Category Archives: Property Law

Damage

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When a buyer agrees to purchase a property from a seller and the parties then sign a contract of sale, settlement of that transaction, that is when actual ownership of the property passes from seller to buyer will typically occur at some point in the future, generally 30, 60 or 90 days from the day of sale.

During this period between sale and settlement, who is responsible if any damage to the property occurs, is it the buyer or the seller?

A starting point is General Condition 24.1 contained in the contract of sale, which obligates a seller ‘to deliver to the property to the buyer in the same condition it was on the day of sale.’ This means the seller will carry the risk of damage to the property until settlement and must ensure the property is maintained in the same condition it was, at the day of sale.

However General Condition 24.2 also contained in the contract of sale provides for an exclusion for ‘fair wear and tear.’

This means should damage result in the normal course of owning a property, the seller will not have to repair the damage and the buyer will have to accept the property in that condition. Such an example could include the breakdown of a wall oven.

If the seller was to replace the wall oven, the property is in fact being put in a better condition than what it was at the time of sale, remembering the seller only has to keep the property in the same condition.

Conversely should damage occur that is outside of normal property ownership, such as accidental damage, the seller must repair that damage.

At settlement should the property not be in the same condition as at the day of the sale, the seller will be breaching the terms and conditions of the contract of sale.

Depending on the amount of damage to the property, the parties may chose to activate General Condition 24.4. In the event of a dispute and in order not to delay settlement, the buyer is entitled to request that an amount, up to $5,000.00 be withheld at settlement subject to the buyer also contributing an equal amount of funds.

These funds are then held in trust and the parties will attempt to settle the matter post settlement. Funds will then be released in accordance with that settlement.

However if there is major damage to the property, the buyer may elect to delay settlement until such time as the property is reinstated to the same condition it was as at the day of the sale. In this event the seller may not seek penalty interest for the delay in settlement.

Should the property be substantially destroyed, the buyer would be within its rights to terminate the contract of sale.

As the seller carries the risk of damage until settlement, the buyer is not obligated to insure its interest in the property, as they can rely on the sellers insurance to make good any damage.

However the seller is not compelled to insure its property, meaning that in the event of damage prior to settlement, there may not be funds to effect repairs that may jeopardise settlement.

Some purchasers will go the expense of insuring their interest in the property to ensure that in the event of damage prior to settlement, there will be funds to make any required repairs.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Adam Zuchowski is a principal property lawyer with Network Legal & Associates.

Contract of Sale and Breach

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Any contract be it for the purchase of property or otherwise will create rights and obligations for the parties to that contract.

In the context of a Contract of Sale for property this essentially means that the seller must deliver the property to the buyer and the buyer must pay the seller the purchase price on the settlement date. But what happens if one or both parties can’t. For example what if the buyer is not in a position to settle by the due date and requires a few extra days to get their finances in order.

Such instances although relatively common, still technically amount to a breach of the Contract of Sale, albeit a minor one.

In these instances general condition 25 which is contained in every Contract of Sale provides that if the buyer cant settle on time, the buyer must pay to the seller compensation in the form of penalty interest on account of loss that the seller may suffer as a result of the delayed settlement.

General condition 26 of the Contract of Sale provides the rate of interest to be charged in these circumstances is to be 2% higher than the current penalty rate.

As a matter of practicality, once the buyer and seller agree on the amount of interest that is to be paid, which is purely a mathematical exercise, the additional penalty interest will be paid at settlement and the breach will be rectified.

In these circumstances the seller is also entitled to claim ‘reasonably foreseeable losses’ in addition to penalty interest. Traditionally the Dispute Panel has taken a very limited view of what actually constitutes a ‘reasonable foreseeable loss’.

In order to widen and make certain what constitutes a ‘reasonable foreseeable loss’ a special condition can be drafted and inserted into the Contract of Sale expressly specifying what is a ‘reasonable foreseeable loss’. Such items can include interest expense payable on an existing mortgage, the cost of obtaining bridging finance (if required), legal expenses in dealing with the breach and any consequential loss that may be suffered.

However it must be noted that more serious breaches can and do lead to the termination of the Contract of Sale. For the Buyer this will mean the loss of the deposit that has already been paid. Additionally the Seller will also have the right to sue the buyer for any loss that is incurred as a result of the Contract of Sale being terminated.

Like the buyer, the seller too has obligations and is required to do ‘all things necessary to enable the buyer to become the owner of the land’.

What happens if settlement is delayed by the seller’s actions. Potential delays could include such things as the seller’s inability to provide vacant possession of the property or errors in the documents that the seller has to provide the buyer.

Penalty interest is only payable on money that is overdue. Generally the seller will not be required to pay the buyer any money meaning there cannot be any overdue money. Thus the buyer is unlikely to be entitled to any penalty interest.

What the buyer may be entitled to is compensation for those losses that have reasonably been incurred. Again a very narrow view has been adopted of what is actually a reasonable foreseeable loss.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Co-ownership

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Pooling resources can be a win-win

Co-ownership is when two or more parties, be they family members, friends or fellow investors come together, pool their resources for the purpose of jointly purchasing and sharing in the ownership of a property.

There are many benefits of co-ownership:

  • The pooling of resources provides a more cost efficient entry into the property market by spreading the entry costs, such as the deposit, stamp duty and legal fees amongst all the co-owners;
  • The pooling of resources further provides for the sharing of the ongoing expense of ownership, such as rates, taxes and maintenance outlays.
  • The ability to increase your borrowing and repayment capacity;
  • Your co-owner is loyal and trustworthy; and
  • It can be a rewarding experience co-owing a property with family and or friends.

However if the transaction is not properly structured and documented before purchasing a property, it can end in expensive and time consuming litigation, stress, losses and ruined relationships.

Prior to the co-owners commencing a search for a property or even drafting and structuring an agreement, the very first step will require each potential co-owner to ask and honestly answer if all parties:

  1. Have the same investment philosophy and objectives; and
  2. Each party possesses the same appetite for risk.

If all the potential co-owners answer yes to the above questions, the next step is to formulate an agreement that will provide a framework that governs the transaction and life of the investment.

Such an agreement is known as, surprise surprise, a ‘Co-Owners Agreement’.

The Co-Owners Agreement should accurately reflect each party’s rights, obligations and contributions. Importantly the agreement should also provide for a mediation and dispute resolution mechanism in the event that a disagreement arises amongst the co-owners.

The agreement should also provide a formula for one or more of the co-owners to exit the investment, cash out their initial contributions and hopefully, share in the profit.  Other considerations might also include the right of one co-owner to live in the purchased property or a prohibition against a co-owner mortgaging or encumbering their interest.

The Co-Owners Agreement should also make it very clear to the parties how the property is to be managed on a daily basis, who is to be responsible for that management and limits of authority on amongst other things, incurring costs on behalf of the collective.

If the aim is to tenant the property, who will deal with tenant and or managing agent. Who has the authority and what is the limit of that authority to make ongoing payments in respect of rates, maintenance or capital expenses. Who will maintain books of accounts and report back to the other co-owners.

By taking the time and effort at the front end of the transaction to properly structure a Co-Owners Agreement, all parties will be certain as to their rights and obligations and disputes can be avoided or at the very least mitigated at the backend.

As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.

Adam Zuchowski is a Principal Solicitor at Network Legal & Associates. Adam is well known for his work within the property sector and has previously written for many publications including a regular column in the Herald Sun.