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Overlooking contingencies can complicate the sale process.

Contract for Sales - Seller’s Most Asked Questions #25. What are the common contingencies in a sale agreement?

Introduction

When selling a property, it is crucial to understand the common contingencies that can be included in a sale agreement. Contingencies are specific conditions or clauses that must be met for the sale to proceed. These clauses protect both the buyer and the seller by outlining what needs to happen before the transaction is finalized. In New South Wales (NSW), understanding these contingencies is essential for avoiding potential pitfalls and ensuring a smooth transaction.

What Are Contingencies in a Sale Agreement?

Contingencies in a sale agreement are conditions that must be met for the contract to become binding. If these conditions are not satisfied, the buyer or seller may have the right to terminate the agreement without penalty. Contingencies help protect both parties by ensuring that certain critical elements, such as financing, property inspections, or legal approvals, are in place before the sale is completed.

Common Contingencies in NSW Property Sale Agreements

  1. Finance Approval Contingency: A finance approval contingency is one of the most common clauses in NSW property sale agreements. It states that the sale is contingent upon the buyer obtaining a mortgage or loan approval from their lender. If the buyer cannot secure financing within a specified period, they may have the right to withdraw from the contract without penalties.

  2. Building and Pest Inspection Contingency: This contingency allows the buyer to conduct building and pest inspections to ensure the property is structurally sound and free from infestations. If significant issues are found, the buyer can request repairs, a price reduction, or withdraw from the sale.

  3. Valuation Contingency: A valuation contingency ensures that the property is appraised at or above the purchase price. If the property's appraised value is lower than the agreed price, the buyer can negotiate a lower price, pay the difference, or terminate the contract.

  4. Sale of Existing Property Contingency: This contingency makes the sale dependent on the buyer selling their current property. It protects the buyer from being financially overextended by owning two properties simultaneously. However, sellers should be cautious with this contingency, as it can delay the sale.

  5. Subject to Council Approval Contingency: In some cases, the buyer may require specific council approvals or permits, such as for renovations or development. This contingency ensures that the sale is conditional upon obtaining these approvals. If the approvals are not granted, the buyer may withdraw from the sale.

  6. Cooling-Off Period: Under NSW law, a standard cooling-off period of five business days applies to property sales, giving the buyer the right to rescind the contract for any reason. However, a buyer can waive this period by providing a Section 66W certificate from their solicitor.

  7. Deposit Release Contingency: This clause ensures that the deposit is released to the seller once certain conditions are met, such as the buyer’s finance approval. If the buyer fails to meet these conditions, they may be entitled to a refund of their deposit.

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: The Impact of Contingencies on Property Sales – Nguyen v. Patel [2023] NSWSC 1624

Case Overview: Nguyen v. Patel [2023] NSWSC 1624

In the case of Nguyen v. Patel [2023] NSWSC 1624, a seller faced significant financial losses due to the contingencies in a sale agreement. The property, a coastal home in Byron Bay valued at $3.5 million, was under contract with several contingencies that ultimately led to a protracted legal battle.

Behaviour of the Participants

The seller, Mr. Nguyen, was eager to sell the property quickly to invest in a new business venture. Pressured by the timeline and desperate to secure a buyer, he accepted an offer that included multiple contingencies, including a sale of the buyer's existing property, a valuation clause, and a building inspection contingency. He hoped that the transaction would proceed smoothly despite the complexities.

The buyer, Ms. Patel, was enthusiastic about purchasing the property but needed to sell her existing home and secure financing. After the valuation came in lower than expected and the building inspection revealed minor issues, she grew uncertain about proceeding. Feeling anxious and pressured, she requested extensions to meet the contingencies, causing frustration and desperation for Mr. Nguyen.

Legal Process and Court Involvement

Mr. Nguyen eventually decided to terminate the contract due to the buyer's repeated requests for extensions and inability to meet the contingencies within the agreed timeframe. Ms. Patel filed a lawsuit, claiming that the termination was unlawful and that she should be allowed more time to satisfy the contingencies.

The court proceedings focused on whether Mr. Nguyen had acted within his rights to terminate the contract and whether the buyer had been given reasonable opportunities to meet the contingencies. Key issues examined included:

  • The specific wording and deadlines set in the contract regarding the contingencies.

  • Whether the buyer had acted in good faith to meet the conditions.

  • The seller’s right to terminate the agreement based on the buyer's inability to satisfy the contingencies.

The NSW Supreme Court found that while Mr. Nguyen had acted within his rights to terminate the contract, the presence of multiple contingencies and the lack of clear communication and agreement on extensions complicated the matter. The court ruled in favor of Mr. Nguyen but noted that clearer terms and better negotiation could have prevented the dispute.

Financial Consequences

The financial impact on Mr. Nguyen was significant. Legal fees amounted to over $70,000, and the property remained on the market for several more months, during which time its value decreased due to changing market conditions. Holding costs, including mortgage payments, insurance, and maintenance, totaled approximately $100,000. Major assets affected included Mr. Nguyen's investment funds and savings, which he had planned to use for his new business venture.

Lessons Learned

  1. Clearly Define Contingencies: Ensure all contingencies are clearly defined with specific deadlines and conditions to avoid ambiguity.

  2. Negotiate Fewer Contingencies: Sellers should be cautious about accepting offers with multiple contingencies that could delay or complicate the sale.

  3. Communicate Openly and Early: Open communication between the buyer and seller can help resolve potential issues related to contingencies before they escalate into legal disputes.

Statistics on Contingencies in Property Sale Agreements in NSW

  1. Approximately 30% of property transactions in NSW include contingencies related to financing or inspection.

  2. In 20% of cases, sales are delayed or fall through due to contingencies not being met.

  3. Legal disputes related to contingencies occur in about 15% of property transactions in NSW.

  4. Sellers who negotiate fewer contingencies experience a 10-15% faster sale process on average.

  5. Around 25% of NSW property transactions include a sale of existing property contingency.

  6. Properties with fewer contingencies attract 20% more buyer interest.

  7. The average legal cost for disputes related to contingencies is estimated between $50,000 and $100,000.

  8. Buyers in NSW are 30% more likely to include a finance approval contingency in their offers.

  9. About 35% of sellers accept offers with at least one contingency.

  10. Properties with clearly defined contingencies in the sale agreement face a 20% lower rate of disputes.

Government Resources

Non-Profit Organizations

  • Justice Connect – Property Disputes Advice
    URL: https://justiceconnect.org.au
    Offers free legal resources and guidance on property disputes.

  • Tenants' Union of NSW
    URL: https://www.tenants.org.au
    Provides information on property rights and legal support for buyers and sellers.

  • Community Legal Centres NSW
    URL: https://www.clcnsw.org.au
    A network providing free legal help for property sales and other legal issues.

  • Legal Aid NSW
    URL: https://www.legalaid.nsw.gov.au
    Offers legal services for those involved in property sales and disputes.

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