If you would like to buy any type of property in NSW you will have to sign a contract of sale which includes details about the specific property in addition to all the terms and conditions associated with the purchase.
What is exchange of contracts?
A property is considered sold at the time of exchanging contracts and payment of a deposit, normally 10% of the purchase price. The exchange of contracts is considered to have taken place when two identical contracts are signed by each of the purchaser and the vendor, and are then dated. The vendor retains the version of the contracts signed by the purchase and vice versa (hence the term “exchange”). As soon as the contracts are exchanged, a contractual relationship is deemed to have come into effect. Up to that point, the agreement is not legally binding on the purchaser or the vendor and either party can change their mind about buying or selling the property.
What is a cooling off period? How does it work?
Pursuant to conveyancing legislation in NSW, every purchaser of a residential property is entitled to a 5 business day cooling off period. Under section 66Q of the Conveyancing Act 1919, residential property is defined as:
“(a) land on which are situated (or in the course of construction) not more than two places of residence, and no other improvements, or
(b) vacant land on which the construction of a single place of residence alone is not prohibited by law, or
(c) a lot or lots (including a proposed lot or lots) under the Strata Schemes Development Act 2015 , comprising not more than one place of residence alone, whether constructed or in the course of construction, and including any place used or designed for use for a purpose ancillary to the place of residence”.
It is important to note, however, that in many cases vendors will insist on receiving a section 66W certificate at the time of exchange which inevitably means the purchaser waives their right to a cooling off period and does not have any way to back out of the contract without forfeiting the 10% deposit.
It is also important to understand that if a property was purchased at auction or on the same day as an auction after the property was passed in, the purchaser will not have any cooling off rights.
It is possible to reduce or extend the cooling-off period by written agreement with the vendor. If you wish to extend, it is critical to provide the vendor with a request in writing, and ensure you have a reply in writing, prior to 5pm on the fifth business day after the date of exchange. If you do not have a written reply from the vendor before that time agreeing to an extension of time, it will be deemed that the cooling off period had expired at 5pm on the fifth business day and you will be bound to the terms of the contract.
In the event the purchaser decides they do not wish to proceed with the purchase, they are legally required to provide the vendor with written notice of their decision during the cooling off period. Although the purchaser will have to forfeit 0.25% of the purchase price to the vendor if they decide not to proceed, they are entitled to have the balance of the 10% deposit paid on exchange returned to them.
As a purchaser, why should I make it a condition of my offer?
Once the purchaser’s solicitor or licensed conveyancer has reviewed the contract and made any necessary amendments, it is absolutely beneficial for the purchaser to exchange contracts with a cooling off period for the following reasons:
- The property comes off the market upon the exchange. Even if another prospective purchaser comes into the picture and offers more money to the vendor, the vendor is unable to accept that larger offer;
- A cooling off period allows a purchaser the opportunity to secure a property risking only an amount equal to 0.25% of the purchase price;
- The purchaser is provided with 5 business days to consider any pest, building or strata inspection reports they order without fear of another purchaser securing the property. The purchaser will be able to get out of the contract, forfeiting only 0.25% of the purchase price to the vendor, if a problem is uncovered ;
- The purchaser is provided the extra time to secure finance for the purchase without competition from other purchasers. So long as the purchaser has conditional approval prior to the exchange, it should be possible for the bank/incoming mortgagee to issue unconditional loan approval during that time; and
- If the bank does not issue unconditional loan approval during that time, it is unlikely that the vendor will not allow at least a small extension to the cooling off period to allow the purchaser a little more time to deal with the bank. It is important to note however that a vendor is able to deny the request for an extension which means the purchaser will be forced to make a decision about whether to proceed with the purchase without the final approval by the bank.
Why is the vendor insisting on a section 66W certificate?
Although cooling off periods are generally in favour of the purchaser, their actual existence could work in favour of the vendor. In a sellers’ market where the supply of property cannot meet the demand by purchasers, a vendor can demand a purchaser waive their cooling off rights. This would ultimately mean that neither the purchaser nor the vendor have a right to rescind the contract. It has been argued that there is an imbalance of power in this scenario as it potentially forces the purchaser to make a decision to not do all their due diligence properly, rush a little or alternatively face missing out on the property they wish to buy as the property stays on the market until the exchange of contracts. Ultimately, it forces the purchaser to waive the cooling off period or miss out on the property. Despite this imbalance, the vendor is completely within their rights to insist on the section 66W certificate and is deemed to be the only way both parties are bound to the terms of the contract upon the exchange of contracts.
A quick contract exchange is necessary on many occasions to secure a property. A purchaser who decides to waive their cooling off rights could make their offer more attractive to a vendor by agreeing to be bound by the full terms of the contract from the time of exchange. Of course, it is not recommended for a purchaser to make this offer without first obtaining all the necessary building/ pest/ strata reports and unconditional loan approval from their incoming bank.
In any case, it is best practice for a prospective purchaser to obtain a pre-approval from the incoming mortgagee prior to even starting to inspect properties. From then on, once you find a property rely on your solicitor or licensed conveyancer to guide you through the negotiation of contract terms and the subsequent exchange of contracts.