The Importance of a Contract Review before Purchasing Property
With a hot property market, purchasers are sometimes willing to take a shortcut to make a quick and/or unconditional offer in order to secure their purchase.
Whilst purchasers are often willing to spend money on a building or pest inspection, many do not see the value in obtaining a legal review of the contract and associated sale documentation before signing the same. Some common reasons include:
- The costs and timing associated with the review and advice;
- A belief that it is a standard contract and therefore they are adequately protected; and/or
- The assumption that there is a cooling off period allowing them to terminate within 3 days of executing the contract.
As to the above:
- The costs and timing of a legal review and advice are often commensurate to a building and pest inspection and could prevent the purchaser incurring significant amounts of money.
- Whilst contracts may use the same general conditions, vendors often insert sneaky special conditions which are favourable to the vendor. Further, a review of title, planning and other authority documentation may reveal issues with the property.
- There is no cooling off period where:
- Your client buys at auction, on the day of auction of within 3 clear business days before or after an auction;
- The property is primarily used for commercial or industrial purposes;
- The property is more than 20 hectares and used for farming;
- The purchaser is an estate agent or corporate body; or
- The purchaser previously signed a contract for the property on substantially the same terms.Further, if your client is entitled to cool off and end the contract in this way, either $100 or 0.2% of the purchase price (whichever is higher) will be automatically forfeited to the vendor (for example, forfeited amount will be $1,500 for a $750,000 purchase price).
So, what can go wrong? Here are just a few recent issues that we identified for clients who sought a contract review:
- It was discovered on an off-the-plan contract that the apartment number and lot number on the plan of subdivision were different. This misalignment between apartment number and lot number could have meant the purchaser ended up with the wrong apartment!
- We identified that there was currently VCAT action in relation to an apartment building. We were able to obtain a copy of the engineering report prepared for this case and therefore were able to give the purchaser (our client) a clear idea as to potential building issues.
- A title review revealed that the government was proposing to subdivide the land sub-strata (below ground) and acquire the same for a road tunnel (with no compensation to the landowner for the acquisition). Our client chose not to purchase the property therefore avoiding possible issues of vibration, noise and/or property damage during and after works.
- We assisted in negotiating a $3,000 reduction in purchase price as a result of damaged property revealed as part of enquiries made pre-execution of the contract.
- Until a contact review, our client was unaware that a property they wished to purchase for the purpose of short-term accommodation (e.g. Airbnb) contained a restriction where any tenancy was required to be at least 30 days.
- Whilst not a residential contract, a contract for a long-term settlement of broadacre development land contained a special condition requiring the purchaser to pay for land tax and council rates from the day of sale rather than the day of settlement which would have resulted in a purchaser liability of millions of dollars.
Buying property is one of the biggest investments your clients will make - don’t let it be one of their biggest mistakes by not completing sufficient due diligence!
SMSF compliance regarding related party leases of business premises
A common situation is the purchase of business real property via your client’s SMSF and the operation of their business from the same. This is often a standard transaction, however your client must take extreme caution to ensure that sufficient documentation is in place so not to be in contravention of the Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’). A related party lease to the business entity is required to reflect an “arm’s length” commercial transaction which must include everything from rental determination, rent reviews, term and further terms to outgoings, maintenance and make good obligations. Further, other factors such as the s.66(1) SISA prohibition of related party asset acquisitions need to be considered (for example, how to deal with tenant fit out and other tenant improvements). Accordingly, the terms must be in line with ordinary market and industry practice, with evidence of benchmarking to be retained for auditing purposes.
Despite being a lease between related parties, to minimise any superannuation law compliance risk, always ensure that a lease is prepared by an appropriately qualified professional, taking into consideration all relevant requirements of the SISA.