When a residential property is sold and a contract of sale is signed, the vendor is usually happy to have the property sold and the purchaser looking forward to moving into their new home. However, the purchase can quickly become problematic if one party wants to cancel the contract. This article will look at when you can cancel the contract of sale and your rights and remedies if the contract is incorrectly cancelled.
Purchaser – When can I Cancel?
The first and best opportunity to cancel the contract of sale is during the cooling off period, being three business days following the date you signed the contract of sale. The cooling off period is designed to allow you time to consider your purchase and cancel the contract immediately if you decide you do not want to proceed. The best part is that there are no consequences for cancelling during the cooling off period apart from your deposit being refunded less $100 or 0.2 per cent of the purchase price (whichever is greater).
However, the cooling off period does not apply if:
- You purchased the property at auction or within three clear business days before or after the public auction;
- The property is used primarily for industrial or commercial purposes;
- The property is more than 20 hectares and used predominately for farming;
- You previously signed a contract of sale for the same property on the same terms; or
- You are an estate agent or corporate body.
Failure to Obtain Finance
If you have specified that the contract of sale is subject to finance, you are permitted to terminate the contract if finance is not approved within the specified timeframe. For the contract to be subject to finance, there must be a clause (for example, the particulars of sale in the standard contract of sale) specifying the lender, loan amount and the date approval must be granted by.
If finance is sought and not approved by the approval date, you may end the contract of sale if you:
- Immediately applied for the loan;
- Did everything reasonably required to obtain approval of the loan;
- Served written notice ending the contract on the vendor within 2 clear business days after the approval date (or any later date allowed by the vendor); and
- Are not in default of any other condition of the contract of sale when the notice is given.
In our experience, the purchaser’s biggest hurdle to overcome is satisfying the vendor that finance was immediately sought and has been refused. The vendor will usually ask for a copy of the letter from the bank rejecting the loan application and other correspondence between the purchaser and their bank to show that the purchaser was active in obtaining finance.
If the contract is correctly terminated, the vendor must immediately refund all monies paid.
If you chose to have the contract of sale subject to a report, such as a building report, you are also entitled to terminate the contract if the building receives an adverse report. More specifically, you can cancel the contract within 14 days from the day of sale if you:
- Obtain a written report from a registered building practitioner which discloses a current defect in structure on the land and designates it as a major building defect;
- Give the vendor a copy of the report and written notice ending the contract of sale; and
- Are not in default of any other condition of the contract of sale.
The threshold of being a major building defect is very high, requiring the defect to be a major element of the building attributable to defective design or workmanship that causes or is likely to cause the inability to use the building, destroy the building or threaten its collapse. Therefore, cosmetic damage or minor damage to the structure of the building is unlikely to justify cancelling the contract of sale.
Vendor – When can I cancel?
Failure to Pay Deposit
Compared to the purchaser, the vendor has fewer opportunities to cancel the contract of sale. The most common reason for a vendor to cancel the contract is due to the purchaser failing to pay the full deposit.
Unfortunately for the vendor, the process to cancel the contract of sale is a longer process requiring a default notice to first be sent to the purchaser. This puts the purchaser on notice of their default and allows them an opportunity to fix the default. It is important that the default notice is in the correct form so that it will allow you to immediately end the contract if the default is not remedied and the reasonable costs and interest paid.
The standard form contract of sale allows the vendor to then retain the deposit paid up to 10% of the purchase price and:
- Keep possession of the property; and
- Continue to own the property and sue for damages or resell the property and recover any deficiency in the resale and any resulting expenses by way of liquidated (i.e. fixed) damages.
When should a Contract NOT be Cancelled?
The contract of sale should not be cancelled by the vendor or purchaser where the property is damaged prior to settlement. If the property is damaged settlement should still occur, however, the parties may elect a sum of up to $5,000 to be held by a stakeholder. The parties can then try to reach a resolution as to the cost of the damage and how it should be fixed. Upon the parties reaching an agreement the money held by the stakeholder is to be released by agreement between the parties, usually to pay the builder who rectifies the damage. However, other remedies are available to the purchaser including pursuing compensation or having the damage repaired through insurance (if insured).
If the purchase or vendor breaches the contract of sale, including incorrectly terminating the contract, the person who breaches the contract is liable to pay to the other party on demand:
- Compensation for any reasonably foreseeable loss to the other party resulting from the breach; and
- Any interest due under the contract of sale as a result of the breach.
However, once the contract of sale is terminated by the aggrieved party other remedies are available through the court process. This could include an award of money (i.e. damages) where the property is re-sold for less money or an order for the purchaser or vendor to proceed with the sale (i.e. specific performance).
Although the above list does not cover every right of termination, it should assist you in understanding the standard contract of sale in Victoria. If you need any advice regarding your contract or conveyance, please contact a member of our team on (03) 9481 2000.