When you are buying or selling residential property in Victoria, you will sign either an unconditional contract of sale or a conditional contract of sale.

An unconditional contract is legally binding immediately upon signing, meaning both parties are obligated to complete the contract by settling on the due date. For properties sold at public auction, the contracts by default are unconditional.

In contrast, a conditional contract is subject to certain requirements being satisfied by one or both parties and this is common for properties under a private sale or ‘expressions of interest’.

These ‘subject to’ clauses are known as Special Conditions.

For conveyancing matters, the most common clauses we come across in contracts are those which make the contract condition upon the purchaser obtaining formal finance approval from a bank or obtaining a satisfactory building and pest inspection.

What do these clauses mean for you as a Purchaser?

A contract which is conditional upon you obtaining formal finance approval means that you will have the right to withdraw from the contract if your finance application is declined. A finance clause should include the amount you intend to borrow from the bank, which bank you are applying to, and the due date you are required to be obtaining finance approval by. Typically, a finance clause has a timeframe of 14 days from the date the contract is duly-signed. This is usually enough time for your bank to conduct its valuation, undertake a credit assessment, and issue formal approval if the lending criteria is met. It is important to make an immediate application for finance once your offer has been accepted and do all things necessary, such as providing financial information to the bank promptly, in order to obtain finance approval.

In order to withdraw from the contract under a finance clause, you must be genuine in your claim that your finance has been declined. To prove this, you will need to supply the vendor with a Letter of Decline issued by your bank and, if satisfied, you will be released from the contract with any deposits you paid being refunded to you in full.

To determine the terms for your finance clause, you should seek advice from both your broker and conveyancer to ensure the contract is worded correctly before you sign it.

Similarly, a contract subject to you obtaining a building and/or pest inspection allows you to withdraw from the contract in the event the inspection report/s identify significant issues with the condition of the property. Now, this is another clause which needs to be worded correctly and we recommend that you have your conveyancer draft a building and pest inspection clause for inclusion in the contract before you sign.

Again, a building and pest inspection clause will have a due date or set timeframe for you to obtain the inspections report, such as 7 days or 14 days.

In most instances, you will only be able to withdraw from the contract if the inspection reports identify major structural defects or major live pest infestations at the property. This therefore means that minor defects or maintenance issues will not grant you the right to withdraw from the contract. If you have obtained an inspection report and are not sure whether any items raised in the report fall under the gamut of ‘major’ you should raise your questions with the inspector directly. Then, you can instruct your conveyancer on how you wish to proceed.

What do these clauses mean for you as a Vendor?

If you have accepted an offer on your sale property that is conditional upon the purchaser obtaining finance approval or a building and pest inspection, then you must keep in mind the purchaser’s rights to walk away from the contract.

During the period in which the contract is conditional, the property cannot be sold to anyone else. Whilst the contract may still be subject to the purchaser satisfying these terms, you signing the contract is your acceptance of the purchaser’s offer and commitment to sell the property to them.

When your estate agent informs you of an offer, it is important to clarify with them whether the offer is conditional upon anything and what the terms of those conditions are to ensure you’re comfortable accepting the offer.

If the purchaser then informs you, the agent or your conveyancer that they are withdrawing from the contract under either of these terms you can request the purchaser’s Letter of Decline from their bank or copies of the building/pest inspection reports to ensure the purchaser is genuine in their request to withdraw from the contract.

Proceeding Unconditionally

Once finance approval is obtained and a satisfactory building or pest inspection has been undertaken, the contract proceeds unconditionally. This means that all ‘subject to’ clauses have been satisfied and the parties can progress the sale to settlement.

Other ‘Subject to’ Clauses

Whilst finance clauses and building inspection clauses are the most common, there are plenty of other clauses which can place certain obligations on either, or both, parties without the consequence of a terminated contract if those obligations cannot be fulfilled. For example, the parties can agree for the Vendor to attend to certain repairs prior to settlement, or for the Purchaser to gain access to the property prior to settlement to commence minor renovations.

These types of clauses are negotiated between the purchaser, vendor and agent at the time of signing and whilst neither party generally has the right to withdraw from the contract under these clauses, these clauses may allow for settlement to be postponed, or for compensation to be paid, if the obligations under those clauses are not completed in time.

Regardless of the type of ‘subject to’ clause which is to be noted in the contract as a special condition, it is important that it is drafted by a conveyancer to ensure the wording accurately reflects the agreement of the parties.

If you are looking to buy or sell a property, do not hesitate to contact us so we can discuss your conveyancing needs.