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'Subject to finance' clause no longer a 'get out of jail free' card

Newshub logoNewshub 3/12/2019 Priscilla Dickinson
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Bailing out of a property agreement due to inability to get finance has just got tougher as the REINZ has announced that prospective purchasers must now provide proof where this clause is used.

Traditionally, if a finance condition was inserted into a sale and purchase agreement and the prospective buyer couldn't get finance, their word was generally sufficient to make the contract fall over.

Under changes to the finance condition in the 10th edition of the sale and purchase agreement, prospective purchasers must now provide evidence - such as a letter or email from their bank - confirming finance is declined.

Bindi Norwell, chief executive of REINZ, said that the tightening of rules around the finance clause is a result of it being used to back out of a deal when in reality, the agreement was cancelled for other reasons.

"Vendors have always been able to challenge a purchaser if they think the purchaser is using the finance clause incorrectly, but the change makes it even clearer to purchasers that they can't use the finance clause in an unacceptable way," Norwell said.

"If [prospective purchasers] can't provide evidence that they can't raise the finance, they could be forced to proceed with the purchase, or face other legal action by the vendor," Norwell added.

As in the past, prospective buyers should get advice from their lawyer and bank and involve them early. 

"It's essential that anyone looking to purchase a property takes legal advice and talks to their financial provider so they understand exactly what they're signing," Norwell said.

Steve Goodey, an experienced Kiwi property trader, said that the finance clause had sometimes been used by prospective purchasers to allow them to perform 'due diligence' - but that's not what it's designed for.

"Essentially, a finance clause is not an option to purchase - it's the vendor wanting clarity on why it is that you're holding their property off the market for a number of days before you go unconditional," Goodey said.

What people should be using is a due diligence clause to do due diligence, and a finance clause to gain finance.

"The good thing about a due diligence clause is that it basically says 'I want 10 days to consider everything that may touch, concern or affect my purchase of the property'," Goodey added.

While a due diligence clause can be a little harsh on the vendor's side, if they push back on that, the offer can be sweetened with a cash-out clause. 

"[A] 'cash out' clause basically says that you put an offer in on [the property] for 10 days and if the vendor gets an offer that's preferable to them, they can accept [it] and you [the purchaser] usually has one or two days to come forward with your unconditional at that point."

While having to provide proof that finance has fallen through levels the playing field, first-home buyers shouldn't feel pushed into making unconditional offers before they're 100 percent sure they're approved up to the level they're offering.

"It's not a five-minute job to go down and see [a] mortgage broker and get finance approved.

"People need to seek confident legal and financial advice," Goodey added.

Following over 18 months of legal and industry consultation, the 10th edition of the REINZ/ADLS Agreement for Sale and Purchase has been updated and the new requirements come into effect on Friday, 6 December 2019.  

Among smaller changes made to the agreement are an optional toxicology report condition, 'fixtures and chattels' has been replaced with new definitions and warranties, GST clauses have been revised and a new requirement for the vendor to provide tenancy documents on the settlement date.

While prospective buyers bidding at an auction are required to have their finance in-place, those negotiating on properties for sale by negotiation are well-advised to do the necessary due diligence, seek legal and financial advice and use the finance clause for it's intended purpose.

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