Auction buyer ordered to pay $350,000 shortfall after failing to settle
A property investor who terminated a contract to buy a Sydney Northern Beaches property after successfully bidding for it at auction has been ordered to pay the vendor almost half a million dollars in compensation and costs.
The compensation covers the shortfall between the original December 2009 winning bid of $2.3 million and the subsequent sale in February 2010 for $1.95 million: $350,000 plus interest and $50,000 in legal costs.
The case dates back to December 12, 2009, when David Anthony Burnet and Pamela Jane Clancy sold their $2.3 million home at Edgecliff Boulevard, Collaroy Plateau, to defendant Lily Maria Gubbay at auction.
Gubbay signed a contract for the two-bedroom house overlooking the ocean and provided a cheque for the 10% deposit of $230,000 to the agent, Cranston Schwarz of LJ Hooker Freshwater.
The cheque was subsequently dishonoured.
On December 16 2009, Gubbay’s lawyer told the vendors she had “no money” and the contract was cancelled by the vendors on December 29 2009.
Court documents reveal that Gubbay owned three other investment properties at the time – in Manly (valued at $950,000 with liabilities of $226,000), Salamander Bay (valued at $380,000 with no liabilities listed against it) and Townsville (valued at $500,000 with liabilities of $492,000).
“The Balance Sheet recorded that the defendant had total assets of $1,830,000 over liabilities of $718,000,” court documents say.
Gubbay was only able to pay $50,000 of the required $230,000 deposit, with her lawyer arguing that acceptance of this amount affirmed the sales contract.
However, Justice Patricia Bergin ruled otherwise: “The fact that the [vendors'] agent banked the $50,000 and the plaintiffs did not direct the agent to return it does not affect the plaintiffs’ right to terminate.”
“That right is lost ‘as soon as the deposit is paid in full’. Those words in clause 2.5 of the contract evidence an intention of the parties that even though part of the deposit might be paid, the right to terminate was not lost until the full deposit was paid.”
Bergin also dismissed a counter claim from Gubbay for the return of the $50,000 deposit.
She said the conduct of Burnet and Clancy was “beyond reproach”
“They were entitled to terminate the contract when the deposit cheque was dishonoured on 17 December 2009. However they did not do so immediately and conducted professional discussions through their solicitors and provided the defendant with an opportunity to pay the full deposit. The defendant did not avail herself of that opportunity.”
Real Estate Institute of Australia acting president Pamela Bennett says the ruling reinforces the fact that an auction process is legally binding.
“At all auctions you must be able to pay the deposit. It is unconditional,” she says.
Source : Larry Schlesinger 6 September 2011. The Smart Company. This article first appeared on Property Observer.
Due diligence with local councils on a property purchase
A professional buyer’s agent should find out as much as possible about a property and it’s surrounds for their clients before their client exchanges contracts to purchase. An important part of the due diligence process is investigating whether there are any issues with the local council.
The purchaser’s solicitor or conveyancer will examine the Contract of Sale, and review the 149 Certificate that is issued by the local council. However from my experience many solicitors and conveyancers do not have the time or inclination to thoroughly check all of the issues with the local council, and therefore it is incumbent upon buyers’ agents to do those extra checks.
As buyers’ agents, we should independently call the local council and speak to the Duty Planner or Duty Surveyor to enquire whether there are any past or current Development Applications (DA’s) on the property to be purchased, and also for the surrounding properties. Information received may have a negative impact on the property of interest and may affect whether your client is still comfortable to proceed with the purchase.
Previously rejected DA’s may contradict what a selling agent has advised on what is possible with renovating or extending a property. Other issues that may be disclosed are: unauthorised building works, Construction and Occupation Certificates not issued, and also demolition orders.
Many council websites have a DA Tracker section, where you can see a history of Development Applications on any property within the area of that council.
Some recent examples of issues that I have uncovered from local council checks have been:
A federation house was in a Roseville street that the Kuringai Council had recently re-zoned to Residential 2(d3), allowing multi-storey developments. My enquiries through council disclosed that a large new six-storey development would be built behind this house. The client still proceeded with the purchase but the sale price allowed for this issue.
A house in Fairlight was affected by road widening. The client’s conveyancer ran a check through the RTA that stated that there were no road widening issues for this property. However my enquiries through Manly Council revealed that there was a Road Widening order on this property, that had been issued by the council independently of the RTA. The land resumed would have taken half of the lawn and garden space of the house. Our client decided not to proceed with this purchase.
A Maroubra unit, with open views to the city, was to lose those views due to a new development directly in front of this building. We checked the plans of the new development, and the client then decided not to proceed with the purchase.
In summary, it is very important that council checks are done on prospective properties as part of a buyers’ agent’s professional due diligence. Failure to do so could potentially expose you to litigation and liability with clients if adverse issues are uncovered following their purchase.
By Henry Wilkinson – Principal, Homesearch Solutions, for the NSW Real Estate Institute 2011
Submitting offers on property in NSW
One of the most important parts of a buyers’ agents service is submitting offers on behalf of clients.
While the Property, Stock and Business Agents Act 2002 (PSBA Act) does not require a purchaser to submit a written offer, offers are usually best conveyed to the selling agent both verbally and in writing, which confirms to the vendor that it is a serious offer and clearly sets out the purchaser’s terms. The PSBA Act does impose obligations upon selling agents as to how they communicate any offers they receive to their vendors.
When submitting a written offer to the selling agent it is prudent to include the following details:
Property details and client’s name (unless confidentiality is required)
Amount of offer
Settlement period (i.e. either as per contract [usually 42 days], or a different time frame as instructed by your client);
Offer expiry date and time (if any)
Whether the offer is subject to any conditions (e.g. subject to due diligence, conducting a building inspection having the contract examined by a solicitor, arranging a bank valuation required for finance approval etc)
Whether exchange of contracts is to include a five day (or longer) cooling off period, or if the exchange is to be unconditional (i.e. a signed section 66W certificate will be supplied).
When submitting an offer for a pre-auction purchase or a private treaty sale on a property that is competitively sought after, it is generally advisable to keep the conditions of the offer as simple and uncomplicated as possible.
An offer to provide a signed contract, deposit cheque and without any special conditions or cooling off period requirements is likely to be far more appealing to a vendor than an offer with preconditions and delays. Vendors will sometimes accept a slightly lesser amount for the surety of an unconditional contract.
If your client’s offer is accepted, you should ensure that exchange occurs as quickly as possible. This will minimise the risks of the property being sold to another buyer.
Maintain regular lines of communication with all parties all the way through to exchange of contracts, ensuring that you also act in accordance with your instructions.
By Henry Wilkinson – Homesearch Solutions, for the NSW Real Estate Institute 2011
Gazumping
Gazumping occurs when you have a verbal agreement with an agent or seller to buy a property at an agreed price but the property is not sold to you in the end. This usually happens when the vendor (the person selling the property) has decided to sell the property to someone else, usually for a higher amount.
If you are gazumped, neither the agent nor the vendor is obliged to compensate you for any money you may have spent on legal advice, inspection reports, finance application costs or inquiries. However, your ‘expression of interest’ payment (if you have paid one) must be refunded to you in full.
In NSW, a property sale is generally only binding on the vendor and buyer when contracts are exchanged between the two parties. Exchange occurs when the vendor signs their copy of the sale contract; the purchaser signs their copy, and the two parties ‘exchange’ their signed contracts. It is usual at this time for the purchaser to pay a deposit, usually 10% of the purchase price.
Protect yourself
Some ways to protect yourself from being gazumped are:
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Always have your loan finance pre-arranged, and ensure you can pay the 10% deposit, by Bank Cheque or a deposit bond so there is no delay before attempting to exchange contracts on a property.
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Obtain a copy of the sale contract as soon as possible and have it examined by either your licensed conveyancer or solicitor.
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Seek to exchange contracts with the vendor as soon as possible. Anyone puchasing residential property has a five-day cooling off period commencing from the time of exchange of the contracts. Only the purchaser can waive the cooling off period and it can be extended by agreement. During this time, you can do a building and pest inspection and have the contract examined. However, if you rescind the contract during this period, you forfeit .25% of the purchase price to the vendor, as the property has been taken off the market for a period of time. The amount forfeited is recovered from the deposit you paid under the contract. If the amount of the deposit is insufficient, you will have to provide the necessary additional funds. You should find information relating to the cooling off period in your contract.
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Negotiate firmly with the vendor or real estate agent. Insist on the agent passing your bona-fide offers to the vendor and obtain written proof of this occurring. The law requires agents to do this. Be ready to exchange with a signed copy of the contract and follow through on the exchange process yourself or with another trusted person to ensure exchange. If you are advised that other offers have been made, demand to see written evidence. If you are certain that you want the particular property, be ready to possibly increase your purchase offer to the vendor.
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Be aware that the vendor is not generally compelled to sell to any specific person and can change their mind at any time prior to the exchange of contracts. Vendors may not necessarily sell to the highest offerer, but may accept a lower offer from a prospective purchaser.
Auctions
When a property is sold by auction, a purchaser is bound to purchase the property after having made the highest bid at the end of the auction after the property has been placed on the market by the vendor. Gazumping cannot occur in the auction process.
From NSW Office of Fair Trading website www.fairtrading.nsw.gov.au
Contracts and Deposits
Contracts and deposits
If you want to buy a home, land or investment property you’ll have to sign a sale contract. The legal work involved in preparing the sale contract, mortgage and other related documents, is called conveyancing. It’s possible to do your own conveyancing, however, most people get a licensed conveyancer or solicitor to do the work for them.
Exchanging contracts and paying a deposit
Exchanging sale contracts is the legal part of buying a home. Before exchange, the agreement is usually just verbal and not binding. Up until you exchange contracts either you or the vendor have the right to change your minds.
After you have discussed the contract with your solicitor or licensed conveyancer and all the proper inquiries have been made, you will be ready to exchange contracts. There will be two copies of the sale contract: one for you and one for the vendor. You each sign one copy before they are swapped or ‘exchanged’. This can be done by hand or post and is usually arranged by your solicitor, conveyancer or the agent. If the agent is handling the exchange, you must expressly authorise them to do so.
At the time of the exchange you will be required to pay a deposit, usually 10% of the purchase price. Following exchange, you have a financial interest in the property so it’s wise to get it insured.
Note: A contract has not been made and is not legally binding before the exchange of contracts and the payment of a 10% deposit.
Cooling-off period
When you buy a property in NSW there is a five business-day cooling-off period after you exchange contracts. During this period you have the option to get out of the contract as long as you give written notice. The cooling-off period starts as soon as you exchange and ends at 5pm on the fifth business day.
A cooling-off period does not apply if you buy a property at auction or exchange contracts on the same day as the auction after it is passed in.
You can waive the cooling-off period by giving the seller a ‘66W certificate’. This is a certificate that complies with Section 66W of the Conveyancing Act 1919. The certificate needs to be signed by your solicitor or conveyancer.
If you use your cooling-off rights and withdraw from the contract during the five business-day period, you will have to pay the seller 0.25% of the purchase price. This works out to be $250 for every $100,000.
Sometimes, there are more buyers looking for homes than there are properties on the market. This is called a sellers’ market. In this case, you may want to organise a quick contract exchange. This way you can reduce the possibility of someone beating your offer and get your building and pest inspections done during the cooling-off period. You will still be able to back out if there is a problem. However, it is important to have the contract checked by your solicitor or conveyancer before you sign it.
It is possible to waive, reduce or extend the cooling-off period with the consent of the seller. If your solicitor or conveyancer has examined certificates from the appropriate authorities, a pest and building inspection has been done and your finance has been approved, then deciding to waive the cooling-off period could make your offer more attractive to the seller.
Settlement
Settlement usually takes place about six weeks after contracts are exchanged. This is when you become the legal owner of the property. The balance of the purchase price and other adjustments are paid on this date.
From NSW Office of Fair Trading website www.fairtrading.nsw.gov.au
Release of Deposit clause
Often a clause is inserted into a property sale contract for the deposit to be released after exchange of contracts to the vendor.
Most solicitors and conveyancers acting for purchasers try to delete this clause to protect the interests of their clients. If it is released then a condition is often placed whereby the released deposit amount must be used for purchasing another property, rather than just being available for the vendor to spend on anything.
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