Subject to Finance Clauses

Monday, December 12, 2016

The standard REIWA Contract for Sale of Land includes an optional subject to finance clause. The parties to the contract can elect whether the clause should apply to the contract by signing in the “finance clause is applicable” or “finance clause is not applicable” box.
 
If a purchaser elects to enter into the contract “subject to finance” they must ensure that there is strict compliance to the terms of the finance clause, or risk the exposing themselves to liability for the purchase price of the property in the event of breach of that clause.
 
The clause provides that a purchaser must immediately make an application to a lender for finance approval and use all best endeavours to obtain that approval.
 
The recent case of Dodds -v- Kennedy [No 2][2011] WASCA 131 has clarified what it means to apply for finance approval. In that case, the purchaser made an application to a mortgage broker and was advised that their application to the lender was likely to be rejected. The purchaser was advised the this rejection could have a negative impact on any future applications for finance, and so the purchaser did not proceed to make any application to the bank for a loan.
 
The Court considered the impact of the subject to finance clause in the REIWA Contract for the Sale of Land. The Court determined that an application made to a mortgage broker did not satisfy the clause. The Court found that an application for finance must be made to an institution which is capable of actually lending money, such as a bank or credit union. Applications can still be made to a mortgage broker, but a subsequent application must then also be made to a lender.
 
Once an application has been made to a lender, the purchaser must be sure to comply with the remainder of the terms of in the subject to finance clause.
Liability limited by a scheme approved under Professional Standards Legislation.

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