Many people think that when they enter into a contract to sell land, the contract is unconditional once the finance and building and pest inspection clauses are satisfied. It may be surprising to learn that there are many situations where the buyer can terminate the contract and recover the full deposit, well after these clauses have been satisfied. We have written this blog post to give sellers some simple tips, to help avoid making costly mistakes. It is important to make sure that the sale contract is binding on the buyer at the earliest possible opportunity. It is also vital that the buyer pays a large enough deposit, to give the seller security if the contract is terminated because of the buyer’s default.
A standard sale contract in Queensland states that the property is sold free of all registered and unregistered encumbrances, other than those disclosed in the contract. While registered encumbrances, such as registered easements and mortgages, can be identified by doing a title search, a title search will not reveal whether or not there are unregistered encumbrances on the title. The most common unregistered encumbrances are sewerage and water mains pipes underlying the property, which the public utility provider has the right to access. The existence of such pipes may only be able to be ascertained by a local government search. By ordering a local government search before entering into a sale contract and disclosing any unregistered easements, this problem can be avoided.
Under a standard sale contract in Queensland, a buyer may terminate if the land is contaminated and this is not disclosed to the buyer. A search of the Contaminated Land Register prior to signing a contract will reveal whether or not the land is contained on the register. If it is, this will need to be disclosed to a buyer before they sign a contract.
The standard sale contract in Queensland states that if there is:
- An error in the property boundaries; or
- An encroachment by structures from or onto the property;
which is “material”, then the buyer may terminate the contract. If the error or encroachment is “immaterial”, the buyer can claim compensation from the seller for the error or encroachment. The existence of an error or encroachment can be identified by doing a survey of the property before entering into the contract. If there is an encroachment or error in the property boundaries, special conditions should be included in the contract which disclose the error or encroachment and state that the buyer will not be entitled to terminate the contract or claim compensation. With properly drafted special conditions, the buyer will not be able to terminate the contract.
Foreign Resident Capital Gains Withholding
If the market price of the property is $750,000 or more, the seller must obtain a Foreign Resident Capital Gains Withholding Clearance Certificate from the Australian Taxation Office (“ATO”) and give it to the buyer before settlement. If the seller fails to give the buyer an ATO Clearance Certificate, the buyer must withhold 12.5% of the purchase price at settlement. The ATO recommends that a seller apply for an ATO Clearance Certificate at least 28 days before settlement, to avoid any complications due to processing delays by the ATO. Failure to obtain a Clearance Certificate early may jeopardise ability of the seller settle on the due date, if it will be relying on the 12.5% of the purchase price which the buyer is obliged to withhold in order to obtain a release of mortgage and pay its costs of sale (including agent’s commission and legal fees).
If a seller is unable to settle on time due to delays or complications in obtaining an ATO Clearance Certificate, the buyer may terminate the contract and forfeit the deposit. It is therefore very important, if you are selling a property with a market value of $750,000 or more, that you apply for an ATO Clearance Certificate at the earliest possible opportunity.
The deposit amount listed in the contract should be sufficient to compensate you if the contract is terminated. If a seller in the unfortunate position where they terminate a contract because the buyer has defaulted, the seller is entitled to forfeit the deposit. In these circumstances, the seller may be liable to pay agent’s commission (even if the sale does not settle, in some circumstances), the seller may have incurred legal fees, and the property may have been off the market for the period that the property was under contract. The deposit should not exceed 10% of the purchase price, but it should be as high as possible up to the 10% limit in order to protect your interests as seller.
How can we help?
Delaney & Delaney’s fixed fee for conveyancing includes checking the contract on your behalf for the above issues before you sign it. We can also order searches and make sure that you disclose all items that you need to prior to signing a contract to give you peace of mind and make sure you are protected as much as possible. If you are planning on listing your property for sale, contact us to find out how we can help.