, the estate agent stands to win a commission which can be deducted from a forfeited deposit!
We’ll return to this point later.
How the Ian Reid finance condition operates
Ian Reid “Conditional On Finance” condition has the potential to set the purchaser up fail in spectacular fashion.
Here’s how:
The requirement for written reasons
Clause 1.c. of the Ian Reid “Conditional On Finance” condition says that the purchaser may end the contract “only if the purchaser…
“provides in writing from the lending institution the reason/s the loan is refused”
This requirement is extremely difficult, if not impossible in some circumstances, to fulfil. Here’s why:
The loan may not have been refused. If the lender has not had sufficient time to complete its approval processes, the “Approval Date” may arrive before approval has been granted. The
loan will not have been refused, and may well be approved when the lender has completed its due diligence. How can the lender provide written reasons as to why the “loan is refused” in such circumstances?
So, where the lender has not actually refused the loan, but cannot approve the loan by the “Approval Date”, the purchaser is unable to “provide in writing
from the lending institution the reasons/s the loan is refused“.
One must ask, of what value to the vendor is the lender’s reason for refusal of the loan? We see no value whatsoever. It seems that the purchaser is placed in the position of
having to complete an almost impossible task, with potentially disastrous consequences in the event of failure, but with no apparent benefit for either the purchaser or the vendor.
The lender may not want to provide reasons. Few lenders provide written reasons for the refusal of finance.
Even if pressed, the lender may simply state that the application did not meet the lender’s loan criteria.
Stating that the loan has been refused should be sufficient for any vendor, allowing the vendor to let the purchaser go and to find someone else to buy the property.
So why this need to know reasons? And what if the reason given is not really a “reason”? Will a court have to decide whether the purchaser has actually fulfilled this
requirement to provide written reasons why the loan is refused?
The matter could drag on for months, through mediation or the courts. Is this to the benefit of the vendor or the purchaser?
Removal of the 2 day notification period
Clause 1.d. of the Ian Reid “Conditional On Finance” condition says that the purchaser may end the contract “only if the purchaser…
“serves written notice on the agent, or the vendors’ solicitor or conveyancer by 5.00 pm on the Approval Date ending the contract.”
The standard “Subject To Finance” clause allows the purchaser 2 business days after the approval date to end the contract. This gives the purchaser time to
consult with the lender about finance, to obtain legal advice about negotiating an extension of time, and to consider all options before ending the contract.
The purchaser is in a position where the right to end the contract is available (because the Approval Date has arrived, and the loan has not yet been approved), but there is still some “breathing space” to allow the purchaser to sort things out, and
to make some alternative arrangements.
The purchaser is also in a position to negotiate with the vendor, by sending the required written notice ending the contract, but adding an offer to keep the contract “alive” if the vendor is prepared to grant an extension of time.
The Ian Reid “Conditional On Finance” condition can severely limit the options of the purchaser, and greatly increase the likelihood that the purchaser will default on the contract. Here’s how:
Written notice must be accompanied by lender’s reasons.
As the purchaser’s finance Approval Date approaches, the purchaser realises that the home loan will not be approved in time. The purchaser serves notice on the vendor before 5 p.m. on the due date, but this isn’t sufficient. Remember, the purchaser must also
provide “in writing from the lending institution the reason/s the loan is refused“. This means that the purchaser has to have obtained these written reasons from the lender before notice is served on the vendor.
If the purchaser really keeps on top of things it may be possible to make contact with the lender, request the lender’s written reasons for finance refusal, and deliver them in time. (But remember the problem discussed above, where the lender is not refusing finance, but has not yet completed the approval process.)
How long will it take for the purchaser to request written reasons from the lender, then for the lender to prepare those written reasons, and then for the purchaser to be in a position to deliver those written reasons to the vendor’s agent by 5 p.m. on the Approval Date?
Of course, it will depend on the period of time allowed for the finance condition.
It is common experience that purchasers are strongly encouraged by estate agents to limit the loan approval period to the shortest time possible. According to estate agents, the shorter the loan approval period, the more attractive the offer will be to the vendor. In some cases this “encouragement” takes the
form of an outright refusal to prepare the finance condition other than as the estate agent requires it. We often hear purchasers complain, “The agent told me I couldn’t have more than 5 days.”
Cancellation upon refusal only
Note that “refusal” becomes the only situation where the purchaser can exercise the option to end the contract. This means that if the lender has not actually refused finance by the Approval Date, the purchaser cannot cancel. And then if the lender refuses
finance after the Approval Date the purchaser’s opportunity to cancel has expired.
Problems for the vendor
It may be assumed that making things so difficult for the purchaser is somehow of benefit to the vendor, but this is certainly not the case.
While it may seem unfair and unethical, there are also practical reasons why restricting the purchaser’s opportunity to end contract is not in the interests of the vendor. Here are some of them:
- The vendor may be trapped. The vendor, realising that the purchaser can’t complete the contract, may want to let the purchaser go. However, the purchaser does not have a legal means of ending the contract. It follows that if the purchaser fails to complete the contract the vendor will be entitled to claim a forfeited depsoit. The estate agent’s
Exclusive Sale Authority requires the vendor to pay the estate agent a commission if the vendor becomes entitled to a forfeited deposit. This, in turn, means that the vendor may have to claim the forfeited deposit from the purchaser. In other words, the vendor may be forced to hold on to the purchaser. - The vendor may have to take legal action. The vendor may not want to deal with the stress of having to take legal action against the purchaser, but may have no alternative if the estate agent wants a commission from a forfeited deposit.
- The vendor may lose anyway. After demanding the payment of the forfeited deposit, taking legal action against the purchaser if the purchaser fails to pay, paying the costs of the legal action and paying the estate agent the commission, the vendor may end up with very little. Worse still, the
vendor may finish up with a legal costs bill, and a house that can’t be sold. (Would other purchasers be interested in becoming involved with a vendor who treats purchasers so harshly?)
Should the estate agent be inserting a finance condition?
The short answer is “No.” The finance condition is in the contract for the benefit of the purchaser. As far as the purchaser is concerned, there is no reason for the estate agent to be involved in the drafting of the finance condition at all. The standard finance condition
is very strict, and protects the interests of the vendor to the extent needed by the vendor, and if either party has any questions or concerns about the finance condition their legal adviser can assist.
The question arises as to why an estate agent would seek to change or replace the standard finance condition. The answer may be that the estate agent seeks to benefit the estate agent, albeit to the possible detriment of the parties concerned.
How the estate agent benefits
It would appear that the most likely person to enjoy any benefit from the use of the Ian Reid “Conditional On Finance” condition is the estate agent. Here’s how:
- Both parties locked in. The estate agent becomes entitled to a commission if the two parties remain bound by the contract. Because the Ian Reid “Conditional On Finance” condition makes it extremely difficult for a purchaser to end the contract, the contract and the estate agent’s commission are much safer than would be the cause if the standard finance condition had been used.
- Estate agent has no responsibility. Because the vendor and purchaser will have their own legal representatives, any arguments over the finance condition will be dealt with by the parties and their lawyers. Although the estate agent may have set up the situation, the estate agent does not have to take any responsibility in resolving it.
- Estate agent can direct attention to other matters. If the vendor and purchaser are locked into a contract the estate agent can focus attention on other matters. There is no need to consider other offers or to conduct further inspections, as the most likely outcome of a dispute will be the payment of a commission by way of a forfeited deposit.
- Commission is almost assured. They payment of a commission to the estate agent is more likely, because the parties are likely to proceed (because the purchaser cannot escape), or the vendor will be required to take the purchaser’s deposit and to use it to pay the estate agent’s commission.
- Few purchasers seek legal advice pre-contract. Estate agents know that very few purchasers obtain legal advice before signing a contract to purchase real estate. Added to this is the fact that a purchaser who signs a contract containing the Ian Reid “Conditional On Finance” condition will be said to have read the finance condition, and accepted it. At worst, a purchaser may obtain legal advice, and have the
standard finance condition inserted.
What does Ian Reid have to say about our criticisms?
We provided Ian Reid with a full copy of this posting, and invited his comments on it.
We also wrote to solicitors Ryan, Mackey & McClelland for their comments.
Neither Ian Reid nor the solicitors responded.
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