— Common Pitfalls and How to Effectively Avoid Them
In the process of a real estate transaction, the contract is not only a legal safeguard but also the core document ensuring the smooth progression of the deal. However, many purchasers and vendors often overlook the hidden risks in it, leading to disputes or even financial losses later on. Therefore, it is crucial to fully understand the contract details and avoid potential risks.
Sunfield Chambers Solicitors & Associates has provided professional legal consulting services for many clients in real estate conveyancing over the years and is well aware of the hidden risks and important details that need attention. From contract signing to final settlement, each step can impact the smooth completion of the conveyancing. To help you make informed decisions in property transactions, based on the process of property conveyancing, this article will walk you through the important points in each stage of the sale process, ensuring your transaction is safer and smoother.
I. Review the Sales Contract
Before selling a property, the vendor must prepare the Sales Contract. The vendor must include the following in the contract:
- A Section 10.7 Certificate issued by the local council, detailing the land zoning permitted by government and other information
- Sewerage diagram
- A copy of Certificate of Title for NSW land and property information
- A copy of all documents related to the creation of easements or restrictive covenants, including a cooling-off period declaration
- A notice to parties ensuring compliance with the Conveyancing Act 1919 (Section 52A) and the Conveyancing (Sale of Land) Regulation 2000.
- If it is a strata title property, a copy of the lot and common property register and the strata plan
- If the property has a swimming pool, a pool registration and compliance certificate
If these documents are not included in the contract, you may have the right to cancel the contract within 14 days after exchanging contracts. If the vendor breaches certain warranties required under Vendor’s Disclosure and Warranty Regulations, you may also retain the right to cancel the contract.
Common Pitfalls and How to Effectively Avoid Them?
Pitfall: “It’s all standard contract, you can sign it first and let the lawyer review it later.”
Avoidance: Apart from the standard terms set by the Law Society, every contract typically contains special conditions drafted by the vendor’s lawyer. Reviewing the contract helps the purchaser fully understand the terms and conditions they are agreeing to before signing. Once signed, a cooling-off period is entered (unless it is an auction or a lawyer signs a s66W certificate).
During the cooling-off period, if the purchaser and vendor cannot reach an agreement on the contract, the purchaser can withdraw from the contract but will lose 0.25% of the purchase price.
Pitfall: Not Having the Lawyer Review the Contract Before Attending an Auction
Avoidance: There is no cooling-off period in auctions. Once the hammer falls and you are the highest bidder, the contract is signed immediately, meaning it becomes legally binding unconditionally. It’s crucial to have a lawyer review the contract before the auction to check for any unreasonable clauses, and easements or covenants on the land that may affect its value.
If you have any special requests (such as extending the settlement time) or proposed changes to the contract, your lawyer needs to negotiate with the vendor before the auction.
II. Signing and Exchanging Contracts
Once all reports meet the requirements and the loan is officially approved, your lawyer or conveyancer will organize the signing of the contract.
The contract is the legal agreement between the vendor and the purchaser. It stipulates the terms and conditions of the sale. Any fixtures that come with the property, such as curtains, blinds, light fixtures, awnings, air conditioning, or TV antennas, should be listed in the contract to avoid disputes during or after settlement.
The vendor’s lawyer or conveyancer will prepare two copies of the contract. The original will be sent to the vendor for signing, and the copy will be sent to the purchaser’s lawyer or conveyancer for review, after which the purchaser will sign. Both parties will then exchange contracts.
Common Pitfalls and How to Effectively Avoid Them
‣Pitfall: The formally signed contract does not include terms verbally agreed upon with the agent.
‣Avoidance: Any verbal agreements made with the agent must be confirmed in writing by both parties’ lawyers or included in the final signed contract. It’s advisable to have the final version of the contract reviewed by your lawyer before signing.
‣Pitfall: Regret after signing the contract and want to cancel it.
‣Avoidance: Once the contract is signed, it enters the cooling-off period (unless it’s an auction or a lawyer signs an s66W certificate). If changing mind during the cooling-off period, the purchaser will lose 0.25% of the purchase price.
‣Pitfall: Unable to secure a loan within 5 working days.
‣Avoidance: The default cooling-off period for an established property is 5 working days, while for an off-the-plan property it is 10 working days. Before signing the contract, you should have pre-approval for your loan or consult with a mortgage broker to estimate how long the loan application will take and negotiate an extended cooling-off period with the vendor.
➼ Related Tips:
Payment of Deposit: On the day when the contracts are exchanged, the agent will require you to pay the deposit as specified in the contract, which is usually 10% of the property price.
Common Pitfalls and How to Effectively Avoid Them:
‣Pitfall: Paying the deposit directly to the vendor.
‣Avoidance: Normally, the deposit should be paid into the agent’s or lawyer’s trust account at the time of the contract exchange and only paid to the vendor after the property is settled. If the contract includes special conditions allowing the deposit to be released to the vendor before the it’s settled, this is highly risky. It is advisable to remove such clauses, as the property’s title will not transfer to the purchaser until the date of settlement.
‣Pitfall: Insufficient deposit.
‣Avoidance: The default deposit is 10% of the property price. If you don’t have sufficient deposit, you can negotiate with the vendor to reduce the deposit. Alternatively, you may pay the deposit in other forms (with the vendor’s agreement), such as using a deposit bond. However, a deposit bond comes with additional costs and conditions, which you can consult with your mortgage broker or financial company.
Payment of Stamp Duty: You will need to pay stamp duty, which is calculated based on the purchase price of the property. Generally, stamp duty should be paid within three months after the contract exchange unless you meet the requirements of the First Home Buyer Assistance Scheme or are purchasing an off-the-plan property for the purpose of owner-occupying, which may have different regulations.
First Home Buyer Assistance Scheme provides full or partial exemption from stamp duty for first home buyers purchasing property or land of a certain value. For any questions, you can contact Revenue NSW at 1300 139 814.
Common Pitfalls and How to Effectively Avoid Them:
‣Pitfall: Stamp duty is due only on the settlement day.
‣Avoidance: If purchasing an established property, stamp duty is generally due on: a) The settlement day, or b) Within three months after the contract exchange, whichever is earlier. If purchasing an off-the-plan property, stamp duty is generally due on: a) The settlement day, b) Three months after the contract exchange (investment), or c) Fifteen months after the contract exchange (owner-occupied), whichever is earlier. Late payment of stamp duty will incur interest, which is a variable penalty. The current interest rate is 11.46% (annual rate, calculated daily).
III. Important Considerations After Contract Exchange and Settlement
Generally, it takes about six weeks from the exchange of contracts to settlement. During this period, your lawyer or property conveyancer will conduct inquiries and searches and prepare the necessary documents.
The transfer of the property and settlement will take place through the official PEXA platform. If the vendor has not provided the latest survey in the contract, your lawyer or conveyancer will apply for a surveyor’s report, which will include details such as the building and fence locations, the correct property boundaries, and any encroachments on the land or neighbouring properties.
All matters related to your property/land will be investigated, including council rates, water rates, outstanding debts, and whether land tax needs to be paid by the vendor, etc. Inquiries will be made with agencies such as Sydney Water, local government departments, and strata company.
Your lending bank or fund company will prepare the mortgage documents, which outline the terms and conditions of the loan. Before signing, make sure you fully understand your mortgage documents, including the exact amount, method, time, and terms of the fees you need to pay under the contract.
Your lawyer will send requisitions on title to the vendor or its representative. The purpose of the requisitions is to obtain information from the vendor that may not have been disclosed or discovered during property inspections, such as any disputes with neighbours over the fence.
As settlement approaches, a settlement statement will be sent to the vendor for completion of settlement. This statement will outline the final amounts owed, including adjustments for rates and taxes up to the settlement date. Typically, the vendor will make all due payments on the settlement day.
Common Pitfalls and How to Effectively Avoid Them:
‣Pitfall: Unable to settle on time, leading to the vendor charging interest and other penalties for delayed settlement.
‣Avoidance: Loan approval does not mean the settlement can happen the next day. After loan approval, the bank needs to prepare the loan contract, which the purchaser needs to sign and send back to bank. The bank will only accept the settlement booking after confirming everything is in order. Settlement usually requires booking with the bank at least 3 working days in advance. In addition to the loan, you also need to prepare your own funds and arrange with your lawyer to ensure the funds are placed in either the authorised account related to the loan bank or the lawyer’s trust account.
IV. Property Settlement Day
Settlement refers to the completion of the conveyancing. Both parties, along with your lender, will arrange a date to complete the electronic settlement through the PEXA platform, and neither the purchaser nor the vendor need to be physically present.
The lender will pay the lending amount, and the purchaser will pay the balance.
The loan bank will complete the registration of the title and property mortgage through PEXA. The property documents and mortgage will be held by the lending institution until the mortgage term expires.
You will need to pay stamp duty, title registration fees, PEXA platform service fees, etc.
You are responsible for insuring the property. Whether or not your lender requires it, you should arrange insurance before settlement. This does not apply if the apartment is managed by strata company where insurance is purchased in advance.
Remember to budget for moving costs and ongoing expenses (such as council rates, water rates, and insurance premiums).
Generally, you can pick up the keys from the agent after settlement.
Common Pitfalls and How to Effectively Avoid Them:
‣Pitfall: Fail to thoroughly inspect the property before signing the contract and discover numerous issues during the final inspection before settlement, with the vendor refusing to make repairs.
‣Avoidance: Existed properties are typically sold as is, referring to the condition of the property at the day when the contract is signed. Be sure to conduct a thorough inspection before signing the contract. If issues are found that need to be repaired by the vendor, your lawyer should communicate in advance and add the required repairs to the contract clauses. Within 3 working days before settlement, the purchaser should arrange a final inspection with the agent. The purpose of the final inspection is to ensure the property has been vacated (if the contract indicates a sale without tenants) and that there have been no significant changes since the day when the contract was signed. If some issues are found (e.g., a stove not working), unless the purchaser can prove the issue was not present at the time of contract signing, the vendor is not obligated to make repairs.
‣Pitfall: Fail to arrange insurance for the property immediately after settlement.
‣Avoidance: The risk associated with the property transfers from the vendor to the purchaser at settlement. The purchaser should arrange insurance in advance, effective from the settlement day, to protect against unpredictable events such as hailstorms, floods, fires, etc.
‣Pitfall: Fail to set up utility accounts after property settlement or receive bills before settlement.
‣Avoidance: During settlement, lawyers typically handle the transfer and settlement of three bills of council rates, water rates, and strata fees. However, for other bills, such as electricity, gas, internet, and phone charges, the purchaser needs to contact relevant companies and set up in advance. For example, when setting up an energy account, inform the company of your move-in date, and it will arrange to read the meter and split the bill based on that date. If you forget and receive a bill from before the settlement, you can contact the energy company and inform them of your settlement date (the energy company may request a confirmation letter from your lawyer). The energy company can then split the bill based on this date, and you will only be responsible for charges from the settlement date onwards.
Property conveyancing is a complex and important transaction, involving legal issues and potential risks that should not be ignored. Sunfield Chambers Solicitors & Associates hopes this article helps you better understand the various stages of the property sales contract and avoid common “pitfalls” and “landmines.” If you have any questions during your property conveyancing or hope to receive more professional legal support, our team is always available to assist you and ensure your conveyancing is safe and worry-free.
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