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Oct 27, 2014

The "what, who, when, how and what if" of contract clauses.

Contract clauses need to be clear.
Clauses that simply say "subject to a white ant inspection" or "subject to due diligence" (whatever that means) are just waffle. They are completely meaningless and open to all manner of interpretation depending on who is interpreting them.
This is because they don't specify the "what, who, when, how and what if."
Those who attended the What's Down The Track forum recently would have heard Paul say that "contracts are like seatbelts." This is because seatbelts are actually not very important most of the time. In fact almost all the time. Except for the precise moments of a car crash, when they are VERY important. Absolutely critical, in fact, but the trouble is you never quite know when you're going to have a crash!
Likewise with contracts in a property transaction. Between people of good will and like minds they may not seem all that important, but it's amazing how often good will vanishes into thin air when understandings change and/or where there is money at stake. This is a perfectly normal human reaction and is why what the contract actually says is so important.
The contract spells out the terms of the agreement you're entering into and then holds the parties accountable to them, so it's important that the contract very accurately reflects your understanding of the agreement you're entering into.
Generally real estate contracts are based on the standard REIWA pattern Contract of Sale by Offer and Acceptance, which specifies lots of things like the parties' obligations and rights under the finance clause, when and how settlement will take place, what undertakings the seller makes about the property, who pays the rates, etc. Most of this is covered in the 20 page Joint Form of General Conditions that forms part of the contract and which is very important you get a copy of.
Any other terms need to be listed as Special Conditions or Annexures. This includes things like termite and structural inspections, RCD & smoke alarm compliance, and inventories of chattels, furniture and equipment where included in the purchase.
This is where the "what, who, when, how and what if" come into it. 
Let's go back back to the first example listed above "subject to a white ant inspection," which begs a heap of questions:
  • Who is responsible for obtaining it? 
  • What is it and who can do it? Does it have to be a written report? 
  • Does the person who's doing it have to actually know what they're doing? When does it have to be done? What if the buyer does it a month after settlement? Or a day before? 
  • And what if there are white ants? 
The clause simply says the contract is subject to an inspection, so it could well be argued that even if the house turns out to be riddled with white ants, the contract is satisfied merely by obtaining an inspection, in which case the buyer may well have to buy it as is. However it is most unlikely this was the buyer's intention when entering into the contract, which just makes the point. The written contract is useless if it does not reflect the parties' intentions.
The same applies to virtually every clause in the contract. Make sure you apply the "what, who, when, how and what if" test every time to every clause.
Otherwise you're simply leaving it to chance? If you're going to the effort of writing a contract at all, at least write it so it works.
One last thing. Get a second opinion. Run the draft contract past your lawyer or settlement agent BEFORE you sign it.
DISCLAIMER: The above advice is intended to provide a summary and is not intended to be relied on in any particular case. It should NOT be construed as legal advice. For detailed advice specific to your circumstances you should seek specific advice from an appropriately qualified professional.

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