Can You Terminate Your Property Contract? The Serious Risks of Defaulting Under a Contract

Can You Terminate Your Property Contract? The Serious Risks of Defaulting Under a Contract

So, you entered a contract to purchase/sell a property and now you want to terminate. The main question is, are you able to terminate the contract?

The answer is yes you can, theoretically, terminate at any time before settlement. However, you need to consider whether terminating is reasonable, or you may open yourself to a floodgate of court claims and extra payments you need to make. The answer to whether you can reasonably terminate your contract, ideally cost-free, will depend on which party you are in the Contract and which stage the Contract is at.

Seller’s ability to terminate.

Generally, a seller has only two grounds for termination once they have entered into a Contract of Sale. The two times the Real Estate Institute of Queensland (REIQ) Contract allows a seller to terminate the contract is if the buyer fails to satisfy a key condition by a due date, or the buyer defaults under the contract. The seller’s ability to terminate relies absolutely on the buyer not completing a condition of the contract on the date they were meant to do so.

If the Seller wants to give themselves the extra opportunities to terminate (for example, allowing the seller to accept a better offer), then the seller must include this in the Contract special conditions. By including them in the special conditions, it gives the buyer the opportunity to consent to giving the seller extra termination privileges.

Buyer’s Termination Rights – Before the Contract is Unconditional

Before the Contract is unconditional, the buyer has up to 4 options for terminating the Contract:

1. Cooling-off

Every buyer buying a residential property, unless purchased at auction or waived by the buyer, has a legislative right to terminate the contract within the first 5 business days. You don’t have to have a valid reason for terminating the contract, you could just simply change your mind. However, if the buyer terminates under cooling-off, they will be sacrificing up to 0.25% of the Contract purchase price

2. Building & Pest

If the Buyer completes the required section (ie. how many days they need for building & pest), then the Contract will be subject to a building & pest condition. This will allow a buyer to terminate a Contract if there are building or pest issues. That being said, the Buyer must act reasonably when terminating the Contract under this condition. To prove the Buyer is acting reasonably, the Buyer must provide a copy of the building & pest report when terminating and should state what are the building & pest issues they are relying on to terminate the contract (ie. termite damage would likely be seen as reasonable ground of termination, however, a missing doorknob would not be seen as reasonable grounds for termination).

3. Finance

So long as the buyer has completed the three sections on page 4 of the REIQ Contract (the finance amount, who the lender will be, and the finance date) then the Contract will be subject to a finance condition. If the Buyer cannot get a loan on terms satisfactory to the Buyer, then they can terminate the Contract. It is not just whether the buyer can obtain a loan, but whether they can obtain a loan on terms satisfactory to the Buyer. This gives the Buyer wide discretion as to whether they are happy with the loan they can obtain, they don’t have to provide proof to the seller that they can’t obtain a loan.

4. Special conditions

It is common that a buyer may request to insert special conditions to the Contract which gives them extra options to terminate, especially when the property is a Unit or Townhouse. Some common special conditions include due diligence and inspection of body corporate records. If the buyer has these special conditions drafted correctly, then they should expressly state that the buyer can terminate the contract if they are not satisfied with the results. This will give the buyer wide discretion to determine what they are willing to proceed with and therefore, more options to terminate the contract.

Seller/Buyer Termination Rights – After the Contract is Unconditional

Once the Contract becomes unconditional, which means all the conditions have been satisfied, it is very difficult to terminate the contract. This is because the buyer had opportunities (during finance and building & pest) to exit out of the contract and actively chose to proceed.

Essentially the only way to get out of a contract after it is unconditional is if the other party has done something that puts the other party at a significant disadvantage, something the innocent party could not have accommodated for. The most common situations are:

• if the seller has failed to provide the buyer with a body corporate disclosure statement if the property is managed by a body corporate;

• seller fails to disclose any court proceedings that may affect the property.

• there’s an unregistered lease or easement that wasn’t disclosed and would materially prejudice the buyer if they completed the contract (i.e.. a failure to disclose a tenancy on a property that the buyers want to move in to); and

• error in the property’s boundary or area which materially prejudices the buyer.

Default

If the Contract is unconditional and the buyer or seller cannot settle by the settlement date (or a settlement date extended under clause 6.2), then that party is considered in default.

If the buyer cannot settle, then the seller can either affirm or terminate the contract. If the seller affirms the contract, then it may sue the buyer for damage (from delayed settlement) specific performance to settlement the contract or both. If the seller terminates the contract, then the seller can keep the buyer’s deposit, take back possession of the property (if possession was already given to the buyer), resell the property, and sue the buyer for damages (such as difference in resale contract price and expenses connected to resale price).

If the seller cannot settle, then the buyer can either affirm or terminate the contract. If the buyer affirms the contract, then it may sue the seller for damage (from delayed settlement) specific performance to settlement of the contract or both. If the buyer terminates the contract, then they will receive their deposit back and sue the seller for damages.

If you have any questions or require assistance with a conveyancing matter in Queensland, then please contact the property team at My Property Protect for more information.

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