For a variety of reasons, buyers are often tempted to put forward an unconditional offer to snatch up their dream home. If you’re attending an auction or thinking about putting in an unconditional offer to buy your dream home or next investment property, it’s important to understand exactly what you’re getting into when you sign the contract.
This article is designed to help you navigate unconditional and conditional contracts and understand the risks involved.
What is the contract of sale?
The contract of sale is an important legal document in the purchase or sale of a property. It sets out the terms and conditions agreed upon between the buyer and seller.
As a minimum the contract of sale should include:
- The particulars of the title for the property
- The purchase price
- Details of the deposit, including the amount and when the deposit is payable
- The date and location for settlement
- Agreed conditions, commonly Finance, Building & Pest Inspection and Due Diligence
The contract of sale is only binding once the seller and the buyer have both signed the document.
What is a conditional contract?
A conditional contract is a type of contract where the sale of the property will only proceed if certain conditions outlined in the contract are met. The contract is called ‘conditional’ until the conditions listed are satisfied, at which stage it becomes ‘unconditional’.
Both the buyer and seller have the opportunity to include conditions in the contract.
What are examples of conditional clauses in a contract?
Conditional contract clauses for buyers
Here are examples of typical clauses in a conditional contract that a buyer might request.
Subject to finance
The clause is designed to give the buyer time to have their finance approved by their bank or financial institution once the property is secured by the buyer. This gives the buyer a right to terminate the contract if they are unable to obtain satisfactory finance approval.
Subject to building and pest inspection
This clause gives the buyer time to organise a building and pest inspector to check the property for faults and underlying issues. If the inspection report uncovers problems with the property, the buyer may have a right to terminate the contract if they are acting reasonably.
Subject to settlement of a sale of a property
This clause is typically included when the buyer needs to settle a property currently in the process of being sold, in order to pay for a new property. If the property does not settle, the condition is normally drafted in such a way to give the buyer a right to terminate the contract without penalty.
Subject to sale of another property
This clause is similar to ‘subject to settlement of a sale of a property’. However, in this case, the buyer does not need to have a contract of sale on the property they are selling. If the buyer is unable to secure a contract of sale by a certain date, the condition is normally drafted in such a way to give the buyer a right to terminate the contract without penalty.
Conditional contract clauses for sellers
Here are clauses in a conditional contract that a seller might request.
A sunset clause
This clause allows the seller of the property to continue to market the property for sale after a contract of sale has been signed. This is usually a protection strategy if the buyer requests special long-term conditions, such as ‘subject to the sale of another property’, which can take several weeks or months. If the seller receives a more favourable offer during this time, they can activate this clause to give the buyer a short amount of time (stipulated in the contact) to make their offer unconditional. If the buyer cannot do this, normally the condition gives the seller a right to terminate the contract so that the seller can proceed with a contract with the new buyer.
Subject to a prior contract terminating
This clause lets the seller enter into a contract with another buyer while the existing contract of sale is still in process. This clause is typically used when the seller has reason to believe the contract with the original buyer will be terminated. If the original contract is not terminated, the seller can terminate the new contract without penalty.
What is an unconditional contract?
An unconditional contract is a contract where there are no conditions attached to the sale.
This means that once the buyer signs the contract, they do not have a right to terminate the contract and they must proceed to settle the contract.
As an unconditional contract is not subject to Building and Pest Inspection or Due Diligence you must be 100% certain that you are satisfied with the condition of the Property Further, as the contract is not subject to Finance Approval, even if your bank does not approve your loan you will not have the ability to terminate the contract.
For sellers, unconditional contracts provide certainty that a sale will be completed.
For buyers, an unconditional contract is often more attractive to the seller, so sometimes this may mean the seller is willing to accept a lower purchase price or in a multiple offer situation this may mean your offer is accepted over others.
How can including conditions in the contract help you?
Including conditions in the contract can protect you if you decide you want to withdraw from the contract due to your terms and conditions not being met. It’s important that you consult a solicitor to draft the conditions using the correct wording, to ensure your rights are fully protected.
What are the risks of signing an unconditional contract?
As a Buyer signing an unconditional contract naturally carries a higher level of risk, especially if the deposit amount is a significant sum as if you are unable to settle the contract, amongst other rights the Seller gains a right to retain the Deposit. Here are some of the risks you should weigh up before entering an unconditional contract:
Over and under valuation
The risk: If you overestimate the property’s value in your rush to secure it, you may unintentionally spend more money than is fair. If you are obtaining a loan your bank will carry out a valuation of the Property once you have it under contract. If this valuation comes in lower than the purchase price you will not have a right to proceed with the contract and your bank may decide that they are not going to finance the purchase as there is insufficient equity in the property to secure the loan.
What we recommend: Before making an unconditional offer on a property, you should perform research to accurately establish the property’s value. We recommend hiring a licensed valuer who can provide an independent market valuation based on quantifiable facts.
Lack of a finance clause
The risk: There’s a risk that your bank won’t approve your Loan or may not be able to advance the funds to you on time. In this case, the buyer may not be able to settle the property and will lose their original deposit.
What we recommend: Before making an unconditional offer, a buyer needs to be fully confident they will have the funds needed to settle the property, either with savings or confidence that the application for a loan will be completed within a certain timeframe.
Problems with the property
The risk: If the contract becomes unconditional without you conducting appropriate due diligence on the property, if you find out during the contract term that there are issues with the Property you will not have the right to terminate the contract.
What we recommend: The buyer should aim to conduct a thorough due diligence investigation of the property before making an offer. Do not rely on a Building and Pest Inspection that has been provided to you by the Sales Agent, remember they are the sellers agent not yours!
Final advice for conditional and unconditional contracts
Here’s our most important practical advice: Before you sign on the dotted line, always seek out legal advice from a licensed, experienced solicitor.
At Brisbane Conveyancing our standard conveyancing package includes a review of a standard REIQ contract. During the contract review our solicitor will advise you whether that contract is conditional or unconditional and will ensure that any special conditions you have negotiated are included in the contract
c Our team at Brisbane Conveyancing offers expert advice personalised to your unique circumstances. Following the advice of our legal experts will help your property transaction proceed with ease — without headaches.
Contact Queensland’s conveyancing experts, Brisbane Conveyancing, on 07 3077 6566.