Legal Guide to Buying and Selling Real Estate

Introduction

Conveyancing is the transfer of property ownership from one party to another.

Buying and selling real estate means making important financial decisions - decisions which affect your future and your family.

Most people buy or sell real estate at least once in a life time; many of us do so more frequently. Real estate transactions always result in contractual relationships with others. Contractual relationships create legal rights and obligations for both vendors and purchasers. In fact, for most people, an agreement to buy or sell real estate involves thousands of dollars and is the most significant contract they will ever sign.

It makes sense to understand your legal rights and obligations from the outset - and before you commit yourself. You need to be sure that your affairs are in the hands of a professional, whose experience and expertise will protect you.

The Conveyancing Process

As mentioned earlier conveyancing is a process of transferring property ownership from the seller (the vendor) to the buyer (the purchaser).

Contract of Sale

In New South Wales, before placing any property on the market, the seller must have a copy of the Contract of Sale prepared by a Solicitor or Licensed Conveyancer. Attached to the Contract are the other Certificates the seller must provide, namely:

  • a Section 149 Certificate from the Local Council, detailing zoning and other information
  • a sewerage diagram
  • a copy of the title folio from the Land Titles Office
  • copies of all documents creating easements or restrictive covenants
  • a cooling off period statement has to be provided
  • a notice directing the parties to section 52A of the Conveyancing Act Sale of Land Regulations
  • if the property is strata unit, the seller must attach copies of the folio of the Register for the lot and common property and a copy of the strata plan.

If the purchaser discovers, after the exchange is effected, that the seller's information is incorrect or misleading, or if the seller does not attach the disclosure information (the prescribed documents), the purchaser may be entitled to rescind (terminate or cancel) the contract.

In any event the purchaser must serve written notice to the seller of rescission within 14 days of exchanging contracts.

Statement of Buyers Rights

A statement of buyer's cooling of rights (in the prescribed form) must be attached to or included in every contract for the sale of residential property. If that statement is not attached or included, the buyer can withdraw from the contract at any time up to settlement and obtain a full refund of any deposit paid.

Certificates

After going through the warranties given by the seller and the prescribed documents attached to the contract, the purchaser's solicitor or conveyancer should decide which certificates are needed from the following authorities:

  • Municipal, Shire, or City Council (it is imperative to get a recent certificate)
  • Water, Sewerage and Drainage Authorities
  • Environmental Protection Authority
  • Office of State Revenue, Commissioner for Land Tax
  • Roads and Traffic Authority
  • Mine Subsidence Boar
  • Pacific Power, Integral Energy, Energy Australia
  • Department of School Education
  • State Transit Authority
  • Australian Gas Light

There are a number of other authorities that may have an interest in the property in certain locations and circumstances

The Steps of Buying

When you find the right property to purchase, a copy of the "Contract of Sale" is obtained from the real estate agent or is sent to your solicitor. It is very important that you understand the terms and conditions of the sale and to check if there are any obvious problems in the contract.

Expressing an interest in the property

Most real estate agents will ask you to pay an initial or part deposit as a sign of good faith.

If you haven't signed and exchanged the contract this payment does not `hold' the property. It is refundable if you change your mind. Paying an initial or part deposit only indicates that the agent will be less likely to show anyone else the property. It is important to note here that if someone else exchanges contracts before you, you will miss out on the purchase.

You can make arrangements through your solicitor or conveyancer with the agent to exchange contracts with a five day cooling off period in order to secure the property. It is unwise to enter into any contract without first obtaining legal advice on its terms.

Apply for the loan

Submit a formal application to your lending body for a loan on the property as soon as possible. You should not exchange contracts for the property (with or without the cooling off period) before finance has been approved in writing. With your formal application you will have to pay fees to the lending body, such as establishment and valuation fees.

The lending body will value the property to determine whether the property is adequate security for the amount of the loan. The lending body leads a percentage of the valuation of the property, not a percentage of the purchase price.

Although the five-day cooling off period can be used to secure a quick exchange, it is wiser to make sure your loan has been formally approved in writing before signing and exchanging contracts.

Property inspection

Inspections should be organised at this stage before the exchange of contracts to ensure the property is structurally sound and free of pests' infestation. If buying strata property, you should order a strata inspection.

Survey

If the seller does not have a recent survey attached to the contracts, your solicitor or conveyancer may obtain a survey report. This will identify the property, show the position of the buildings and also fences in relation to the correct boundaries and show any encroachments onto the land or on the neighbouring property. Most lending bodies require an up-to-date survey.

Exchange of contracts

When all of the above reports are in order and the loan is formally approved your solicitor or conveyancer will organise the exchange of contracts.

The contract is a legal agreement between the seller and the purchaser. It sets out the terms and conditions of the sale. Any fittings you are purchasing with the property such as curtains, blinds, light fittings, awnings, air conditioners or TV antenna should be listed in the contract to avoid disputes at or after the settlement

The contract is prepared in duplicate by the seller's solicitors or conveyancer. The original is forwarded to the seller for signature. The copy is forwarded to the purchaser's solicitor or conveyancer for approval and then signed by the purchaser.

The exchange of contracts is then carried out. The contract is dated at the exchange and thereafter the seller and buyer committed to the transaction on the terms of the contract.

What about GST?

The Commonwealth Goods and Services Tax will see all new houses subject to a 10% tax. The federal government will compensate all first home buyers (regardless of whether they are' buying a new or existing home) by $7,000 in an attempt to cover post-GST prices. It should also be noted that the GST will also be levied on stamp duty for a short period of time at the rate of 10%.

Realistically, GST on new homes will not be levied at the rate of 10% since kitchen appliances and other goods purchased for the construction of new homes may be subject to a dower rate of tax since sales tax previously levied at the rate of 20% and more will be abolished and replaced by 10% on the subject goods. If you are selling your home, a 10% GST is levied on legal costs and agent's fees.

If you are renting out your through a real estate agent, management fees ill be increased by 10% to accommodate the new tax.

Deposit

On the date that the contracts are exchanged, the agent will request that you pay the agreed deposit stated in the contract. While the amount is usually 10 percent, it can vary by agreement.

Your solicitor or conveyancer will normally pay this deposit to the real estate agent, and it will be held in the agent's trust account. Alternatively the parties may agree to invest the deposit and receive interest. It is very unwise for the purchaser to hand the deposit over to the seller on exchange or release the deposit to the seller to use as a deposit in a separate purchase of his or her own.

Five day cooling off period

After the exchange of contracts, there is a provision for a five business day cooling off period. This means you can change your mind and cancel the contract without any limitations.

If you decide not to proceed during the five day cooling off period you will forfeit 0.25 percent of the purchase price to the seller eg on a $400,000 property you will forfeit $ 1000.

There is no cooling off period if:

  • you instruct your solicitor or conveyancer to sign a section 66w certificate which waives your cooling off right; or
  • you are successful bidder at an auction.

It is important to have your loan formally approved and inspections carried out before attending an auction or before waiving your cooling off rights. It may be better to wait until you are satisfied with the property and have your loan approved and then the exchange waiving your cooling off rights rather than exchanging too quickly and relying on those rights. This strategy is harder to adopt in a seller's market because the property may be sold to someone else if you delay.

The advantages and disadvantages of Exchanging Contracts through an Estate Agent or Solicitor

It is important to understand the advantages and disadvantages of choosing to exchange contracts through an estate agent or to wait and exchange through a solicitor.

Advantages: Estate Agent

  1. It will generally be faster, as an agent may be able to obtain the seller's signature and exchange contracts with you on the same day.
  2. You will get the benefit of the 5 business day cooling off period and can secure the property for those five days . You can withdraw from the contract at any time, for any reason, within the cooling off period - however you will forfeit 0.25% of the purchase price.
  3. Exchanging contracts earlier minimises the risk of being gazumped, that is the seller sill not be able to sell the property to anyone else during the cooling off period.

Advantages: Solicitor

  1. If you opt to see a solicitor, they will check the contract to see if there are any burdensome conditions, and if there are, you can negotiate with the seller who may agree to change them before exchange.
  2. You will have time to make inquiries and secure reports before exchange of contracts.
  3. If you decide not to exchange you will lose the money spent on advice, inquiries and reports but will not lose the 0.25% that you would forfeit if you withdrew after exchange and within the cooling off period.

Disadvantages: Estate Agent

  1. Severe special conditions in the contract you are not aware of. After exchange, you may get legal advice that the contract contains unfavourable conditions is may be too late to change them.

Disadvantages: Solicitor

  1. By waiting you may be gazumped, that is until exchange of contracts the seller is free to sell to anyone else. You may lose the property and any money spent on advice, inquiries, reports and loan fees.
  2. You will forfeit 0.25% of the purchase price if you withdraw during the cooling off period even if there is something wrong with the property.
  3. After expiration of the cooling off period you are contractually bound to proceed with the purchase. You can get out of the contract by forfeiting the full 10% deposit or if the seller has breached the contract.
  4. You have only 5 business days in which to get advice, arrange finance and investigate - this may not be sufficient time.

After exchanging contracts

It takes four to eight weeks between exchange and settlement. During this time enquiries and searches are made and documents prepared by your solicitor or conveyancer.

  1. The transfer document is prepared and taken to the office of state revenue for stamping together with the original contracts. The transfer is then sent to the seller or his representative. Once signed by the seller, it will return to you at settlement.
  2. All relevant enquiries relating to your land are made. These include relevant Electricity authority, water authority and the local Council. These show if the authorities have any interest in your land, for example, whether the roads and traffic authority plans to resume part of your land for road widening. They also show the amount of council and water board rates, if there are arrears and if the land is subject to a land charge in the hands of the seller.
  3. Your lender will prepare the mortgage document, which sets out the terms and conditions of the loan. Make sure you fully understand your mortgage document before signing it. Know exactly what you are contracted to pay, how, when, and for how long. This document allows the lender to sell the property if you do not make the repayments. The lender can recover the amount owing, including the original amount of the loan, interest payable on it and the costs. For further information, see the section entitled "What is a Mortgage?"
  4. Requisitions on title are sent to the seller or the seller's representative. Requisitions provide the purchaser with information from the seller, which may not have been previously disclosed or discovered during inspection of the property. An example is whether there are any disputes relating to fences with neighbours.
  5. Close to settlement a `settlement statement' is sent to the seller. It details the final amount owing including the adjustments for rates and taxes as the date of settlement. The seller will direct your solicitor or conveyancer how the cheques are to be drawn.

Insurance

`Passing of risk' legislation puts the responsibility for insurance onto the seller up until settlement or completion of the sale. From settlement, when the property becomes yours, you are responsible for insurance. It may still be prudent to insure the property before the settlement if you are not aware that the seller has an insurance policy.

If you are buying a home unit, a `certificate of currency' should be obtained from the body corporate's insurer to make sure the property is adequately insured. Your lender requires details and proof of this on or before settlement.

If you are moving into the property before settlement, the seller would probably want to make a special arrangement whereby you are responsible for insurance from the time you take possession.

Final Search

On the day of settlement it is imperative that a final search of the title is obtained from the land titles office. This is to ensure that the property is clear from any interest or restrictions, which may have been recorded between the date of exchange and settlement.

You should carry out a full inspection of the property to ensure that the property has not been damaged and all fixtures and fittings listed in the contract are intact.

Settlement

Settlement is the completion of the transaction. A date is arranged by both parties and your lender for settlement. This is usually at the seller's lending body (ie. the outgoing mortgagee). Representative of the seller and the purchaser attend, together with a representative from the leading bodies of the buyer and seller.

  1. The lending body pays the loan money and the purchaser pays the balance. You must check before settlement (when the settlement statement is being prepared) what the actual amount provided on settlement by your lender will be. Your lending body will usually deduct its costs and disbursements from the loan amount so you will not get the full amount you are borrowing.
  2. Your solicitor authorises the seller's representative to collect the deposit from the real estate agent. The buyer will pay, in addition to the price, "adjustments" such as taxes, council and water rates already paid in advance for the year by the seller. The solicitor from the date of settlement will calculate the amount. Land tax is payable in total by the seller and may be adjusted if provided in the contract.
  3. Your solicitor will receive a signed transfer and the title deed, and will arrange for the Land Title Office to register the transfer and the mortgage on the title. The title documents and mortgage will be held by the lending body until the term of the mortgage is completed.
  4. The buyer pays stamp duty on the mortgage as well as on the contract of sale (this may be arranged after exchange).
  5. The buyer is responsible for effecting insurance on the property from settlement. It is very important that you arrange insurance before settlement whether or not it is a requirement of your lender.
  6. Remember to budget for your moving costs and ongoing costs such as council rates, water rates and insurance. Your solicitor will advise you to pay all rates at settlement.
  7. The keys to the property will be handed over at settlement or you can pick it up from the real estate agent once authorised by the seller's solicitor.

What is a Mortgage

A mortgage is the security for payment of a debt given by a borrower to a lender. Technically it is a conveyance, transfer or assignment of real or personal property given by the mortgagor to the mortgagee to secure the payment of money or the performance of a monetary obligation.

For the purposes of a mortgage transaction the borrower is known as the mortgagor (the person who grants a mortgage) and the lender is known as the mortgagee (the person who takes an interest under it).

Standard Covenants by the Mortgagor

The covenants in a mortgage document set out the formal agreement between the mortgagor and the mortgagee, that is they set out the obligations and rights of the parties.

Some common covenants by the mortgagor are:

  1. The personal covenant for repayment, that is, the obligation to repay the principal and to pay interest on the principal to the mortgagee. If repayments are not made regularly, the mortgagor (ie. you) will be charged with a higher rate of interest.
  2. The covenant not to sell, rent, create another mortgage or charge over the property, part with possession, assign, subdivide or deal in any other way with the mortgaged property without the written consent of the mortgagee.
  3. The covenant to keep the mortgaged property properly insured against fire and other usual risks.
  4. The covenant to keep the mortgaged property in good repair and not to do anything that might reduce the value of the property.
  5. The covenant to pay all rates, taxes and levies assessed against the mortgaged property and comply with all notices issued against it.
  6. The covenant not to make alterations or additions to the mortgaged property without the prior written consent of the mortgagee.
  7. The covenant not to obtain a Development or Building Approval without the prior written consent of the mortgagee.
  8. The covenant to comply with all statutes and requirements of competent authorities in relation to the mortgaged property.
  9. The covenant to pay the costs incurred by the mortgagee in arranging, administering, enforcing, releasing and terminating the mortgage.

What is a Guarantee?

It is a promise by you that the person who is getting credit under a credit contract ("the debtor") will keep to all the terms and conditions of a loan agreement. If that person does not do so, you promise to pay the credit provider ("lender") all the money owing on the contract (and any reasonable enforcement expenses) as soon as the money is asked for.

If you do not pay, then the credit provider can take enforcement action against you, which may result in the forced sale of any property owned by you such as your house and personal assets.

Your guarantee is not enforceable unless you get a copy of the credit contract or proposed credit contract before you sign.

If you are a Guarantor of a loan, you should be aware of the following:

  1. You are liable for all the obligations under this guarantee and indemnity both separately on your own and jointly with any one or more other persons named in the guarantee and indemnity as "Guarantor".
  2. You guarantee that the debtor will pay the mortgagee (the lender) all amounts payable under the guaranteed agreement when they are due including reasonable enforcement expenses. Your guarantee continues until all these amounts have been paid in full.

What Constitutes Default?

Mortgage documents usually specify the events which constitute events of default entitling the mortgagee to call for repayment of all moneys outstanding and to exercise the mortgagee's rights against the mortgaged property if payment is not made.

A typical list of such events is as follows:

  1. Failure to pay money due.
  2. Breach of covenants in the mortgage, for example you do not keep the property in good condition; you do not insure the property.
  3. Breach of other security obligations.
  4. If it is established that false or misleading statements have been made by the mortgagor to obtain the loan.
  5. Allowing anything to occur on the property that is illegal or offensive.
  6. Assigning your rights or obligations under the mortgage.

Rights and Powers of the Mortgagee

Some common rights and powers of the mortgagee are:

  1. The right to assign their rights under the mortgage.
  2. The right to enter the mortgaged property, usually on reasonable notice, to inspect the condition of the property, to find out whether the mortgagor is complying with the mortgage and to carry out their rights under the mortgage.
  3. The right to do anything which the mortgagor should have done but either has not done or has not done properly and the right to recover the costs from the mortgagor.
  4. The right to give or refuse to give consent.

Rights on default under a Mortgage

  1. The right to sue for the amount owing (ie demand payment).
  2. The right to take possession of the property and to remove personal possessions at the cost of the mortgagor or to dispose of those possessions.
  3. The right to do anything which the owner of the property could do including the right to sell the property to recover the amount owing together interest and other costs including solicitor's costs, the costs of selling the property and the costs of maintaining the property.

Rights on Default under a Guarantee

  1. If the borrower fails to make any payment on time, the guarantor will be liable to remedy that failure, and that could involve the guarantor in payment to the lender of all amounts owed by the borrower to the lender including principal, interest, default interest and the lender's costs of rectifying the default.
  2. If the guarantor fails to remedy any failure by the borrower to comply with the terms and conditions of the loan in any way, including the obligation to pay principal, interest, default interest, or other charges;
  • The lender can sue the guarantor personally; and
  • Can take possession of the guarantor's property secured to the lender and sell it to recover the amount owing together with interest and other costs, including solicitor's costs, the costs of selling the property and the costs of maintaining the property; and
  • If the proceeds of sale of the guarantor's property are insufficient to satisfy the debt to the lender, the lender can sue the guarantor for the deficit, and
  • The lender can exercise its rights against the guarantor even if it has not pursued the borrower.

This information is provided Courtesy of Grech Partners Solicitors

Suites 41 & 42, 5 Inglewood Place, Baulkham Hills NSW 2153
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*Fixed prices do not include disbursements or contract (stamp) duty. This information and pricing relates to residential real estate conveyancing only.