Below is Chapter 5 of our ‘Buying Property in NSW’ booklet. To read the other chapters of our booklet, click the links below:
- Chapter 1 – Introduction
- Chapter 2 – Ownership
- Chapter 3 – Sale types
- Chapter 4 – Due diligence
- Chapter 6 – Exchange
- Chapter 7 – Settlement
Once you have completed your due diligence and are satisfied with the findings, the next step is negotiating the contract. The contract of sale is a comprehensive document outlining the terms and conditions of the property purchase. Understanding its structure and the key elements within it will empower you to negotiate effectively.
Contract structure
By thoroughly understanding and reviewing these components of the contract, you can negotiate the terms of your property purchase more effectively.
Details about the purchase
Front pages
The front pages of the contract provide key details, including the parties involved, the property identifier and description, the settlement period, the purchase price, and the application of tax.
Standard contract terms
The standard contract terms are imported from the Conveyancing Act 1919 (NSW) and include fundamental legal obligations and protections for both parties. Understanding these terms is crucial, as they form the legal backbone of the contract.
It is tempting to gloss over these standard terms or defer to someone else to understand them for you. However, a property purchase is the biggest purchase most people make, and it is important to take the time to read and understand what you are committing to.
Special conditions
The special conditions are additional terms introduced to vary the standard contract terms. Special conditions can cover a wide range of topics, from specific repair obligations to additional settlement requirements. It is important to review these carefully and negotiate any terms that may not be favourable to you.
Further, any promises or representations that the vendor or their agent have made to you that you are relying on for the purchase should be recorded in the special conditions.
Details about the property
Requisitions on title
Prior to exchange of contracts, you can ask specific questions about the property that address issues like outstanding notices, disputes, and compliance with local regulations. Ensuring clear answers can help uncover any hidden issues. You will have a second opportunity to ask questions of this nature after the exchange of contracts by raising “requisitions on title” on the vendor.
Title search
A title search reveals the legal description of the property, including the current owner and any claims or encumbrances on the property. This is essential for confirming the vendor’s ownership and identifying any legal issues that may affect the purchase.
Deposited/strata plan
These plans provide a visual representation of the property’s boundaries and its relationship to neighbouring properties.
- Deposited plan: Details boundaries, dimensions, and the configuration of the land.
- Strata plan: Outlines the boundaries of each unit, car space and common property areas in strata-titled properties.
Dealings
This section covers any easements, restrictions, and covenants on the property.
- Easements: An easement grants someone the right to access part of the land without owning it. Usually, you will see an easement registered on title for specific purposes. For example, an easement for sewerage allows council or water companies to access sewer lines on the property.
- Restrictions on title: Restrictions on title limit how you can use or develop the land, such as building height restrictions. It is crucial to understand these to know what you can and cannot do with the property.
Planning certificate (Section 10.7 of Environmental Planning and Assessment Act 1979 (NSW))
This certificate provides zoning information and details on what developments can be undertaken on the property, with or without council consent. It also indicates if the property is in a bushfire-prone area, flood zone or heritage conservation area, which can affect development plans.
Sewer diagrams
These diagrams show the location of sewer lines on the property. This is relevant as building over sewer lines may be restricted by water authorities, affecting potential development.
Other documents
Additional documents that may be relevant include:
- Swimming pool certificates;
- Leases; and
- Land tax withholding certificates.
Key terms
When negotiating the contract for purchasing property in NSW, it is essential to understand and address several key contract terms. These terms can significantly impact the transaction and your obligations as a purchaser.
Deposit
The deposit clause is a significant aspect of the property purchase contract, serving as a financial commitment from the purchaser to complete the purchase. Generally, a 10% deposit is required when purchasing property. In the current market it is common for vendors to accept a reduced deposit, such as 5%. However, this must be specifically negotiated and agreed upfront. If an alteration to the usual deposit is agreed, a special condition is included acknowledging that a reduced deposit is accepted, or a deposit may be paid in instalments.
Clause 2 of the standard contract terms outlines how deposits are to be paid, held and, in some cases, invested. Usually, the deposit is placed into a trust account managed by the agent or lawyer until settlement. From the deposit, the agent’s commission is paid, and the remaining balance is given to the vendor.
Some contracts include a “release of deposit” clause in their special conditions, allowing the vendor to access the deposit before settlement. This can provide the vendor with funds earlier but comes with risk that need to be carefully considered.
If the deposit is invested in an interest-bearing account, the return on investment is typically split between the vendor and purchaser upon settlement. Despite this, the vendor will keep the balance of the deposit, and the agent will receive their sales commission from the deposit.
It is important to note that clause 9 of the standard contract terms outlines that if the purchaser defaults on the contract, they risk losing the full usual 10% deposit. This risk applies even if only a 5% deposit was initially paid, as the vendor can pursue the purchaser for the remaining 5%. There are several ways a purchaser can default on the contract, including:
- Not paying the deposit on time;
- Failing to settle on the settlement date (although there are further steps the vendor must take to terminate the contract and retain the deposit in this case); or
- Not complying with the conditions of the contract, such as lodging a caveat on the property when the contract specifically prohibits it.
Claims for compensation
Under clause 6 of the standard terms of the contract, where a contract incorrectly describes the property (e.g. land size or inclusions), the purchaser can claim compensation even if they didn’t rely on this description when they entered into the contract. However, under clause 7, if the claim for compensation is greater than 5% of the purchase price, the vendor may be able to rescind with 14 days’ notice if you do not withdraw your claim. Otherwise, the amount claimed will be held by the agent until the claim is resolved.
It is very common for vendors to amend these terms by including a special condition stating that the vendor is entitled to terminate the contract if you claim compensation. The only practical way around this is for you to conduct your due diligence on the property and ensure that you are satisfied with the description of the property prior to purchase.
Adjustments
Adjustments are essential to ensure a fair financial reconciliation between the vendor and the purchaser at settlement. Understanding these adjustment terms helps ensure a smooth and fair settlement process.
Under clause 14 of the standard terms of the contract, the vendor is entitled to receive rent and is liable for rates up to and including the adjustment date, which is often the settlement date. This means any financial responsibilities and benefits related to the property are prorated up to and including this date.
Clause 23 outlines that quarterly strata levies are adjusted as per clause 14 of the standard contract. This ensures that each party pays their fair share of these expenses based on the adjustment date. Special levies must be disclosed by the vendor. If a special levy was determined before the contract date but not disclosed, the vendor remains liable for it, even if the payments are due in instalments. The purchaser may also have the right to rescind the contract if such levies are not disclosed.
Clause 24 details that if the property is tenanted, any outstanding rent up to the adjustment date will be treated as paid. The vendor is responsible for recovering any unpaid rent from the tenant, ensuring that the purchaser receives a clean slate regarding rental income.
Under clause 13, GST does not generally apply to residential properties. It also typically does not apply to commercial properties that are subject to leases, as these are considered the sale of a “going concern”. If GST applies, the purchaser must pay the purchase price to the vendor and the GST amount to the ATO.
As at June 2024, clause 31 dictates that for property purchases over $750,000, the vendor must provide a certificate confirming they are not a foreign resident for capital gains tax withholding purposes. If the vendor does not provide this certificate before settlement, the purchaser must withhold 12.5% of the purchase price and pay this amount to the ATO. The balance of the purchase price is then paid to the vendor. The vendor will need to file an income tax return to request a credit for the withheld amount.
Work orders
Work orders are directives that require specific work to be completed on the property, typically issued by local councils or other authorities.
Clause 11 of the standard terms of contract state that the vendor is generally required to comply with any work order issued on or before the contract date. The purchaser is responsible for complying with work orders issued after settlement.
If there are any swimming pools or spas on the property, vendors must provide one of the following:
A certificate of compliance;
An occupation certificate issued within the last three years; or
A certificate of non-compliance.
If a pool or spa is non-compliant, the purchaser has 90 days from the settlement date to rectify the defects listed in the certificate of non-compliance and to obtain a certificate of compliance. If the vendor provides you with a certificate of non-compliance, you should negotiate a reduced purchase price or for the vendor to complete the compliance works prior to settlement at their cost.
Delayed settlement
A delayed settlement occurs when the property settlement does not take place on the agreed-upon date.
If the settlement is delayed due to reasons attributable to the purchaser, they may be required to pay penalty interest for each day that the settlement is postponed. If settlement does not occur on the allocated date, either party can serve a notice requiring the other party to settle within 14 days. Failure to comply with this notice can result in the termination of the contract.
Purchasers need to be cautious if the contract is terminated after the exchange. If the termination is due to the purchaser’s breach, the deposit may be forfeited, and the purchaser may also be liable for additional damages.
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The information contained in this post is current at the date of editing – 21 August 2024.
