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Misunderstanding this can result in contractual issues and buyer withdrawal.

Contract for Sales - Seller’s Most Asked Questions #17: What is a cooling-off period?

Introduction

When selling a property in New South Wales (NSW), it’s crucial to understand the concept of the "cooling-off period." This is a critical phase in the property sale process that can significantly impact the finalization of the transaction. Sellers must be aware of their rights and responsibilities during this period, which typically spans five business days following the signing of the sale contract by both parties. However, there are exceptions and important nuances to consider.

What is a Cooling-Off Period?

A cooling-off period in NSW property law is a designated timeframe during which a buyer has the right to cancel a signed sale contract without facing significant financial penalties. This period is designed to protect buyers from impulsive decisions and provide them the opportunity to reconsider their purchase after signing the contract.

During the cooling-off period, the buyer can rescind the contract for any reason. If a buyer chooses to withdraw, they may be liable to pay a penalty of 0.25% of the purchase price to the seller. This amount is non-refundable, and the seller retains it as compensation for taking the property off the market.

Key Considerations for Sellers:

  1. Timing of the Cooling-Off Period: The cooling-off period begins once the contract for the sale of land is signed by both parties and the buyer receives the vendor's statement (section 32 statement). This period is generally five business days, although it can be extended or shortened by mutual agreement between the buyer and the seller.

  2. Exemptions from the Cooling-Off Period: Not all property transactions include a cooling-off period. For example, auctions or properties sold on the same day as an auction are exempt. Furthermore, a buyer can waive the cooling-off period by signing a section 66W certificate, which their solicitor or conveyancer must provide.

  3. Implications for Sellers: For sellers, understanding the cooling-off period is vital to avoid potential pitfalls. If a buyer withdraws within the cooling-off period, the seller loses time and may incur holding costs, particularly if they are reliant on the sale to finance another purchase. Sellers should discuss with their solicitors the possibility of requesting a section 66W certificate to remove this uncertainty.

  4. Strategies for Sellers:
    • Encourage potential buyers to seek pre-approval for financing to avoid last-minute withdrawals.

    • Consider setting conditions that would require the buyer to waive their cooling-off rights.

    • Have a backup plan in case the sale falls through, such as arranging bridge financing or keeping other interested buyers engaged.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: Costly Consequences of a Cooling-Off Period in NSW

Case Overview: Re Estate of Collins [2021] NSWSC 912

In the case of Re Estate of Collins [2021] NSWSC 912, a significant financial and emotional toll was imposed on both the seller and the buyer due to complications arising from the cooling-off period. This case involved the sale of a heritage-listed property in the affluent Sydney suburb of Paddington, valued at approximately $3 million. The buyer signed the contract but rescinded during the cooling-off period, resulting in a legal battle over the penalty and the associated costs.

Behaviour of the Participants

The seller, an elderly widow who had lived in the property for over 40 years, was desperate to sell quickly due to mounting medical bills. She felt immense pressure to complete the sale, believing it would provide the financial relief she needed. However, when the buyer withdrew at the last moment, citing concerns over structural issues that were not disclosed, her sense of betrayal and panic was palpable.

The buyer, on the other hand, had initially fallen in love with the property's charm and historical significance. However, upon further inspection and reflection, they became anxious about the potential costs of repairs and the property’s compliance with modern building codes. The buyer’s withdrawal was driven by a sense of fear and uncertainty, despite knowing the financial impact their decision would have on the seller.

Legal Process and Court Involvement

The seller disputed the legitimacy of the buyer’s withdrawal and claimed that the buyer had acted in bad faith, as they had already been made aware of the property’s age and condition. The case was brought before the NSW Supreme Court, where both parties presented their arguments.

The court examined several aspects:

  • The buyer's awareness of the property’s condition.

  • The timing and reasoning behind the withdrawal.

  • Whether the seller had provided all required disclosures.

Ultimately, the court ruled that while the buyer was within their rights to withdraw during the cooling-off period, the seller had suffered financially due to the buyer’s decision. The court upheld the 0.25% penalty but acknowledged the broader financial and emotional impact on the seller.

Financial Consequences

The financial costs were considerable for both parties. The seller incurred substantial legal fees, estimated at over $100,000, to contest the withdrawal. In addition, the property's value depreciated as it remained on the market for several more months. The holding costs, including insurance, maintenance, and council rates, added another $50,000 to her expenses.

Major assets affected included the seller's primary residence, which had been used as collateral to secure a bridge loan. The delay in sale resulted in increased interest costs, and she had to liquidate other investments to manage her cash flow.

Lessons Learned

  1. Prompt Action is Crucial: Delays in understanding or addressing cooling-off rights can lead to significant financial losses.

  2. Transparency is Key: Both parties should ensure full transparency to prevent disputes over disclosures.

  3. Seek Legal Advice Early: Engaging a solicitor at the earliest stage can help navigate potential pitfalls and prevent costly legal battles.

Statistics on Cooling-Off Periods in NSW

  1. Approximately 20% of residential property transactions in NSW involve the use of a cooling-off period.

  2. In around 15% of cases where the buyer withdraws during the cooling-off period, sellers incur additional holding costs exceeding $25,000.

  3. The average legal cost for disputes involving the cooling-off period is estimated to be between $50,000 and $150,000.

  4. 10% of cooling-off period cases escalate to court proceedings in NSW.

  5. Nearly 30% of sellers who have experienced a cooling-off period withdrawal report extended property listing times of over 6 months.

  6. Buyers pay an average penalty of $7,500 when withdrawing during the cooling-off period, based on a median property price of $3 million.

  7. The average holding cost for a property during a cooling-off period extension is $5,000 per month.

  8. Real estate values can decline by 1-2% per month for properties remaining on the market after a cooling-off period withdrawal.

  9. More than 40% of sellers who face a cooling-off period withdrawal incur additional marketing and staging costs.

  10. Approximately 5% of NSW residential property disputes related to the cooling-off period involve heritage-listed properties.

Government Resources

Non-Profit Organizations

  • Justice Connect – Legal Help for Property Disputes
    URL: https://justiceconnect.org.au
    Offers free legal resources and advice on property disputes.

  • Tenants’ Union of NSW
    URL: https://www.tenants.org.au
    Provides resources on property rights and legal support for tenants and landlords.

  • Community Legal Centres NSW
    URL: https://www.clcnsw.org.au
    A network offering legal assistance to NSW residents, including property law disputes.

  • Legal Aid NSW
    URL: https://www.legalaid.nsw.gov.au
    Government-funded legal services for those facing property law issues.

  • Australian Consumers’ Association (Choice)
    URL: https://www.choice.com.au
    Provides consumer advice and advocacy, including on property transactions.