Beware: Subject to Finance Conditions

Special conditions that make a contract for the purchase of land subject to the Purchaser successfully obtaining funds from a lender are commonplace in the property law industry.

On the face of it, a subject to finance condition is a simple enough concept – if the purchaser fails to obtain a loan of a specified sum of money from a reputable lender by a specified date, then the contract can be terminated by either the Purchaser or the Vendor, sometimes without any further action from either party.

Subject to finance conditions are included in contracts at the request of a purchaser and for the benefit of a purchaser. Despite this, it is very important to ensure that your solicitor or conveyancer checks the subject to finance condition before you sign the contract in order to ensure that the dates and other particulars of the condition (eg. the minimum amount of the loan and the date by which the loan is to be approved) are reasonable and can be met by the purchaser and their lender.

There are contracts in the marketplace which provide a purchaser with the opportunity of getting finance, however the condition is satisfied if the purchaser receives a conditional approval. A common condition is that the loan approval is subject to the lender completing their own valuation of the property to be purchased. With new developments it is not uncommon for the lender to assess a lower value than the purchase price in which case the lender will reduce its loan amount leaving the purchaser to provide more funds which they may not have.

It is also important to determine how the condition is to be fulfilled. A subject to finance condition will typically require that the purchaser obtain unconditional approval from a lender for a loan that meets the agreed particulars and a copy of that approval is then provided to the Vendor to satisfy the condition.  The finance condition used will most likely be one of the standard form conditions from either the Real Estate Institute of South Australia, Law Society of Australia, Society of Auctioneers and Appraisers, or the Australian Institute of Conveyancers. 

Other subject to finance conditions can be prepared specifically for a particular purchase or development.  In this instance, the rules of finance conditions in standard form contracts will not apply. It is then vital that proper advice is obtained to ensure that the condition is reasonable and can be satisfied by the Purchaser as once a condition has been satisfied the purchaser becomes obligated to complete the purchase and can lose the option to withdraw from the transaction and could forfeit their deposit to the Vendor.

Clelands Lawyers can provide you with advice regarding the requirements and potential dangers of all forms of subject to finance conditions in a wide variety of transactions.

Tim von Einem

July 2018