Selling property? How to make a binding contract and not be sued! – Part 4
In the last three newsletters we discussed what information a Seller should disclose to a Buyer when selling a property and the potential consequences of failing to do so. In addition to the points already discussed in the last three newsletters, Sellers and Buyers should take note of the following:
It is possible that any improvements on the land (ie. houses and sheds) may not be lawfully occupied unless a Final Building Certificate has issued.
A Certificate is issued by the local Council or private building certifier for each building permit issued on or after 1 April, 1976 (which is when the Building Act 1975 came into force). The Certificate is issued once a final inspection of the building work has been performed and confirms that the building work complies with all Council requirements and building laws at the time. The inspector will consider things like if appropriate cyclone rated building materials have been used and if the building complies with current fire safety laws, amongst many other things.
If the building or improvement was built prior to 1 April, 1976, no Final Building Certificate is required (given that the Building Act didn’t exist at the time the building was constructed). However, if a building built prior to 1976 but has had improvements, extensions or renovations carried out after this date, then these improvements, extensions or renovations will require their own Final Building Certificate.
If the house does not have all its relevant Final Building Certificate/s, then a Buyer may have a right to terminate the Contract up to settlement. This is because under a Contract a Seller represents to a Buyer that they are selling a ‘dwelling’ that can be lawfully occupied.
It is therefore recommended that a Seller finds out if they hold all Final Building Certificates for the dwelling and any sheds on the land and if not, that this is addressed prior to entering into a Contract with the Buyer. There are various options available to a Seller if they don’t hold the required Certificates, including doing things necessary to obtain them from Council, or inserting a clause into the Contract disclosing this to the Buyer and confirming that the Buyer accepts the dwelling and any sheds on the land on an “as is where is” basis and accepts that they may be unapproved structures.
Leases held over the Land
If a Seller leases all or any part of their property to any third party and sells their property to another party, the full particulars of such leases must be disclosed to the Buyer in the Contract.
Within 7 days of the Contract being signed, the Seller must provide the Buyer with a copy of all written lease agreements (and all amendments and other arrangements) in place, so that the Buyer can satisfy itself of the terms of the leases prior to going ahead with the purchase.
If the Seller does not disclose the existing leases to the Buyer, the Buyer will have a right to terminate the Contract up to settlement. If the Seller provides the leases to the Buyer but the Buyer isn’t satisfied with the terms of the leases, the Buyer can terminate within 7 days after receiving them (unless the Seller has inserted a special condition into the Contract noting that the Buyer is deemed to have accepted the lease terms and has no rights to terminate the contract).
If the Buyer is not informed by the Seller of the existence of a lease, then the Buyer may be stuck with the lease, in instances where the lease is for 3 years or less or if the lease is registered on the title (as the Buyer is deemed to have received notice of it by conducting a title search over the property).
If the lease is for more than 3 years or includes option terms that extends the lease term by more than 3 years when exercised, and it has not been registered over the title and the Seller has not disclosed the lease to the Buyer prior to settlement, the Buyer can refuse the existing lease and eject the Tenant from the property following settlement. Though practically, this can be a difficult, lengthy and expensive process.
The other risk the Seller runs when not disclosing all leases to a Buyer prior to settlement, is there is a clause found in most leases providing a warranty to the Tenant that if the Landlord (aka. the Seller) ever sells the property, the Landlord will disclose the lease to the Buyer and get the Buyer to sign a document confirming they agree to be bound by the lease as the new landlord. A breach of this clause means the Tenant could have a right against the Seller (as Landlord) to sue for damages.
Whenever buying or selling property (including farmland), it is essential that you engage an experienced property lawyer to assist you to ensure you enter into a valid Contract and all important information relating to the property is disclosed, which will reduce any issues or complications arising during the conveyancing process or following settlement.
The content of this newsletter is to provide a general guide on this topic. Please contact our friendly team for professional advice in relation to your specific circumstances.