1. In Brief

If a buyer is purchasing land 'subject to finance' using the standard REIWA contract and fails to apply to the relevant lender for finance, they will have breached the contract.

A mortgage broker advising a buyer that the lender 'will' decline the application is not enough. The buyer should ensure their finance application is actually made to the lender.

If using the standard REIWA contract, we suggest some amendments to reduce risks to the buyer.

2. Issue

The case of Dodds v Kennedy [No 2] [2011] WASCA 131 highlights that care must be taken when using the standard REIWA Subject to Finance clause.

The case concerns a buyer's obligation to apply for finance under the REIWA standard Contract for Sale of Land by Offer and Acceptance form (Contract).

3. Facts

  • Mr and Mrs Dodds (Buyers) and Mrs and Mrs Kennedy (Sellers) entered into a sale contract for a house in Hillarys using the standard Contract.
  • The  Buyers  struck  out  the  box  headed  'Finance  is  NOT  applicable'  and  completed  the  box headed 'Finance clause is applicable'. In the box, the Buyers specified the ANZ bank (ANZ) as the lender, the amount of finance and the payment date.
  • Approximately one week later, the Buyers met an accredited ANZ mortgage broker (Broker). The Broker was not entitled to grant approval for loan applications. The Broker advised the buyers that they did not comply with the criteria for an ANZ loan.
  • The  Buyers  wrote  to  the  Sellers explaining  that  their finance  broker  had  advised  that  they could not get approval.
  • The Buyers believed the Contract had ended and so did not submit any loan application to the ANZ, or any other bank, and did not settle on the settlement date. They then asked for their deposit back.
  • The Sellers issued default notices and terminated the Contract. The Sellers sold the property to another purchaser and sued the Buyers for damages.

4. Decision

  • Initially, Justice Bowen of the Supreme Court of Western Australia held that, amongst other things, the Buyers had breached the Contract and were liable for damages, interests and costs.
  • The Buyers appealed the decision to the Supreme Court of Western Australia (Court of Appeal) (Court).
  • The Court rejected the Buyer's appeal.
  • Whilst there were 2 separate judgments from Justice Pullin and Justice Murphy, in summary, the Court held the following:
  • An application for finance approval must be made to a lender as defined in the contract and one which is actually capable of approving a finance application.
  • If the buyer nominates a specific lender in the Contract, then the buyer must make an application to that specific lender
  • If the buyer appoints a mortgage broker, the mortgage broker must, on behalf of the buyer, apply for a loan from a lender or finance provider
  • If the mortgage broker does not do this, the buyer will not comply with the Contract.
  • In the Contract, sub-paragraph (b) of the definition of lender is the default provision which applies when no financier is nominated but the buyer does sign the 'Finance clause is applicable' box. In this case, the buyer must attempt to get finance approval from one of the entities in the definition.
  • The Buyer's nominated ANZ as their lender and they failed to apply to ANZ. This was a breach of the Contract. The Court affirmed Justice Bowden's decision and dismissed the Buyer's appeal.

5. How this decision affects you

If a buyer is purchasing land 'subject to finance' using the standard Contract which has already been entered into, and is unamended,

  • A letter from a mortgage broker advising finance has been declined will not suffice to fulfill the 'subject to finance' condition in the Contract.
  • Without any amendment to the Contract, the legal position is as follows.
    • If the buyer nominates a specific lender in the Contract, then the buyer must apply for finance from that lender. Failure to do this will be a breach of the Contract.
    • If no lender is nominated, then the buyer must apply for finance from a lender specified in sub paragraph (b) of the definition of lender in the Contract.
    • Failure to submit an application to a lender is a breach of the Contract.
    • A mortgage broker advising that a finance application to a lender will be declined, for example in a 'Non Approval Notice', does not constitute an application to a lender. Therefore, the buyer would still be in breach of the Contract.
    • A buyer using a mortgage broker should ensure that their finance application is made to the relevant lender. It is not enough that the mortgage broker advises the buyer that the lender 'will' decline the application (if they have not actually submitted it).
      In this case, the buyer's credit rating may be damaged by a declined application. However, the other alternative is that they are sued for breaching the Contract (which could be a substantial amount of damages). The credit rating damage is preferable to the risk of being sued.
  • If the buyer is purchasing land using the standard Contract and has not yet entered into the Contract, they should consider amending the Contract to include the following:

    There are 2 options.

    Option 1:

    The buyer can amend the definition of lender in the Contract to remove as much uncertainty as possible and remove any reference to a mortgage broker.

    The amendment should delete (by scoring through and initialling):

    • any reference to 'mortgage broker';
    • the words:

      (A)'if the buyer makes a finance application to, or';

      (B)'in each case is'; and

      (C)'carrying on business in Western Australia'.

    The definition of Lender would then read:

    'Lender means:

    • the lender or mortgage broker nominated in the Schedule; or
    • if the Buyer makes a finance application to, or if no lender is nominated in the Schedule then, any bank, building society, credit union or other institution which makes loans and in each case is carrying on business in Western Australia or a mortgage broker carrying on business in Western Australia'.

    This gives the greatest certainty, however the downside to this option is that a buyer has no ability to apply to a mortgage broker. They are required to make an application to either the lender specified or to any other lender, and if rejected, their credit rating could be adversely impacted.

    Option 2:

    If the buyer wishes to attempt to make an application to the mortgage broker, and hence preserve their credit rating, the second option is to amend the Contract to:

    • again delete the words:

      (A)'if the buyer makes a finance application to, or' (as above); and

      (B)'in each case is carrying on business in Western Australia' and

    • include a reference to the mortgage broker in the definition of Lender, by way of adding a Special Condition:

      'Special Condition 1

      Notwithstanding the provisions of clause 1, an application to a mortgage broker carrying on business in Western Australia is a Finance Application for the purposes of clause 1 if the Buyer makes an application to a mortgage broker and the mortgage CM Legal Pty Ltd ACN: 094 864 212 broker advises the Buyer in writing that in the mortgage broker's reasonable opinion the Buyer would not satisfy the requirements of a major lending institution.'

  • In any event, if a buyer wishes to take the risk of making an offer when they are uncertain as to whether or not they will be given finance from a specific lender, it would be prudent to not specify a specific lender in the Contract. This will mean the buyer can apply to any lender specified in sub-paragraph (b) of the lender definition.
  • If a buyer has made an offer using the Contract, and it is likely they will unable to acquire finance, it is recommended that the buyer still applies for finance, taking into account the above. This means they will have complied with the Contract (assuming other requirements have been complied with) and they would ordinarily be entitled to their deposit back.

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