Selling and Buying Property when times are tough
by McColm Matsinger Lawyers
Selling and Buying Property when times are tough
Most people who have travelled down the road of buying or selling property will tell you that there are a lot of things and issues that raise their head during the course of the transaction which they never considered at the time they originally embarked on the sale or purchase process.
When times are tough, there is a very important issue to take into consideration both for sellers and buyers which is often overlooked. This relates to whether the seller’s mortgagee will consent to the sale and agree to release the property from its mortgage.
When the economy is good, prices are high and people are not forced to sell, this factor hardly ever gets a second glance and it is just taken to be one of the items that the solicitor deals with as part of the Conveyancing process.
However, in a market where sellers are being forced to sell and buyers are vigorously negotiating down prices, it can be the make or break of the transaction.
It seems to be a common misconception that if the property sells on the open market at the “best possible price obtainable out there”, then that must be what the property is worth and the existing mortgagee will “just have to accept the sale”. The reality is that the existing mortgagee holds the cards and is under no obligation to agree to release the property for any amount less than what is owing to it.
Recently we have come across several transactions where the sale price of the property, after deduction of costs, does not cover the amount owing to the seller’s mortgagee and the mortgagee has refused to release the property from its mortgage, effectively stopping the sale.
Of concern is the consequences of this happening. We have heard of a case where the transaction has proceeded all the way to settlement with the buyer’s representative arriving at the settlement venue on the agreed date with full settlement monies only to be told at that stage that the seller’s mortgagee would not settle!
At this point, the buyer may already have incurred substantial costs in the form of its legal representative’s professional fees and disbursements (usually not refundable as all the work has been done), stamp duty paid (usually refundable but takes some time to obtain the refund), moving arrangements and materials that may have been purchased for renovation purposes or new furniture for the house. It is understandable then that a buyer would not be happy and would almost certainly be looking for compensation from someone – and that someone would be the seller as the buyer usually does not have any rights against the seller’s mortgagee.
Whereas in the past, the standard terms of the REIQ contract only made provision for rights that the seller would have against the buyer if the buyer defaulted on its obligations under the contract, the current standard conditions have evened
out the playing field and now buyers have the same rights to sue for damages, specific performance or both. Sellers therefore put themselves in a precarious position if they do not take steps to protect themselves in contracts where there is a risk that the seller’s mortgagee will not release the property.
What can sellers do to protect themselves
The seller should, before the property is put on the market, discuss the situation with their financier. This would give the seller a clearer indication of exactly what price would need to be achieved in order to cover all expenses – sellers should not just rely on their latest bank statement to determine the outstanding balance because there could be break costs or other amounts (such as credit card debt) that the financier may want discharged on release of the mortgage. The seller may also find that other arrangements can be made with the bank to facilitate the sale even if the property is sold for less than the outstanding amount (perhaps transferring part of the debt to other security that the seller has).
It is also recommended that the seller should contact their solicitor to draft an appropriate clause to be inserted into the contract to cover the seller in the event that the existing mortgagee does not agree to release the property.
What can buyers do to protect themselves
Research information about the property and ask as many questions as possible of the real estate agent. Warning signs are knowing that the seller is forced to sell the property, outstanding and arrear outgoings such as council rates and levies and search results showing details of legal proceedings against the seller in a Court of Law by a bank.
Discuss your proposed purchase with your solicitor before you make a written offer to the seller and have your solicitor draft a special condition for the contract, to make the contract subject to the seller’s legal representative providing written confirmation that the seller’s mortgagee will consent to the sale within a certain period (say perhaps 14 days) of the contract being entered into. Do not accept a clause which merely states that the contract is subject to the seller’s mortgagee providing a release of mortgage at settlement as this could put you in the same position as the scenario described above.
The above precautions may not work in all cases but they could certainly reduce the risks of going through the process without a successful result at the end.
At McColm Matsinger Lawyers, as part of the comprehensive service that we provide, we are always happy to discuss your matter and review your contract of sale before you sign it to ensure that your rights are protected and that your transaction will run smoothly.
McColm Matsinger Lawyers
Ph: (07) 5443 1800
Liability limited by a scheme approved under professional standards legislation