When buying property in Australia, the purchase contract is critically important and must not be taken lightly. Signing blindly without carefully reviewing the terms can not only prevent you from acquiring your desired property but also result in unforeseen financial losses. Buyers in Australia need to read the purchase contract carefully to understand their responsibilities and obligations. For example, in the case study below, the parties faced a dispute over a purchase contract. Buyers should therefore pay attention to whether the contract specifies a time frame for obtaining the title deed and completing the land transfer. Today’s article serves as a reminder for property buyers in Australia, highlighting the matters that require particular attention when signing a purchase contract.

Case Study

According to The Urban Developer, as Australia’s construction crisis deepens and building material prices rise, Metricon, Australia’s largest home builder, has recently been forced to renegotiate contracts with its clients.

Metricon’s CEO Mario Biasin stated: “Some clients, mainly in Queensland, have experienced delays in obtaining their land titles.” In other words, these clients received their title deeds later than expected.

The CEO also stated that Metricon is committed to honouring every valid contract with an agreed fixed price. He noted that “Metricon operates within the law under the terms of signed contracts, and is committed to working with affected clients to find solutions suited to their individual circumstances. Unfortunately, because clients received their title deeds late, prices had already risen by the time of the delay.”

This may mean these clients first breached the terms of the purchase contract unilaterally. Metricon’s CEO Mario Biasin indicated: “We are renegotiating a small portion of unfulfilled contract commitments with clients, assisting them in signing a new purchase contract that reflects current pricing.” This means Metricon intends to cancel the previously signed purchase contracts with clients.

Around February 2022, Metricon sent letters to some clients stating: due to the impact of COVID-19 and rising building material prices, Metricon could no longer maintain the prices agreed in the original purchase contracts. If clients wished to continue, they would need to pay an additional AUD 80,000; otherwise, they would have to walk away and forfeit their AUD 20,000 deposit.

In response, some clients believed Metricon had failed to honour the previously agreed purchase contracts and are preparing to take legal action against Metricon. Housing Industry Association Chief Economist Tim Reardon said new purchase contracts will inevitably become more expensive for clients, and home-building costs will continue to rise through mid-year. Industry sources also indicated that renegotiated contracts have pushed the price of four- or five-bedroom homes up by around AUD 35,000, with construction costs at AUD 200,000.

Metricon is not the only builder feeling this strain and impact. The intensely competitive property market and rising construction costs are also affecting many other builders, hitting the construction industry hard. For example, Brisbane residential builder Privium collapsed in November 2021 owing AUD 28 million in debt. Home builder Hotondo Homes had its Tasmanian franchise enter liquidation in early 2022 due to rising building material costs.

Case Analysis

In the case above, you can see that the builder Metricon had agreed on a fixed-price contract with its clients, but because clients experienced delays in obtaining their land titles, they received their title deeds later than expected. By the time of the clients’ delay, construction costs across the industry had generally risen. Metricon therefore may have taken the position that the clients breached first, unilaterally violating the contract terms, making it impossible to deliver at the original fixed price. As a result, Metricon stated it had no choice but to renegotiate the contracts with clients.

Current competitive pressures in the property market and ever-increasing construction costs are placing pressure on both builders and clients alike. In these circumstances, we recommend that everyone engage a professional lawyer to help review all the terms of the purchase contract when signing one. Make sure your contract clearly states whether the price is fixed price, and whether a time frame has been specified for the transfer of land title, among other matters.

Sign Your Purchase Contract With Caution!

When buying property in Australia, the transaction must be handled through a lawyer — the buyer and seller do not communicate directly. An Australian property contract is at least 100 pages long and generally very difficult for a layperson to understand, so a property lawyer’s assistance is essential.

1. Exchange of Contracts and Deposit

If the buyer is satisfied with the property, everything is prepared, and both parties have reached agreement on the sale price and all other contract terms, then the buyer and seller each need to sign a separate but identical copy of the purchase contract, and exchange contract copies. To avoid unnecessary disputes, this procedure is generally recommended to be completed by each side’s lawyer.

Once the exchange of purchase contracts is complete, the buyer needs to pay a 10% deposit, i.e. 10% of the property price. For example, for a property worth $800,000, the deposit payable would be $80,000.

So who does this purchase deposit go to? There are generally two options.

The first is a Bank Check — that is, going to your own bank and drawing a cheque for the purchase deposit, for instance $80,000 (using the $800,000 property example). The recipient of the purchase deposit cheque is the Trust Account of the law firm acting for the property seller.

The second is a Bank Guarantee — that is, going to your own bank and arranging a Bank Guarantee. In other words, you open another fixed-term deposit in your own name, indicating that these funds will not be moved and are held for the developer. That way the money remains in your own bank, you can earn interest on it, and no one else can withdraw it.

Note that before the exchange of the purchase contracts, either party may terminate the contract at any time. However, once both parties have signed the contract, the contract takes effect. After the exchange of contracts, if either party breaches, legal issues and compensation may arise.

2. Cooling-off Period

After the buyer pays the purchase deposit, there is a cooling-off period. The cooling-off period refers to the buyer’s right to terminate the contract within a specified time after the exchange of contracts. The cooling-off period is calculated from the exchange of contracts between the buyer and seller. Taking New South Wales as an example, the cooling-off period is 5 business days and applies to non-auction residential property sales. The cooling-off period therefore ends at 5:00 PM on the fifth business day after the exchange. If the buyer wishes to withdraw from the purchase contract during the cooling-off period, they must pay the seller 0.25% of the purchase price.

3. 66W Certificate and Special Conditions

While the cooling-off period is a standard provision, the buyer has the right to attach a “66W Certificate” to the exchange contract. Having this document means there will be no cooling-off period. Without a cooling-off period, if the buyer wants to withdraw from the contract, they must pay the corresponding fee or penalty as stipulated in the original purchase contract — usually around 10% of the purchase price. Of course, the buyer and seller may also negotiate at contract signing whether to reduce or extend the cooling-off period.

In addition, the buyer should pay attention to the various Special Conditions in the contract, which set out in detail the buyer’s rights and obligations. For example, considerations regarding the use of common facilities, the requirement for overseas buyers to submit an application to FIRB, pre-occupation inspections, and provisions on outgoings such as council rates, land tax and strata fees.

In Closing

Australia’s overall economic environment has been affected during the pandemic, and issues like those faced by builders are very likely to occur. We urge all property buyers here to pay attention to, and understand, the background of the builder and any news about them when purchasing a property. Understanding the builder’s situation also provides greater peace of mind for your property transaction. In addition, when purchasing property in Australia, make sure you have a clear understanding of your purchase contract. We recommend seeking the assistance of a professional lawyer to understand the meaning of each contract term and to understand clearly your rights and obligations as the buyer. Never sign blindly. Otherwise, you may find yourself in an awkward situation — unable to move into your new home as scheduled, and also losing time and money, which simply isn’t worth it.