Legal
Why You Need Legal Advice Before Signing Sales & Purchase Agreements
Have you ever agreed to the terms and clauses without actually reading them?
This is not a trick question – most people accept terms of agreements without reading them. It’s a risk that most of us believe is worth taking. However, not all contracts are the same, nor are the risks equal.
Indifference To The Terms Of Agreements
For some agreements like your mobile plan or agreeing to the terms of use of your personal data most of us don’t read the fine print. We happily quickly agreed to them without much thought.
However, applying the same indifference to the terms and clauses of some contracts can get you into a lot of bother if the terms are called into action. For example, if you agree to the terms of a loan or the sale of your home if everything is plain sailing, then whether you read the terms or not doesn’t matter much.
Default Implications
However the same can not be said if circumstances change and failure to keep your end of the deal is called into question. With loans, if you default on repayments the stakes could be high including:
- Downgrading your credit rating
- Penalty payments
- Debt collection repossessions
- Bankruptcy
Today, contract terms cover everything from lender and borrower requirements, repayments, penalty fees, and other special conditions; however, you’re none the wiser if you’ve not read them or don’t understand what you’ve read!
Selling Your Home
Like loan agreements, anyone signing the property sales and purchase agreement must understand it.
PropertyTalk’s forum discusses a property chain that ends badly with purchaser defaults and substantial financial loss, which could have been avoided with more attention to the agreement. However, selling or buying a property is a highly emotive, especially when it’s a home for your family.
If the price is right…
The numbers are significant, with sales prices in the hundreds of thousands. When you’re selling your largest asset, the sales price motivates you to get the deal done.
If the price is right, then nothing can stand in the way of making the sale happen? Wrong, just as the seller telling PropertyTalk about her failed house sale recently found out.
Homebuyers can also experience the same single-minded focus. If the seller accepts the price, is the house now mine? No, not until settlement has occurred.
If all that mattered was the price, then there’d be no need for much more than a sentence or two saying the buyer agrees to pay and the seller agrees to accept the tidy sum of $… for the property. Thankfully there is a lot more to it.
The sales and purchase agreement has many clauses and terms to protect both the seller and the purchaser.
Sales & Purchase Agreement – a collection of negotiations
Investopedia eloquently describes the sale and purchase agreement as a collection of negotiations between the buyer and seller. When you view it in this light, it’s evident that the price is just one negotiation, and both the buyer and seller need to have their wits about them to get the best deal on all the requirements for the agreement to work successfully.
Who Regulates Real Estate Sales?
Over the years there have been revisions to the real estate sales agreement. Most countries regulate real estate sales to prevent fraudulent activity and misunderstanding of the obligations of both parties.
- USA – NAR (National Association of Realtors)
- UK – NTSEAT (National Trading Standards Estate Agency Team)
- Australia – REIA (Real Estate Institute of Australia)
- New Zealand – REAA (Real Estate Agents Authority)
Real Estate License, Code of Conduct, Complaints
These organizations issue the Real Estate license and enforce the licensing law. They also create and manage the code of conduct and investigate customer complaints.
Any adult can buy or sell a home at any time. They don’t need to be educated or have specific knowledge or training. No wonder many home sales go wrong!
Example – Sale Gone Wrong
Back to our recent experience with a PropertyTalk forum user who was unaware of an issue with the sale and purchase agreement. Unfortunately, she has been walloped financially due to the contract terms.
So what happened? You can read the discussion in full following the link above or read this summary.
When the purchaser signed the sale and purchase agreement, the seller believed they had a deal, i.e., the home was sold. So with much delight, the seller went researching for a new home and eventually found it.
Signing the sale and purchase agreement on that home the seller went unconditional – which means there’s no backing out. A 10% deposit was paid and the settlement date was scheduled to occur after the settlement of the seller’s current home. This is called a property chain – where the purchaser of a property needs to successfully sell their home to fund their next one.
‘Or Nominee’
However, unfortunately, when the seller signed the agreement to sell their home, they were unaware the purchaser signed the sale and purchase agreement with ‘or nominee’. Worse still the seller, later on, realized that the purchaser had not added their name to the agreement.
More strange things started happening – the sellers saw that their existing home had sold again! How could this be happening? And that it sold another couple of times before the fast-approaching settlement date 12 weeks out from the date of signing the agreement.
The seller got a lot of answers from PropertyTalk forums including the meaning of ‘or nominee’ and recommendations on steps to take to get back on track.
Sometimes property sales settle with the ‘or nominee’, and as such, the sellers may or may not be any the wiser that it was circled and agreed to by them. Only when things go wrong do sellers realize it’s risky accepting ‘or nominee’ agreements.
Failed Settlement
The purchaser never did settle, and the seller failed to hold up their end of the bargain as purchasers of another property. This has cost them dearly with default penalties and other costs now six figures and counting.
Blame
Who’s at fault for the failed sales transaction?
Was it the real estate agent, the seller, the purchaser, or the lawyers?
Probably all of them – some more so though, as the real estate agent and the lawyer have a duty of care for their client.
More questions that need answers….
Was the purchaser going to purchase the property and use the ‘or nominee’ as a fallback? Or was the purchaser just a middleman (a trader) hoping to make some money like a finder’s fee from marketing the property again and choosing who will get to buy it?
Did the real estate agent explain the ‘or nominee’ to their client and why wasn’t the purchaser’s name on the agreement?
The real estate agent should have made sure the purchaser was committed with their legal name and contact details. Plus inform their client of the ‘or nominee’ and its implications. This is just the standard duty of care part of the code of conduct expected of a licensed agent or an agent working for an agent with an REAA license.
Another gatekeeper should be the seller’s lawyer. Had the seller presented the sales and purchase agreement to a property lawyer for review before signing it, the ‘or nominee’ would have been discussed as it is usually crossed out.
Accepting a sale with ‘or nominee’ is risky, but you can mitigate the risks with the purchaser’s proof of ability to purchase.
The purchaser is not let off the hook with the ‘or nominee’ condition in the sales and purchase agreement. But you must have the purchaser’s name on the contract!
Unfortunately, the failed settlements in this property chain mean there’s more work to do. The seller has a home to sell and another one to buy when the time is right.
Plus, the seller can make a complaint with the REAA. As the purchaser’s name wasn’t on the contract claiming the payment of expenses, penalties, and costs associated with the failed settlement may be challenging. Plus, there are the additional costs of starting the sales process again with remarketing their home for sale. What a learning experience!
Summing Up
Our example demonstrates the need to read the fine print of contracts and agreements.
For more risky deals like property sales and purchase transactions and any loan agreement, always make sure you understand what you’re signing. Get a professional to go through the contract and present anything that errs from normal or requires acknowledgment of the terms, for example, if payments are missed.
