By Russell Cocks, Solicitor
First published in the Law Institute Journal
Many contracts for the sale of land are subject to the purchaser obtaining approval of a loan. In most cases the purchaser will have undertaken preliminary inquiries in relation to the availability of finance and the application process will be something of a formality and result in an approval. Occasionally the purchaser will have overestimated their ability to borrow, or the financier will be dissatisfied with the security property, and the application will be unsuccessful. In those circumstances the contract comes to an end and any deposit paid is usually refunded.
Justice Smith in the Supreme Court of Victoria in the recent case of Umbers v Kelson [2008] VSC 348 had cause to consider the meaning of a relatively common form of finance condition that provided as follows:
“This contract is subject to the lender approving the finance of the purchase of the business by the approval date or any later approval date allowed by the vendor. The purchaser may end the contract if a loan is not approved by the approval date only if the purchaser has
- made immediate application for the loan;
- has done everything reasonably required to obtain the approval of the loan;
- serves written notice ending the contract on the vendor on or before two business days after the approval date; and
- is not in default under any other condition of this contract when notice is given.
Money must immediately be refunded to the purchaser if the contract is ended.”
The approval date specified in the contract was within one month of the date of the contract.
This form of finance condition is similar, but not identical, to the condition set out in the standard contract of sale of real estate. As can been seen by reference to ‘the business’ in the condition, it comes from a contract for the sale of a business, rather than land but, for all intents and purposes, it has the same meaning and effect as the standard finance condition in the contract of sale of real estate (now General Condition 14).
If the loan is not approved by the approval date it is common practice for the solicitor for the purchaser to write to the solicitor for the vendor to seek an extension. Such a request, without more, is presumed to place an obligation on the vendor to respond, hopefully with an extension, but if not then with notification that the contract has come to an end. Such a course of action is potentially hazardous as the vendor might not promptly respond and then claim that the purchaser has not exercised its right to end the contract within the specified time and has now lost that right.
A more cautious approach is for the solicitor for the purchaser to write, within the specified time, advising that finance has not been approved and that the purchaser accordingly ends the contract unless the vendor agrees to an extension of time for approval. Readers are no doubt nodding in acknowledgement that that is indeed their practice, or perhaps thinking that it will become their practice in light of the previous paragraph.
Unfortunately that practice did not meet with the approval of Smith J. The words used were:
“We seek an extension of one month…In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract.”
His Honour concluded that this formula failed to terminate the contract in the event that the vendor did not agree to the extension. The purchaser tried to “have his cake and eat it” and so the vendor’s inaction simply meant that the finance condition expired and the contract became unconditional as to finance.
Arguably a letter that stated ‘in the event that an extension is not agreed to, the contract is ended’ would achieve the desired result, but it seems unfortunate that the courteous mode of expression adopted by the solicitor for the purchaser should lead to an outcome entirely outside of the anticipation of the parties.
Exercising an abundance of caution, perhaps the process of making a request for an extension of time for approval of finance ought to be separated entirely from the termination process, so that the purchaser does not risk the possibility of trying to “have its cake and eat it”. Thus a request for extension should be made by or on the day set for approval and another letter sent terminating the contract if that extension is not received within 2 days of that request. However, adopting His Honour’s style of colloquial analysis, perhaps the purchaser might then be accused of “playing with fire” as now there is not one crucial date to be complied with, but two.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.