Rebate Was Really A Penalty!

OPINION
by Peter Mericka B.A., LL.B
Real Estate Consumer Advocate
Real Estate Lawyer
Qualified Practising Conveyancer Victoria
Director Lawyers Real Estate Pty Ltd

What if the sales rep tells you that you’re getting the property for $330,000 but has you sign a contract for $350,000?

We offer a comprehensive pre-purchase contract and disclosure statement checking service to our clients, and we often find nasty contract conditions appearing like wolves in sheep’s clothing.

The following situation serves as an example of the way an apparent “sweetener” can be the exact opposite.

Our client came to us for pre-purchase advice, explaining that the sale price of the property was $330,000. We pointed out that the contract, prepared by a company we’ll call “What-A-Con” stated that the sale price was in fact $350,000.

“Oh that’s OK, the estate agent said that “What-A-Con” have to make the contract out for $350,000 but they give a rebate of $20,000.”

Sure enough, there was a special condition in the contract regarding a “rebate”, but in our view the rebate was no more than a penalty of $20,000 paid in advance!

The rebate special condition read as follows:

“The Vendor will rebate to the purchaser a sum equivalent to $20,000 payable by the Purchaser on the purchase.”

But then came the snatch-back:

“If the Purchaser does not settle the property in accordance with the terms herein then the Purchaser’s right to the rebate is lost.”

The contract set out an array of special conditions, with a variety of ways in which the purchaser could easily find himself in breach. (One of these was a settlement deadline of 3 p.m. and, as most conveyancing lawyers know, settlements are often delayed for reasons as silly as a signature being difficult to read, a settlement agent missing her tram stop etc. etc.)

We explained to our client that we felt that he was being set up for a fall; that in our view the “rebate” was a penalty, paid in advance, in the knowledge that the likelihood of the vendor finding a reason to snatch it back was quite high.

We also had to explain that we could not attend to the conveyancing in the matter if the rebate condition remained in the contract because:

• Banks are notorious for delaying settlements, and for blaming the borrower for their delays;
• The smallest of mistakes, such as a letter being marked “return to sender”, or a fax not printing properly, could cause delay;
• It was simply not possible to guarantee to the client that the penalty could be avoided.
• We could not accept the responsibility of protecting the client from such a massive “instant” penalty;
• Our professional indemnity insurers were likely to advise us not to accept the matter in such circumstances;

Negotiations

We attempted to negotiate with “What-A-Con”, requesting that the “rebate” condition be removed, and the purchase price stated as $330,000. “What-A-Con” did not have a lawyer assisting them; instead, they relied on their in-house conveyancer to negotiate the legal issues on their behalf.

“What-A-Con”‘s conveyancer refused to allow the amending of the price and the striking out of the rebate condition.

We advised our client that he should instruct us to have the rebate condition amended, so that he would not have to incur a $20,000 penalty in the event of a simple delay in settlement. Our client accepted our advice, agreeing that he could not affort such a penalty.

“What-A-Con”‘s conveyancer seemed lost in the legal aspects, and did not seem to understand that “What-A-Con” was placing our client in an impossible position. (It seems that “What-A-Con” is more used to dictating terms than negotiating them.)

Only when “What-A-Con” realised that our client was prepared to cancel the contract did they come to the nogiating table.

At the end of the negotiations, “What-A-Con”‘s conveyancer agreed to the clause being amended, and produced the following amendment:

“If the Purchaser does not settle the property in accordance with the terms herein then the Purchaser’s right to the rebate is lost unless settlement takes place within 14 days of the date of default. The purchaser will not be required to pay penalty interest if settlement is effected within 14 days of the date of default, however the vendor reserves their rights under the contract, after the 14 days is up.”

While the amended condition was poorly worded, we were delighted with it. Not only had “What-A-Con” softened the penalty provision to the point that it was acceptable to our client, they had also eliminated the standard right of the vendor to claim penalty interest!

Our client accepted the amendment, the matter proceeded, and despite some problems with the client’s bank, settlement took place and the matter was completed.

Conclusion

This incident demonstrates a number points:

• ALWAYS obtain pre-purchase legal advice;
• Be prepared to negotiate, even when the other party initially refuses to do so;
• Stay firm, and act on the advice you are given – sometimes running the risk of losing a property is a better option than simply accepting unfair terms;
• Be aware that a low purchase price wrapped in a “rebate” may really be a wolf wrapped in sheep’s clothing.

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