Essential Guide to Real Estate Contracts: Protecting Your Clients

Understanding Contracts of Sale

A contract of sale consists of two key components:

1. General Conditions – These are standard elements included in every contract of sale, prescribed by the Land Institute of Victoria, designed to be fair and reasonable.
2. Special Conditions – These are prepared by either the vendor’s or purchaser’s solicitor and supersede the general conditions.

Every client’s circumstances differ, so if you encounter unusual situations, consult with a conveyancer—they’ve likely seen similar cases before.

Settlement Terms and Negotiation Points

When purchasing property, an offer includes much more than just the purchase price. Consider this example:

If a vendor receives two $500,000 offers:

• Offer A: Unconditional with 10% upfront deposit
• Offer B: Subject to finance for 14 days, subject to building/pest inspection, with 5% deposit

Most vendors would choose Offer A, demonstrating that terms matter as much as price.

Deposit Payment Guidelines

• Standard amount: Minimum 10% (maximum allowed in Victoria)
• Negotiable factors: Lower percentages can be negotiated, though they may weaken the offer
• Payment timing: While standard terms require payment on the day of sale/acceptance, this can be negotiated
• Strategic planning: Consider your client’s financial situation when setting dates (e.g., if funds are in a term deposit)

Subject to Finance Condition

“Subject to finance” means the sale is conditional upon the purchaser obtaining formal loan approval. Finance clauses typically range from 14-28 days, with 14 days being standard (though bank processing times can fluctuate).

Note: The difference between pre-approval, conditional approval, and formal approval will be covered in a future section.

Building and Pest Inspections

Standard Victorian contracts allow purchasers to make the contract subject to building and pest inspections by licensed professionals.

Recommendation: Find a building inspector who is also a registered builder, as they’re likely to identify more issues than someone trained only in inspections.

Important conditions:

• Inspections must typically be completed within 14 days of sale
• Purchasers may cancel the contract if the report identifies a major structural defect
• Purchasers may cancel if the pest inspection reveals a current infestation

Timeline Coordination

For a conditional contract of sale, you might align the following timeframes:

• Deposit payment: Due in 14 days
• Finance approval: Due in 14 days
• Building/pest inspections: Due in 14 days

The deposit goes into the agent’s trust account where it remains untouched, protecting your client’s funds until later in the process.

Section 27 of the Sale of Land Act

This complex provision governs the early release of deposit funds to the vendor.

Requirements for release:

1. Vendor must complete a Section 27 statement detailing:
   • Current loan amount
   • Outstanding repayments
   • Monthly payment amounts
   • Interest rate
   • Loan term
   • Any defaults or caveats
   • Whether payments have been missed
2. Vendor must obtain a letter from their bank on official letterhead confirming these details

Due diligence checks by purchaser’s representative:

• Verify the bank-confirmed loan amount matches what the vendor declared
• Ensure the loan amount is less than 80% of the purchase price (if it exceeds 80%, Section 27 requirements are not met)
• Confirm no defaults or missed payments

If all requirements are satisfied, the deposit may be released to the vendor within 28 days, after the purchaser’s representative confirms the client is protected.

Managing Property Defects

Initial inspection is critical for purchasers to understand the property’s condition and identify defects early for potential negotiation.

Final inspection occurs seven days before settlement. If new defects appear that weren’t present initially, the vendor must fix them before settlement.

Best practice: Conduct thorough initial inspections to avoid discovering pre-existing issues too late. The goal is to have clients settle without unresolved defects.

Penalty Interest

Clients have a contractual obligation to meet deadlines, particularly deposit payment and settlement dates.

Key points:

• Vendors may charge penalty interest only on outstanding amounts
• For late deposits: Interest applies to the deposit amount from the due date
• For late settlement: Interest applies to the purchase price minus the deposit
• Rates range from 10-16% per day on the outstanding amount

Avoiding penalties: Meet contractual obligations and maintain open communication. If extensions are needed, address them proactively through proper channels.

Illegal Building Works

This is a significant gray area in conveyancing. As a client representative, you must be vigilant during inspections.

Definition: Works completed without required council approval (building permits, planning permits, occupancy permits, or final inspections).

Key concerns:

• Purchasers inherit any illegal building works
• There is no statute of limitations for council enforcement
• Councils may use tools like Google Earth to identify unauthorized structures
• Vendors are not legally required to disclose illegal works in the contract or vendor statement
• Owner-builders must provide additional documentation

Recommendations:

• If works appear to have been done in the last 7-10 years, get a building inspection
• Alert the inspector about specific concerns (e.g., newer deck on an older house)
• Building inspectors can’t definitively identify illegal works but can provide indicators
• Mitigation options exist during negotiations with vendors
• Most clients prefer to avoid properties with illegal works risk

When in doubt about any of these matters, contact your conveyancer for specific advice.