What is the “Subject to Finance” Clause
A purchaser of real estate in Victoria must be presented with a Contract of Sale of Real Estate and Section 32 Vendors Statement. These are usually bound as one document. The Particulars of Sale page (found in the contract of sale) sets out all the details of the property sale transaction – who the parties are, the property details, the contract price, the amount of the deposit, the settlement date etc.
One of the items in the particulars page is headed “Finance”. It asks for the name of lender, the loan amount and the approval date. If this information is completed in the Particulars of Sale (usually the selling agent will complete this information at the request of the purchaser), then the corresponding General Conditions of the Contract of Sale relating to finance are automatically invoked and the contract is rendered “subject to finance”. What does this mean?
“Subject to finance” means that the contract of sale is conditional upon the purchaser being approved for a loan from the Approved Lender, for the amount specified (make sure you allow enough to cover stamp duty, bank fees, titles office lodging fees and legals – be conservative) on or before the approval date. If finance approval has not been granted by that approval date, then the purchaser may end the contract without penalty by serving written notice on the vendor or the vendor’s legal representative within the time allowed by the contract (usually 2 business days after the approval date).
The Approval Date
The approval date is crucial and the purchaser’s legal representative must keep a close eye on this date. It’s good practice for a lawyer to contact the purchaser a few days prior to the approval date and obtain an update in respect of the purchaser’s loan application. The question to be asked at that point is – have you secured “unconditional” loan approval?
Unconditional Approval vs Pre-Approval
Unconditional loan approval is not the same as pre-approval. Pre-approval simply means that the lender is satisfied that based on the purchaser’s financial position and income, the lender may make an offer to provide finance for a certain amount. Such an offer is subject to the lender undertaking a satisfactory valuation of the security property being purchased. The lender in most instances will only lend up to e.g. 80% of the value of the property as determined by the valuation. This is called the LVR or Loan to Value Ratio. There are instances where a lender’s valuer will deem that the purchaser has paid too much for the property. Accordingly, the lender may only offer to provide finance of 80% of the lender’s valuation (not 80% of the amount actually paid). The purchaser may not have budgeted for a possible shortfall and will need to make up the difference. If the contract is subject to finance, the purchaser may at that point end the contract in accordance with the general conditions of sale.
The ability to end the contract in this way also usually requires that the borrower has done everything reasonably expected of him or her to secure unconditional approval within the time allowed by the contract.
Extending the Loan Approval Date
Of course, the purchaser may alternatively request an extension to the loan approval date. This involves the purchaser’s representative sending a written facsimile request to the vendor’s representative advising that the purchaser has not yet secured unconditional approval. The facsimile would commonly contain a statement to the effect that if the vendor does not consent to the request for an extension, then the purchaser hereby serves written notice ending the contract in accordance with the subject to finance clause.
This statement is purely for the protection of the purchaser. If the vendor rejects the request for an extension but such rejection arrives after the time allowed for ending the contract, then the purchaser is protected in that the purchaser has ended the contract within the time prescribed. Yes the purchaser loses the sale, but that is a much better case scenario than breaching the contract by not having the money to pay for the property on the settlement date.
Including the statement also has the benefit of giving the vendor some incentive to actually agree to the extension. After all the vendor does not wish to lose the sale. However the buyer should be mindful that the vendor may reject the request, particularly if for example there is another prospective purchaser waiting in the wings to make a more favourable offer.
How much more time will be required? This is a question which needs to be referred to the lender or the finance broker? Again it’s best to be conservative. If the buyer is told 7 – 10 days, then they should ask for 14. This saves the buyer from making repeated requests for extensions.
Paying the Deposit by the Due Date
Finally, a purchaser must be mindful that if the due date for payment of the deposit coincides with the loan approval date then (unless the vendor has also agreed in writing to extend the due date for payment of the balance of the deposit monies) the deposit must be paid on or before the due date. This is even if the loan approval date is extended. Paying the deposit on or before the due date is extremely important. Failure to do so will render the buyer in breach of the contract and therefore unable to rely on any provisions of the contract which may enure for the buyer’s benefit including the subject to finance clause.
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