On 15 June 2011, the Court of Appeal of the WA Supreme Court in Dodds -v- Kennedy [No 2] [2011] WASCA 131 made some rulings in relation to the clause 1 of the Standard REIWA/Law Society Contract for Sale of Land by Offer and Acceptance that may surprise many in the Real Estate, Banking, Mortgage Broking and Settlement industries. The Standard Contract is used in the majority of house sales in WA.
The relevant terms of the Standard REIWA/Law Society Contract are set out below.
Surprise No 1
Mortgage brokers usually assess finance applications before submitting them to a lender and if the prospective buyer does not satisfy the criteria of any of the lenders with which the broker can place loans, the loan application is not submitted to any lenders.
However, the Court of Appeal in Dodds unanimously held that a buyer is in breach of clause 1.1(a) if no application is made to an actual lender of money. This leaves many buyers very, very exposed. Many buyers and many in the industries mentioned above, believed, until Wednesday this week, that it was sufficient to make an application to a mortgage broker and if the broker advised the buyer that finance could not be obtained, and the requisite notice was given, the contract was at an end. Wrong! Instead, the buyers are in breach if the broker does not forward an application to an actual lender, and the buyer will not only lose their deposit, but also be liable for further damages if the seller cannot sell the house for the price that the original buyer was prepared to pay.
The brokers are also compromised because they are assessed on the quality of applications that they submit and many are paid less if their ratio of settled loans to applications falls below a particular level.
So, if using a broker, especially a broker tied to a single bank, to avoid being in breach of the contract if they do not complete, buyers must now either:
(a) ensure that their broker passes on at least one application to the bank; or
(b) amend the contract terms as suggested below.
Surprise No 2
The majority of the Court of Appeal judges in Dodds also held that the definition of “Lender” should be interpreted as follows:
Lender means:
(a) the lender or mortgage broker nominated in the Schedule; or
(b) if the Buyer makes a finance application to, or if no lender is nominated in the Schedule then, any bank, building society, credit union or other institution which makes loans and in each case is carrying on business in Western Australia or a mortgage broker carrying on business in Western Australia.
They held that the definition did not make proper sense without deleting the first 9 words of paragraph (b). Up until Wednesday of this week, most thought that it did not matter if a Lender was specified on the front panel of the contract because you could make the application to any lender or mortgage broker. Wrong! The majority held that, if the Lender is specified, an application must be made to that lender in order to comply with clause 1.1(a).
So, either:
(a) DO NOT COMPLETE THE LENDER DETAILS WITH THE NAME OF A BANK; or
(b) amend the contract as suggested below, or
(c) do both!
Suggested Variations of the Standard Contract:
The Standard Contract contains clauses 1, 2, 3 and 4, so add the following special conditions as clauses 5 and 6:
5. The definition of “Lender” in clause 1 (the Finance Provisions) is deleted and replaced with the following
Lender means:
(a) the lender or mortgage broker nominated in the Schedule; or
(b) any bank, building society, credit union or other institution which makes loans and in each case is carrying on business in Western Australia or a mortgage broker carrying on business in Western Australia.
6. Notwithstanding the wording of clause 1 (the Finance Provisions) and notwithstanding the rulings in Dodds -v- Kennedy [No 2] [2011] WASCA 131:
(a) an application to a mortgage broker carrying on business in Western Australia is a Finance Application for the purposes of clause 1; and
(b) if:
(i) the buyer makes a Finance Application to a mortgage broker; and
(ii) the mortgage broker assesses the buyer as not qualifying for Finance Approval,
… that is sufficient to amount to a rejection of the Finance Application for the purposes of clause 1.
Relevant Provisions of the Standard Contract:
1.1 Buyer’s Obligation to Apply for Finance and Give Notice to the Seller
(a) The Buyer must:
(1) immediately after the Contract Date make an application for Finance Approval to the Lender using, if required by the Lender, the Property as security; and
(2) use all best endeavours in good faith to obtain Finance Approval.
(b) If the Buyer does not comply with clause 1.1(a) or 1.1(c)(1) then the Contract will not come to an end under clause 1.2 and the Buyer may not terminate the Contract under clause 1.3. The rights of the Seller under this Clause 1.1 will not be affected if the Buyer does not comply with Clause 1.1.
(c) The Buyer must immediately give to the Seller or Seller Agent
(1) an Approval Notice if the Buyer obtains Finance Approval, or
(2) a Non Approval Notice if Finance Approval is rejected at any time while the Contract is in force and effect.
1.9 Definitions
In this clause:
…
Finance Application means an application made by or on behalf of the Buyer to the Lender to lend any monies payable under the Contract.
Finance Approval means:
(a) a written approval by the Lender of the Finance Application or a written offer to lend or a written notification of an intention to offer to lend made by the Lender; …
Lender means:
(a) the lender or mortgage broker nominated in the Schedule; or
(b) if the Buyer makes a finance application to, or if no lender is nominated in the Schedule then, any bank, building society, credit union or other institution which makes loans and in each case is carrying on business in Western Australia or a mortgage broker carrying on business in Western Australia. …
Non Approval Notice means a Notice in writing given by the Buyer or the Lender to the Seller, or Seller Agent to the effect that Finance Approval has been rejected or has not been obtained.