“I didn’t know I had to read the whole Contract – they are just standard clauses … aren’t they?”
|Just above the signing section of the standard contract used in most residential conveyancing transactions in Tasmania (the REIT Contract) are the following words:
“By signature the parties confirm:
How Can We Help? Worrall Moss Martin Lawyers has specialist skills and experience in property law matters, including providing pre-contract advice to both purchasers and vendors. If you are contemplating selling your property or purchasing a property, please contact one of our property and commercial team, David Bailey, Tiahna Tomac or Carissa Barwick.
It is surprising how many people overlook the acknowledgement, the Standard Conditions of Sale, or neglect to seek legal advice before signing a contract for the sale or purchase of property.
- they have read these Particulars of Sale and the Standard Conditions of Sale 2018,
- their intention to be bound by this Contract for the sale of real estate, and
- they had the opportunity to take necessary advice before signing the Particulars of Sale.”
Unfortunately, it is quite common for people to seek advice after signing the contract, only to realise that there are significant issues with how it has been drafted.
A standard contract consists of the Particulars, which provide the specific terms of the contract that parties amend, and the Conditions, which are the general conditions that apply to all transactions (unless varied by the Particulars). It is important for both purchasers and vendors to have a detailed understanding of the contract before signing it.
In this article we look at some of the considerations that vendors and purchasers should have regard to before signing a contract for the sale or purchase of property.
Considerations for Sellers
- Who is entering into the contract? It is important to accurately record the capacity in which legal title to the property is held, not only for legal purposes, but also for tax and accounting purposes.
Even though the Certificate of Title may record the name of a company or an individual as the owner, it may be that they hold the property as trustee for a trust. The Land Titles Office does not record trust relationships on the Certificate of Title, even if the original transfer instrument records that the property is held as trustee.
Accurately identifying the capacity in which the registered proprietor holds property, can prevent difficult and costly issues arising after a contract has been executed. For example, if you purchased the property through your self-managed superannuation fund and using loan arrangements (known as Limited Recourse Borrowing Arrangements), there are often strict processes that must be followed to avoid complex tax issues.
- Locate the Certificate of Title. It is easy for vendors, caught up in the excitement of a high offer for their property, to forget the importance (or location) of the Certificate of Title (Title) for the property. It is important to know where the original Title is before signing a contract, to avoid any difficulties complying with the settlement timeframe. A lost title can significantly delay completing the sale, and allow the purchaser to terminate the contract.
If the property is (or was) subject to a mortgage, your bank will likely hold the Title. The bank will release the Title at settlement, in exchange for you paying the outstanding loan amount from the sale proceeds.
If a bank is not involved, and you do not know where the Title is held, you can contact the Land Titles Office (or your lawyer) who will have records of who the Title was last released to. The Title may be held by the law firm who undertook your original purchase, or it could be held by your accountant.
- GST Treatment and seeking accounting advice. If you are selling existing residential property, then the sale is unlikely to be a ‘taxable supply’, and will be input taxed. However, the situation can be complicated if you are selling vacant land suitable for potential residential purposes, a property with mixed purposes, agricultural property or an investment property.
It is always important to seek accounting and legal advice if you have any doubt about whether GST will apply to the sale.
Correcting the GST treatment of a sale is often not an easy amendment to make once a contract is signed, as the purchaser may have entered into the contract on the basis of the GST status declared in the contract.
Considerations for Purchasers
- Capital Gains Tax and seeking accounting advice. It is important obtain capital gains tax advice from your accountant before entering into the contract, as there could be benefits from structuring the transaction in certain ways, and in relation to the timing of completion.
- Is the sale price of the property $750,000.00 or above? If the sale price of the property is more than $750,000.00, it is important to be aware of Capital Gains Withholding tax implications.
An ATO Capital Gains Withholding Certificate is required where the sale price exceeds $750,000.00. If the Certificate is not obtained, then the purchaser must withhold 12.5% of the sale price from the vendor, and pay that amount to the ATO.
The ATO website currently recommends an application for a Certificate be made 28 days prior to the Certificate being required.
The Certificate must be obtained and provided to the purchaser at least two business days before settlement occurs. We recommend applying for a Certificate as soon as possible, if the sale price is over the threshold. As a certificate is valid for 12 months, it may be worth applying for the Certificate in advance.
- Are other assets being sold? Contracts frequently include other assets or chattels being sold with the property. For example, where a business is being sold with the property (for example, a café or accommodation business) or where there are chattel items included which have significant value. If there are issues with how that sale is structured, it can be very difficult to negotiate substantial amendments to the contract.
The REIT Contract is generally not suitable for a business sale, and the business assets should be set out in a specially drafted business sale agreement.
It is common for the business and the property to be owned by different entities. Many contracts do not reflect this, which can create complex (and costly) legal and tax issues.
While we always recommend seeking legal advice before signing a residential contract, it is even more important where a commercial property or a mixed-use property is being sold.
- Vendor warranties – do you understand your obligations? Unlike many other jurisdictions, Tasmania does not have a compulsory vendor disclosure regime, under which vendors are obliged to disclose information about the property to the purchaser before entering into a contract. However, an optional vendor warranty regime has recently been inserted into the REIT Contract. Vendors are not obliged to answer the vendor warranty clause in the REIT Contract in any other way than “without qualification”. By selecting this option, the vendor makes no binding warranty or representation about the property. If any other selection is made, the vendor will be exposed to risks in making representations about the property that could later result in the purchaser taking action against them.
- Do you understand the risks in entering into a contract without a due diligence clause and/or building inspection clause? Tasmanian property law has historically been very “vendor-centric”. Purchasers are expected, at law, to have either undertaken their due diligence before entering into the contract, or to protect themselves by requesting special clauses such as a building inspection clause or a due diligence clause. Otherwise, a Tasmanian property is sold “as is/where is”, and it is extremely difficult for a purchaser to terminate the contract upon discovering a defect, unless the defect will fundamentally prevent the purchaser from using the property for their intended use. It can, therefore, be very difficult to withdraw from the contract without losing your deposit.
Conversely, particularly in the current “sellers’ market”, including special clauses to protect a purchaser may result in their offer being less attractive to the vendor.
A due diligence clause typically allows a purchaser 21 days from the contract date to undertake their due diligence searches, which are usually carried out by the purchaser’s lawyer. If the searches identify any adverse issues with the property, then a properly drafted due diligence clause will usually allow the purchaser to terminate the contract without penalty.
A building inspection clause is more limited, and only concerns defects with the dwelling or other improvements on the property. It is important when obtaining a building inspection for the report to include a written quote for the cost of remedying any defects. Without a quote it may be difficult to terminate the contract.
Worrall Moss Martin Lawyers can assist purchasers by preparing specially drafted due diligence and building inspection clauses to fit their specific circumstances.
- How much should a deposit be? Deposits are usually 5%-10% of the sale price. The size of the deposit offered is a commercial decision for the purchaser. A higher deposit is more attractive to a vendor, but puts the purchaser at greater risk if a dispute arises.
- How much time should a finance clause allow? If you are relying on a finance clause to purchase the property, then the typical period is 21 days from the contract date (or 21 days from the issue of title, if you are purchasing a property within an impending subdivision). However, the specific terms of the finance clause are important to ensure that options for obtaining finance are not overly restricted.
- Did you receive a recent copy of the Title and Plan for the property from the vendor or their agent? It is best practice that a vendor or their agent provide a recent search of the Title and Plan for the property, so that the purchaser can review them before making an offer. It is important that the Title and Plan search is recent, as instruments could have been registered on title after the title search was obtained.
Even if a purchaser does receive a copy of the Title and Plan, we recommend consulting a lawyer for a full understanding of its terms. For example, if the property is subject to restrictive covenants (for example, in relation to the use of the property or the number or type of buildings that can be constructed, or to the available construction materials), it is critical for a purchaser to understand the nature and the legal effect of those restrictions.
- Have you physically inspected the property, considered a survey, looked for obvious issues with boundaries? If a thorough inspection of the physical layout and boundaries of the property is not done, significant issues can arise. Some examples we have advised clients about include:
- a part of an outbuilding unlawfully crossing into a neighbouring property;
- a driveway that appeared to form part of a property was not part of that property, and did not have an easement allowing the property owner to use it; and
- a parking area was not within the boundaries of the property.
- Is the purchase structured in the most appropriate way? Even if the property is intended for ‘personal’ (as distinct from commercial) use, there are numerous reasons why, depending upon a purchaser’s individual circumstances (and their intention for the property), owning it in their personal capacity may not be ideal. There are many structures through which property can be purchased that offer advantages to a purchaser.
If a property is going to be held in a company or trust structure, we always recommend establishing that structure before entering into the contract, to ensure a smooth transition to settlement. A party cannot enter into a contract using an entity which is not yet established.
A purchaser can use their name and an “and/or nominee” clause, where the structure is yet to be established, but this can cause issues if proper legal advice is not sought at the time of entering into the contract.
Significant issues can arise, for example, where a unit trust is used to purchase a property and between the date of the contract and the settlement date there is a change of unitholders.
Another issue to keep in mind for a purchaser using a discretionary trust to purchase a property is the Foreign Investor Duty Surcharge (“FIDS”). A discretionary trust is automatically assumed to fall under the definition of a foreign trust unless proven otherwise. If a trust is deemed to be a foreign trust, additional duty (currently 8% of the dutiable value of the property) will be payable by the purchaser. To avoid this extremely adverse situation, purchasers must have carefully drafted provisions included in the trust deed, which expressly exclude foreign persons as beneficiaries of the trust. Worrall Moss Martin Lawyers can help you ensure that your trust is FIDS compliant before the FIDS is imposed on the purchase.
A wealth of information in relation to estate and commercial matters can be found at our website www.pwl.com.au
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This newsletter contains material for general educational purposes and is not designed to be advice to any particular person about their own affairs as it does not take into account the circumstances of the reader as an individual. It is recommended that appropriate professional advice be obtained by each reader so that reliance can be taken upon that advice.
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