Subject to Loan Approval: What does the fine print say?

These days it is hard to find a situation where a loan isn’t required in order to complete the purchase of a property. Whether you’re a first-time buyer or a seasoned investor, getting loan approval is almost par for the course when it comes to buying property. As a purchaser, you would have heard time and again from your broker, your conveyancer or your agent, that your offer needs to be “subject to finance”. It is certainly an import aspect in the drafting of a sale contract as this finance clause safeguards buyers who need a loan to complete their purchase. However, far too often we see purchasers input their finance details within the Contract, without really understanding the intricacies of the General Condition and its consequences.

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What does the fine print say?

Many conveyancers, firms and agencies use the standard Law Institute of Victoria (LIV) and Real Estate Institute of Victoria (REIV) Contract of Sale of Land.

Ticking the “Loan” box within the particulars of sale in a Contract of Sale of Land, means that General Condition 20 applies to the Contract, along with its relevant stipulations and protections. This “Loan” section will ask for three pieces of information:

• the name of the lender;
• the total amount being applied for; and
• the date in which loan approval is to be received

It is extremely important for agents and purchasers to understand that these details are not guides and cannot always be “amended later if needed.” They are binding pieces of information which require a purchaser to abide by them.

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General Condition 20 of the standard LIV/REIV Contract of Sale of Land outlines the obligations for buyers as follows:

1. Immediate Loan Application: You must apply for the loan promptly, specifying the lender and the maximum loan amount as stated in the contract.
2. Reasonable Efforts: You are expected to take all reasonable steps to obtain loan approval. This includes providing necessary documentation and responding to lender inquiries.
3. Timely Notification: If the loan is not approved by the agreed 'approval date,' you must:
   
   1. Notify the seller in writing within two clear business days after the approval date (known as the ‘grace period’); and
      
   2. Provide written evidence from the lender confirming the loan was not approved.
4. No Other Defaults: At the time of cancellation, you must not be in breach of any other contract terms.

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So, what does this mean for purchasers?

Applying General Condition 20 to a real life situation, means that if you input your lender, for example, as National Australia Bank in the particulars of sale, with an amount of $750,000.00, but you decide to instead apply for the loan with Commonwealth Bank, who then declines your application, even though you had applied for the loan immediately and for the correct amount, this does not satisfy the General Condition ability to leave the Contract under the finance clause, as the lender you used is not the same. Similarly, if you did apply to National Australia Bank, but the amount you applied for was $755,000.00 to which you were still declined, this also does not satisfy the requirements under the General Condition.

A Vendor can, and usually will, request evidence of the Purchaser’s finance being declined. They are entitled to evidence that the Purchaser applied for the loan immediately and that the loan application was based on the particulars inserted within the contract, that is, that the lender, and amount do not differ.

Generally speaking, a loan decline letter from a broker rather than the listed lender/bank will not satisfy the General Condition either.

If the Purchaser does not satisfy these requirements the Vendor can decline the Purchaser’s request to end the Contract and my enforce performance of the Contract on the Purchaser. Meaning, even though you have not been able to obtain the relevant finance, you are locked into a Contract you must complete.

You can see how this can be serious and cause purchasers an incredible amount of stress. If they are not able to obtain the finance and the Vendor doesn’t accept their request to end the contract due to their finance application being in contravention of the finance clause, the purchaser is left in a situation where they are vulnerable to future legal action by the Vendor.

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This can happen to you, because it’s happened before!

In the case of Putt v Perfect Builders Pty Ltd [2013] VSC 442 and [2013] VSC 600, the particulars of sale specified that the Contract was subject to a loan of $475,000.00, however the purchasers applied for a loan of $476,000.00. The court, as a result refused to order a return of the deposit to the purchaser, citing numerous reasons, including the fact that the purchaser did not apply for a loan in the amount as stipulated within the particulars of sale. The court was also not satisfied that the purchaser did everything “reasonably required” to obtain approval.

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Risks and Best Practices

Not following the clause correctly can lead to serious consequences, including the loss of Deposit. As a Purchaser, you may forfeit your deposit to the Vendor if you try to end the Contract incorrectly as a result of the finance application not being consistent with the particulars of sale.  You may also be subject to legal action due to your inability to complete performance of the contract. A letter of decline for finance that shows the details of your application not matching the particulars of sale could result in the Vendor suing you for damages for not fulfilling your contractual obligations.

To ensure you’re protected as a buyer—or if you’re an agent assisting a purchaser with their offer—it’s essential to understand the requirements and deadlines set out in the General Condition 20 clause. Act swiftly and start your loan application as soon as possible, actively engaging with your bank or broker to provide all necessary information and avoid delays. Securing pre-approval before submitting an offer is a great way to start the process and demonstrate your diligence. Keep the lines of communication open with your lender, agent, and the Vendor’s legal representative so that everyone is aware of your application’s progress and any issues that may arise. Above all, seek professional advice and consult a legal expert to ensure your clause is drafted correctly in the contract and that your finance process complies with the signed contract of sale.

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Conclusion

The 'subject to finance' clause is a valuable tool for Purchasers needing a loan, but it requires careful attention to detail. By understanding and adhering to General Condition 20, you can navigate the property purchase process with greater confidence and security.

If you need assistance with your finance clause on an offer you’re wanting to submit for a purchase, contact our friendly and experienced property team today on 03 5623 5166 or email reception@wakefieldlawyers.com.au.

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Disclaimer: The information in this post is general in nature. This does not constitute legal advice and should not be relied on as such. Please contact one of our Lawyers if you are seeking advice about a specific legal matter.

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