There have been two South Australian cases that have caught my eye in the last year about subject to finance conditions for contracts for the sale and purchase of land. The first was back in November with the Full Court decision of Margush v Maddeford [2014] SASCFC 129 and somewhat more recently there is the District Court judgment of Judge Tracey in McInnes v Davies & Anor [2015] SADC 88, which was handed down on 4 June.

It’s very common for finance to not be approved within the timeframe envisaged by a land contract, leaving both vendors and purchasers in a predicament about the termination of the contract.

Margush should provide some comfort to purchasers. The purchaser failed to obtain finance but never exercised its right to terminate the contract due to the lack of finance. The vendor claimed damages against the purchaser asserting that the purchaser was obliged to buy the land if the purchaser had not invoked the protection of the finance condition. The Court held that even though the contract remained on foot, the purchaser was not obliged to go through with the purchase unless and until finance was approved.

But that doesn’t mean that a purchaser can forget about bothering to terminate when finance is not approved. The situation changes if finance is approved at a later date, because the parties may then be forced to proceed (at least for most South Australian contracts), and until the contract is terminated the purchaser is normally obliged to keep trying to get a loan. If finance is approved later, then it may not leave enough time to get the loan sorted before the settlement date, potentially leading to the purchaser being in breach of the contract.

McInnes should be seen as a warning to those purchasers who don’t adhere strictly to the special conditions. Here the purchaser belatedly obtained approval, and wanted to proceed with the purchase, but the Court held that the approval was insufficient.

Some of the key facts:

  • Finance was due on 24 April, which date was subsequently extended to 16 May.
  • The finance was to be through Zobel for not less than $394,250 and by way of a loan of 30 years.
  • On 26 May the vendors started moving towards terminating the contract.
  • On 27 May the agent was emailed a letter from the NAB purporting to be a finance approval letter.
  • A notice of termination was prepared on 27 May and dated 26 May but was not provided to the purchaser at that time.
  • On 5 June the purchaser’s lawyer wrote to the vendors stating that the contract was still on foot.
  • On 6 June the vendors sent to the purchaser a copy of the first notice and another notice.
  • The finance offered to the purchaser ended up being with NAB for $394,000 and by way of a loan of 25 years and with a slightly different interest rate.
  • To make matters worse, while the contract was still on foot, the vendors entered into a contract with another purchaser and that led to a caveat dispute.

The Court had to decide whether or not the purchaser had waived the special condition at some point (meaning that the purchaser chose to make the contact unconditional) and whether or not the finance condition had been met by way of the NAB’s approval advice letter. Either would have won the case for the purchaser, but in both cases the Court found for the vendor. The waiver point is important in a number of respects, and lawyers should keep it in mind when these disputes crop up, but I won’t dwell on it now.

The special condition provided that “the Purchaser must deliver to the Vendor written notice signed by the Lender that the Lender has agreed to grant the loan” but it was held that the “NAB letter did not agree to grant finance in the terms specified by the special condition”. The relevant part of the reasons for judgment is fairly short, but the decisive point seems to be that the NAB approval letter did not specify any details of the terms of the loan other than that finance had been approved to assist with the purchase. This suggests that if an approval letter does not state that it is for a loan on the same terms as those set out in the contract then it may not be adequate (depending on the contract).

It was also held that the terms of the actual finance offer were not as required by the contract and the Court also queried whether or not the emailing of the approval letter to the agent could be valid notice for the purpose of the special condition. Those issues were not fully explored by the judgment.

It will be interesting to hear/see whether the purchaser has sought to appeal. The purchaser has previously made one appeal to the Supreme Court regarding the related caveat dispute and may see this as a harsh result considering that on the face of it, suitable finance had been approved and the vendors had received notice of it via their agent, even if that notice was not given strictly in accordance with the contract. In the absence of an appeal the purchaser will presumably be liable to the vendors for a great deal of costs and for any losses sustained by the vendor because the sale did not proceed.

This case demonstrates that it is very important to pay attention to the actual requirements of the contract, not merely what is industry practice or what is convenient. I have seen many approval letters that would suffer from the same problem in McInnes and it is by no means uncommon for finance approvals to be dealt with very informally.

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