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Contract of Sale and Breach

By | Property Law | No Comments

Any contract be it for the purchase of property or otherwise will create rights and obligations for the parties to that contract.

In the context of a Contract of Sale for property this essentially means that the seller must deliver the property to the buyer and the buyer must pay the seller the purchase price on the settlement date. But what happens if one or both parties can’t. For example what if the buyer is not in a position to settle by the due date and requires a few extra days to get their finances in order.

Such instances although relatively common, still technically amount to a breach of the Contract of Sale, albeit a minor one.

In these instances general condition 25 which is contained in every Contract of Sale provides that if the buyer cant settle on time, the buyer must pay to the seller compensation in the form of penalty interest on account of loss that the seller may suffer as a result of the delayed settlement.

General condition 26 of the Contract of Sale provides the rate of interest to be charged in these circumstances is to be 2% higher than the current penalty rate.

As a matter of practicality, once the buyer and seller agree on the amount of interest that is to be paid, which is purely a mathematical exercise, the additional penalty interest will be paid at settlement and the breach will be rectified.

In these circumstances the seller is also entitled to claim ‘reasonably foreseeable losses’ in addition to penalty interest. Traditionally the Dispute Panel has taken a very limited view of what actually constitutes a ‘reasonable foreseeable loss’.

In order to widen and make certain what constitutes a ‘reasonable foreseeable loss’ a special condition can be drafted and inserted into the Contract of Sale expressly specifying what is a ‘reasonable foreseeable loss’. Such items can include interest expense payable on an existing mortgage, the cost of obtaining bridging finance (if required), legal expenses in dealing with the breach and any consequential loss that may be suffered.

However it must be noted that more serious breaches can and do lead to the termination of the Contract of Sale. For the Buyer this will mean the loss of the deposit that has already been paid. Additionally the Seller will also have the right to sue the buyer for any loss that is incurred as a result of the Contract of Sale being terminated.

Like the buyer, the seller too has obligations and is required to do ‘all things necessary to enable the buyer to become the owner of the land’.

What happens if settlement is delayed by the seller’s actions. Potential delays could include such things as the seller’s inability to provide vacant possession of the property or errors in the documents that the seller has to provide the buyer.

Penalty interest is only payable on money that is overdue. Generally the seller will not be required to pay the buyer any money meaning there cannot be any overdue money. Thus the buyer is unlikely to be entitled to any penalty interest.

What the buyer may be entitled to is compensation for those losses that have reasonably been incurred. Again a very narrow view has been adopted of what is actually a reasonable foreseeable loss.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

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Co-ownership

By | Property Law | One Comment

Pooling resources can be a win-win

Co-ownership is when two or more parties, be they family members, friends or fellow investors come together, pool their resources for the purpose of jointly purchasing and sharing in the ownership of a property.

There are many benefits of co-ownership:

  • The pooling of resources provides a more cost efficient entry into the property market by spreading the entry costs, such as the deposit, stamp duty and legal fees amongst all the co-owners;
  • The pooling of resources further provides for the sharing of the ongoing expense of ownership, such as rates, taxes and maintenance outlays.
  • The ability to increase your borrowing and repayment capacity;
  • Your co-owner is loyal and trustworthy; and
  • It can be a rewarding experience co-owing a property with family and or friends.

However if the transaction is not properly structured and documented before purchasing a property, it can end in expensive and time consuming litigation, stress, losses and ruined relationships.

Prior to the co-owners commencing a search for a property or even drafting and structuring an agreement, the very first step will require each potential co-owner to ask and honestly answer if all parties:

  1. Have the same investment philosophy and objectives; and
  2. Each party possesses the same appetite for risk.

If all the potential co-owners answer yes to the above questions, the next step is to formulate an agreement that will provide a framework that governs the transaction and life of the investment.

Such an agreement is known as, surprise surprise, a ‘Co-Owners Agreement’.

The Co-Owners Agreement should accurately reflect each party’s rights, obligations and contributions. Importantly the agreement should also provide for a mediation and dispute resolution mechanism in the event that a disagreement arises amongst the co-owners.

The agreement should also provide a formula for one or more of the co-owners to exit the investment, cash out their initial contributions and hopefully, share in the profit.  Other considerations might also include the right of one co-owner to live in the purchased property or a prohibition against a co-owner mortgaging or encumbering their interest.

The Co-Owners Agreement should also make it very clear to the parties how the property is to be managed on a daily basis, who is to be responsible for that management and limits of authority on amongst other things, incurring costs on behalf of the collective.

If the aim is to tenant the property, who will deal with tenant and or managing agent. Who has the authority and what is the limit of that authority to make ongoing payments in respect of rates, maintenance or capital expenses. Who will maintain books of accounts and report back to the other co-owners.

By taking the time and effort at the front end of the transaction to properly structure a Co-Owners Agreement, all parties will be certain as to their rights and obligations and disputes can be avoided or at the very least mitigated at the backend.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Adam Zuchowski is a Principal Solicitor at Network Legal & Associates. Adam is well known for his work within the property sector and has previously written for many publications including a regular column in the Herald Sun.

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The Importance of Having a Will

By | Wills and Estates | No Comments

The Importance of having a Will

After you have bought your house and moved in, the final part of any property transaction should be the preparation of a Will. If you already have a Will then now is the time to review it. In fact, after you have completed any major financial transaction or had children you should review your Will to ensure that it reflects your changing circumstances. In the event that nothing has changed you should still revise your Will regularly.

But what is a Will and why is it so important?

A Will is a formal legal document through which you express your final wishes and determine the distribution of your property when you pass away. This means through your Will you will decide and control who gets your property, known as your estate and how much of your estate the beneficiaries are entitled to.

Unfortunately nearly half of all Australians do not have a Will. And for those who do have a Will it may not be a true reflection of their wishes. Some people also take short cuts when doing their estate planning, such as using an online will or a Post Office Will kit. Often mistakes are made rendering these cheap Will alternatives invalid.

If you die without a valid Will the law decides who gets your assets. This is called ‘dying intestate’.

These laws apply to everyone and do not take into account an individual’s wishes or situation.

Should a person die without a Will (and assuming that person had no children), their domestic partner will inherit the estate. A domestic partner can be either a legal spouse or a defacto (of either sex) who had been in a relationship with the deceased for a minimum period of 2 years.

In the event that the intestate deceased had children, a spouse or domestic partner is only entitled to the first $100,000 of the estate plus one third of the balance. The remaining two thirds of the estate will be distributed equally amongst the surviving children. This is not a good outcome for the domestic partner of the Deceased and invariably leads to expensive court proceedings.

Should the intestate be single and have no children the next in line to inherit the estate is the parents. Following this formula the next in line is the siblings, followed by grandparents, aunts and uncles, great-grandparents, nieces & nephews, first cousins, great nieces and nephews, first cousins once removed, second cousins and finally remote kin.

When there are no surviving relatives or they cannot be located, the estate passes to the government.

In order to deal with the deceased’s estate, someone will need to apply to the Supreme Court for a grant of ‘Letters of Administration’. In most instances this person is the spouse or next of kin. If no such person exists, the Court will appoint any person it thinks fit.

Once Letters of Administration has been granted, the person making the application becomes known as the ‘Administrator’ and will then deal with the deceased estate in accordance with the law.

The major shortcoming of dying intestate is that your assets will not be distributed in accordance with your wishes. Someone who you would want to provide for may in fact miss out entirely on an inheritance.

Expensive disputes inevitably arise when a person dies intestate. These disputes inevitably pit family members against each other.

The purchase of a property provides an opportune time to draw up a will or update an existing Will.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Adam Zuchowski is a principal property lawyer with Network Legal & Associates, which includes an experienced Wills & Estate team.

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Contracts of Sale

By | Conveyancing | No Comments

The key to contracts

Anyone buying or selling property is required to enter into a Contract of Sale.

The Contract of Sale in the context of a property transaction is the single most important document. It sets at the rights of the parties and provides the parameters or a map as to how the transaction will be conducted. Should a dispute arise, it will determine how that dispute is resolved.

Ordinarily the seller’s lawyer will prepare the Contract of Sale and for that reason it will be heavily weighted in the sellers favour. As the majority of property in Victoria is sold via public auction, at the conclusion of that auction the winning bidder is required to execute an unconditional Contract of Sale. Thus the purchaser is very rarely provided with the opportunity to amend the Contract of Sale.

Clearly this is a very important document, but what actually is a Contract of Sale and why is it required?

The Instruments Act requires that any agreement for the sale of land be recorded in writing. Any other agreement, such as a verbal agreement is not enforceable.

When a real estate agent provides the Contract of Sale, they are required to use the form of contract contained in the act.

This contract will contain all the essential terms of the transaction including details of the purchaser and seller, the day of sale, details of the price and deposit, including how and when it is to be paid, details of the property and chattels (those fixtures and fittings forming part of the sale) and settlement details.

Additionally the contract will also contain all the prescribed general conditions and if necessary, any required special conditions.

It is worth noting that lawyers are permitted to use their own form of contract.

When a real estate agent refers to the submission of a written offer to the seller, what they are actually requiring is that a Contract of Sale is filled out with all the above details and then the purchaser’s signature on that contract.

By signing the contract a purchaser is confirming that they intend to be bound by it. The real estate agent will then submit that contract to the seller. Should the seller be happy with these terms he or she will then also sign confirming acceptance of your offer.

As this stage the contract crystalizes and comes into existence. This means that there is a binding and enforceable contract between the parties.

Part of the contract documents must also include, what is known as a Section 32 Statement or Vendors Statement. The name is derived from section 32 of the Sale of Land Act, which obligates a seller to provide to the purchaser certain information about the property being offered for sale.

Interestingly the Act requires the seller to provide the buyer with the Section 32 statement prior to the execution of the contract.

In the event that the Section 32 Statement is incomplete, the Act provides the buyer with the ability to end the Contract of Sale and the refund all deposit monies. However the Act further provides that should a buyer be no worse off as a result of the non-disclosure, there is no ability to end the Contract.

As such a buyer should not automatically make the assumption that a technical breach will provide them a basis to end the contract.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Adam Zuchowski is a Principal Solicitor at Network Legal & Associates. Adam is well known for his work within the property sector and has previously written for many publications including a regular column in the Herald Sun.