Your Guide to Contracts of Sale with Christopher Conolly

We’re thrilled to welcome our first guest, Christopher Conolly of HWL Ebsworth Lawyers for an introduction to deciphering a contract of sale.

HERE’S WHAT YOU’LL LEARN FROM TODAY’S EPISODE:

  • Why signing the exchange binds you to the contract;
  • The deposit and its importance on the front page;
  • Why a solicitor can be worth the cost when exchanging and how they provide value; And
  • Much More

LINKS OR ARTICLES WE MENTIONED:

  • None

SPEAKERS IN TODAY’S EPISODE

Michelle May – Sydney Buyers Agent

Marcus Roberts – Mortgage Broker

Christopher Conolly – HWL Ebsworth

ASK US ANYTHING!

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Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.

Transcript

Marcus Roberts: Hi and welcome to the Sydney Property Insider podcast. This is episode eight and today we’re talking about your guide to contracts of sale. This podcast is a weekly podcast giving you round up news and tips to help you navigate the maze of investing in property. Now, this week Michelle and I are very lucky to have our first guest Christopher Conolly from HWL Ebsworth. Christopher has extensive experience in all aspects of commercial property law including corporate sales acquisitions, leases and agreements for sale, agreements for lease, project development agreements, sub-divisions and options. His clients include government departments and authorities, age care providers, urban regional developers and corporations. 
Marcus Roberts: Chris is an accredited specialist in property law for the law society of New South Wales and he has a particular focus on development projects for government authorities, retirement village and aged care developments documentation and advice, planning agreements for local councils and developers and property development and subdivision. Chris, welcome to Sydney Property Insider. 
Chris Conolly: Thank you Marcus and thank you for the introduction. I should also mention that withstanding all that, we do some domestic conveyancing as well. 
Marcus Roberts: Excellent, yes. You’re a very busy man. Absolutely. Chris, today we’re focusing on the contract of sale, very important document and one that both of us should understand given what it represents and given the large agreement that people are entering into when they purchase a property. Starting at the very beginning, what should you be looking at on the front page of a contract? 
Chris Conolly: The very beginning is entering this as a significant document. Once people sign an exchange, they’re bound so you do need to understand it and understand what you’re adhering to. Front page of the contract, the New South Wales law society contract is set out so people can see that the basics, the commercial terms if you like of the transaction. You’ve got the vendor and purchaser, you also have the vendor’s agent named, you’ll have the property names describes and it’s described by way of title and address and the other description property are the inclusions and possibly any exclusions. That’s all in here. We talk about what the property is, the improvements and whether it’s clear or subject to tenancy. 
Chris Conolly: That’s all on the front page and the other thing that will be on the front page, which would be important for the purchase is the date of completion. We enter into a contract by echanging contract and then usually 42 days, which is six weeks later the contract settles and at that time the money is paid and the key is collected. The other thing that’s most important on the front page is price. The price and the deposit, deposit usually being 10% of the price and then the balance is specified as well. 
Michelle May: Just quickly on the deposit, even if you have agreed to a 5% deposit, the front page will still reflect the 10% deposit. Is that correct? 
Chris Conolly: That’s a difficult issue. What the courts have said is that the deposit on the front page is the deposit that’s taken … the deposit for the contract. Now, sometimes there’s agreements for lesser amounts of the deposit and really, you should change the front page. 
Michelle May: Well, that’s interesting. 
Chris Conolly: Now, there has been a practice of doing that and putting a clause on the contract saying that the deposit not saying it’s 10% on the front page is for example 5% and then if there is a default, the deposit is 10% but the courts have typically held that that’s not effective and the amount of deposit actually paid is correct at the contract. 
Michelle May: That’s interesting because I deal with clients who obviously negotiate prior to have 5% and typically the front page is still filled out to be 10%. That’s very interesting. 
Chris Conolly: I think that’s practice that really should have ended about a year or two ago. There were some quite clear decisions in the New South Wales supreme court and what they said was the cause was attempted to say not saying what’s on the front page, the deposit was actually 5% have been ruled to be invalid as a penalty. 
Michelle May: Okay, so if you have negotiated 5% deposit, the front page should say 5% deposit. 
Chris Conolly: Absolutely. 
Michelle May: Very good. 
Marcus Roberts: If that has already been put on the contract as 10%, can that be signed off by both parties to the agreement through sign or initial or is a new front page required? 
Chris Conolly: No, at all times the contract … quite commonly contracts are changed by hand so I guess you’re quite right, it’s just a matter of ruling through putting in the new number 5%, you would adjust obviously the amount for the deposit into a physical dollar amount and the amount for the balance as well. That’s the way you do it and in contracts you use the initial. 
Marcus Roberts: Yes. Okay. 
Chris Conolly: One thing I would also like to mention is not only is there a front page in New South Wales contract, there’s a page two and page two has some important choices that everybody buying and listening should have a look at. Firstly, it deals with [deposit] bonds and electronic transactions. Currently, they are rare things and they’re usually marked no and they’re automatically marked no because if you looked at those boxes on the second page you’ll see that the ones in capitals are the ones that apply. More commonly, there’s a land tax adjustment. This is something that would typically be marked yes for a commercial and typically marked no for residential property principally because if you have a residential property then it’s usually the principle price for residents and exempt from land tax. 
Chris Conolly: There’s a GST box there. Now, for most residential transactions, that will be marked no, it’s not a tax code supply and the reason given for that will be that it’s eligible for residential premises. Once you get to commercial transactions it will be marked yes and there’s a potential there for the GST to apply. 
Michelle May: Okay. That’s interesting. I’ve never actually noticed that. If it’s in capitals, that’s what typically would apply if there was nothing marked in the box. Is that right? 
Chris Conolly: That’s absolutely right and it’s through the entire first two pages of the contract and it used to be confirmed by way of a statement on the front page but in the last version they took that off and they buried it in one of the clauses in the standard contract. It’s in clause 20. 
Michelle May: Okay, clause 20. 
Chris Conolly: Yes. In fact, it’s clause 20.15. 
Michelle May: Right. Well, that’s very interesting to know that. Everything in capitals is what’s automatically will default to … 
Chris Conolly: Exactly. If you look at the … for example in terms of the improvements, house is in capitals. That would normally apply unless you mark something else like a home unit or a car space. 
Marcus Roberts: Christopher, one of the things that you mentioned just now was inclusions and exclusions. Is there anything specific that you should be on the watch for? One of the things very commonly I hear about is driers for example. 
Chris Conolly: Driers, yes driers. The law is that if it is not actually part of the building, then it can be removed by the vendor. In other words, it can be unscrewed and taken away, for example, a drier that is not fixed and it doesn’t automatically come with the property. It needs to be marked as an inclusion. The [sad] contracts are the list of things that you normally expect. It’s got things like loans, dishwashers, fixed wall coverings, which are tiles, wino, carpets, it’s got range woods, it’s got pool equipment TV and things. If you like there are starting examples of what you would put particularly if you’re a purchaser, well worth having a fairly careful inspection of property and finding out things like driers, microwaves, very large pot plants is something that also people are surprised to find that plant is gone when they come to settle. There’s a whole lot of things there. It’s really just a matter of doing a fairly careful inspection. 
Chris Conolly: Alarms systems are other things that sometimes people find surprising they have been removed but they’re not actually part of the building. 
Marcus Roberts: Absolutely and those things can add up. If you’re talking about a drier, a microwave, an alarm system, large pot plants that need to be replaced outside, you’re talking about a fairly hefty expense that you as the purchaser may need to take on to get the property back to where you thought it may have been so absolutely necessary to have the inclusions you think are necessary in there. 
Chris Conolly: Yes, very important and not only the expense but also the disappointment. Every purchaser has ever seen something taken that they wouldn’t expect them to take. 
Marcus Roberts: Especially microwaves because I can only imagine moving in that first night and go, “Okay, we’re just going to use take out or something.” And looking and going, “Oh, there’s no microwave, we’ve got nothing that we can eat.” 
Chris Conolly: I know that’s also the spot, the covered spot will actually be for that particular appliance. 
Marcus Roberts: Of course, yeah. What goes in this cupboard? 
Michelle May: Now, I’ve actually had it happen on a purchase for a client where when I did the preset on that inspection, I always take the front page of the contract to double check that everything is left behind once the vendor has moved out prior to settling the property that half of the garden, all the plants gone and the excuse of the vendor was, “Well, they were all in pots.” Even though they were in the soil, they were still in pots, which was never disclosed to us. How does that sit. I mean it was pretty difficult and yeah. By law, how does the law look at that? They were in the soil but they were still in pots. 
Chris Conolly: The law comes back to sort of the very clear question of was it actually part of the building, and the answer to that is no. Pots can be removed. 
Marcus Roberts: Even if they were not visible? 
Chris Conolly: Even if they were not visible, which is very hard … 
Michelle May: Very disappointing. I mean at least half the garden was gone and there were beautiful … I mean it was one of the reasons why my buyer fell in love with the house. The garden was a huge aspect of that. 
Chris Conolly: There is always a possibility of saying, “Well, that was a misleading and deceptive conduct and making a claim.” But the reality for most property transactions is people would not want to do that. That’s sort of at the end of the day, something that you don’t want to continue doing. You want to buy house, settle and move on. 
Marcus Roberts: You just want to move on with your life. Absolutely. 
Chris Conolly: There is a regime in the contract for making claims and the simple way it works is you make a claim for an amount of money and as long as it’s less than 5% what happens is that it gets put aside as part of the deposit and parties can work that out afterwards. If they fail to agree then there’s a provision for the appointment of an arbitrator by the law society. 
Michelle May: Yeah, as it turned out, that’s exactly what happened. They pulled aside some money and they negotiated the cost of the plants that were removed and to have it replaced but it’s not something … that’s not the way really want to start. 
Marcus Roberts: No, leaves a bad taste in your mouth when you first move in. 
Chris Conolly: The contract itself allows vendors to express the exclude things. That would be a really good example of what you would expect to be in the contract. On the front page there’s a side note exclusion, so you could include plants some pots in the backyard or something. If you’re a vendor it’s well worth doing because it saves that complaint and dispute at the end of the day. 
Michelle May: Quite regularly, I see that certain lamps are part of exclusions because they’re designer lamps or whatever. In what state does a vendor then have to leave the overhead light if they remove that, can it just be a wire or do they actually have to replace it with a bulb at least minimum? Because it has happened again, from experience where the vendor just left bare wires and obviously that’s rather disappointing. 
Marcus Roberts: These properties that you’re seeing Michelle. Goodness. 
Michelle May: I know. Tricky. 
Chris Conolly: From a sort of layman point of view the answer is the vendor is entitled to remove their fixture, which is the light fitting. There’s no obligation to put anything new in there so they can still leave it as wires. 
Michelle May: Really? I thought at least they would have to make good that it has to be safe … that you can at least turn on the light. 
Chris Conolly: Well, they do not damage the ceiling. They have no obligation to replace the fitting. 
Michelle May: There you go. Interesting. I’m learning so much already. Clauses in particular that vendors like adding and as a buyer then, what should you look at to remove if you do see them? Is there anything that springs to mind that you … 
Chris Conolly: Yes, there’s a number of things. There’s quite a lot of things that perhaps shouldn’t be in contracts and really the standard contract itself covers most things and there are very few things that you need to add from a vendors point of view other than things about the real estate warranty and the notice period for default. 14 business days after exchange. There’s usually a provision there about latent defects and that’s not acceptable. The things that people need to watch out for are changes to how the land tax is adjusted, amendments to the standard contract. Really you should consult your solicitor about those and make sure they’re acceptable. 
Chris Conolly: The release of the deposit clause is quite common and is something to be avoided if at all possible and it does put the purchaser in a position where the deposit’s not secure and although everyone thinks you signed the contract you’re going back with the house, sometimes that doesn’t happen and it can happen for reasons completely unknown to you and there are circumstances that if the deposit’s been released, you’ll lose the deposit. 
Michelle May: In real terms, normally when you buy a property, you give the agent your deposit check or a direct deposit, go straight into the trust account of the selling agent. When you have a release of deposit clause in the contract, where does the money go? 
Chris Conolly: Well, it goes to the vendor. 
Michelle May: It goes directly to the vendor. 
Chris Conolly: And no matter what the clause says, that’s what happens. Sometimes it says for the vendor to use the deposited amount on the property, for the vendor to use the payment stamp duty, all that sort of stuff but at the end of the day, it’s going to the vendor. The problem with things when they go wrong, if for some reason the vendor can’t complete, it’s usually a big problem. It’s usually the case that where that money has gone, it can’t be recovered. The typical example of vendors can’t complete is because their discharging bank won’t provide settlement, they won’t provide settlement because they’re not getting enough funds and there’s a lot of funds to pay at the mortgage and there’s going to be a dispute so that’s a really good example. 
Chris Conolly: Another example is the vendor dies or goes bankrupt and by those circumstances, if money’s been released, very difficult to get back. 
Michelle May: Right. Okay, so that’s definitely one that needs to be checked out very carefully? 
Chris Conolly: Yes, and it certainly needs to be as a starting point rejected if there can be some explanation as to why it’s important for that particular vendor and if that’s part of the bargain in terms of the price that you’re getting and the type of settlement you’re getting and then maybe that’s an acceptable thing to do and it’s certainly not that common but you do need to be very careful about that. 
Marcus Roberts: And if you were purchasing at auction this again, is something that you’d want to be agreed to prior to the actual auction itself because once the auction … once the hammer goes down, ultimately it’s going to be hard to change the terms of the contract. 
Chris Conolly: Absolutely. If you’re bidding at auction, you’re bidding at the … on contract that the auctioneer is waving around on the terms of that contract. After you’ve been the successful bidder, that’s the contract you’re going to sign. Some people do come up and say, “I’m the successful bidder but I didn’t know about clauses a, b and c.” Look, people sometimes agree to that but if it comes to the point of law, the answer is no, they can’t have those clauses deleted and yes, they have [inaudible] the auction and they are bound. 
Michelle May: And because an auction is unconditional, if you don’t and you do sign and then you walk away, you lose your deposit. Is that right? 
Chris Conolly: No, not entirely correct. 
Michelle May: Not entirely, okay. 
Chris Conolly: You are bound on the date of the auction and there are some cases where you have bidders who throw their hands up after they’ve got to the auction, literally run away and the result of that is the auctioneer is entitled by law to some contract on behalf of the purchaser and he can do so and from that time on the purchaser is bound and he’s bound to the contract, which not only the deposit, it’s the full purchase price. Now, if he hasn’t paid the deposit, the next question is how are we going to get the deposit out of him. That can be difficult but from the legal point of view, he’s bound. 
Michelle May: Yeah, so once you’ve put up your hand … 
Chris Conolly: Once you’ve been accepted and you’ve effectively signed the contract. 
Michelle May: That’s right. Okay. There’s a lot of talk about foreign investment obviously, foreign investors. Could you explain a little bit how the foreign resident capital gains withholding tax applies? 
Chris Conolly: Yes. This is a new regime, which was introduced in the last couple of years and what it does is that it says that if you’re … what it’s aim is making sure that foreign residents of Australian property, don’t sell the property and leave the country without paying capital gains tax. That’s what it’s aimed at and I suppose most people hearing that would think, “Well, I’m not a foreign resident so I’m not concerned about it.” But the regime actually says that if you’re a vendor of the property then you need to go and get a clearance [stipend] and the reason you need to do that is because the taxation law has now been amended to provide that purchasers are obliged to pay 10% and they’ve gone up to 12.5% of the purchase price to the government, the Australian taxation office if there is not a clearance. 
Chris Conolly: The attach that clearance [stipend] to a contract and that will mean that that regime has been satisfied. If it is not attached to the contract, there’s a possibility to providing prior to completion and if you don’t provide it prior to completion then the purchaser must [inaudible] money and pay it directly to the Australian taxation office. That’s a fairly significant consequence and it’s significant both for the vendor and for the purchaser because purchasers who fail to do that then have a debt to the Australian taxation office for that amount of money. They’re personally liable for it. 
Marcus Roberts: Very important. 
Chris Conolly: Very important and the threshold was up until the first of July 2017 $2 million, I think that threshold was sort of on the basis that that will be [inaudible] I don’t believe that for sure has now been reduced to 750,000. 750,000 particularly for the Sydney property market, most properties are included and it is one of those things vendors have particularly to be careful about because if you’re going for an auction, you think, “Well, that’s only a small unit. We’d be lucky to make 700,000 and then it’s a good day.” If it does get over 750,000 you immediately trigger that payment. Not very difficult to get, you apply online from the Australian taxation office, best if the vendor applies directly themselves and provides it to their lawyer to attach the contract. 
Michelle May: Okay. Expanding on that, tax and everything that comes with it, what are the current rates for stamp duty and tax for foreign purchases? 
Chris Conolly: For foreign investors in New South Wales … land in New South Wales, from 1st July 2017, there is a transfer of duty surcharge, which increased from 4% to 8%, that’s in addition to the standard amount of stamp duty. That surcharge is payable only by a foreign investor. Land tax also has a surcharge and that goes up from 0.75% to 2% for the 2018 land tax year and 2018 land tax year commenced on the 1st of January 2018. In both cases they’re significant surcharges. 
Michelle May: And regular stamp duty in New South Wales is? 
Chris Conolly: It’s on a sliding scale so it increases depending on the actual person. 
Michelle May: Okay. Say for a $1 million dollar purchase, which is easily done these days, do you know the figure? 
Chris Conolly: No. 
Michelle May: Okay. There are calculators. I’m sure. 
Chris Conolly: The office of state revenue New South Wales has a land tax and stamp duty calculator. It’s just a matter of plugging in the price and the date [inaudible 00:25:13]. 
Michelle May: Okay. Well, we’ll put the link on our website. 
Marcus Roberts: We’ll put the link … yes, we’ll put the link in the show notes so that if you’re purchasing you can do some quick calculations on your own. 
Michelle May: Yeah, I just remember thinking when I paid my stamp duty a couple of years ago, I just remember that I really knew South Wales government should dedicate part of then M5 motorway to my family because we got to pay a significant amount of money. 
Marcus Roberts: Christopher, thank you so much for that, that’s really informative. One of the last questions I have is how can a good solicitor help verse the direct conveyancing sites that we see on line a fair bit today. There’s people looking at property costs say, “I’ve got to pay for the property, I’ve got the bank cost, I’ve got pest and building, I’ve got conveyancing and so forth.” A lot of people might be looking at the shortcut or the cheaper way of doing things but what is it that a good solicitor can do that the conveyancing sites or conveyancer can’t necessarily do as well? 
Chris Conolly: I suppose there’s a matter of reassurance in somebody who’s understanding what you’re doing and on your side in terms of negotiating things. Very important if there’s something more complicated and something more complicated often arises. I think 80% of the cases, there’s something else that arises or something you need to consider. That’s important and I suppose people need to understand that the conveyancing sites you’re talking about are very rudimentary. You can … if you’re more experienced and understand how these things might not be useful too but even then I get people who are more experienced, understand about those things and prefer me to do it. 
Chris Conolly: I think the best example of that was a teacher who had very carefully done a previous purchase on her property and came to me and said, “I don’t care how much it costs because you can do it all and I don’t want to do it ever again.” 
Marcus Roberts: So it’s not just the reassurance, it’s also the time factor of you are the purchaser, having someone that’s professional that does this on day in day out basis rather than plugging in numbers into a conveyancing site. 
Chris Conolly: I find very much the conveyancing sites [inaudible] really they won’t get back to you. A number of times people come back to me and say, “You know we’re halfway through the transaction. I’m not getting a response from them, I’m not getting a response from the other side, it’s supposed to be settled last week. What do I do?” It’s gone completely array. Alternatively, they will come up and say, “I’ve moved in but there were no plants and no one responded to me. I don’t know what to do.” That’s sort of common. I think it’s making sure things are right to begin with which is very important things go smoothly and then it’s when things don’t go smoothly, what do you do? 
Marcus Roberts: Especially when as we’ve said before in weeks gone by, you’re doing property approaches for a lot of people maybe two or three times in your life. Handing it over to professionals who do this on a day in day out basis is really worth your money, is really worth outsourcing to someone who understands the ins and outs of the contract. 
Chris Conolly: Absolutely, and look I wouldn’t recommend any ordinary person try and read that contract even when you’re a lawyer and coming to that, you’re coming to that with the basis of conveyancing rules [inaudible] and how it all works, you come to it with the understanding of all the things that are in the contract say you got title deeds, you got a planning certificate, you got reference sheets, all those things that are very familiar to an experienced lawyer and all those things that are important things to understand when you’re buying that property. 
Marcus Roberts: Great. Well, Christopher, that’s great. Thank you very much for your time. I know I’ve learned a lot from the past few minutes. I’m sure our listeners have as well. If people do want to get in touch with you, what’s the best way for them to do so? 
Chris Conolly: I’m a partner at HWL Ebsworth. The email address just looking up HWL Ebsworth and my direct line is 93348729. 
Michelle May: We’ll put all your contact details on our website as well for those who would like to get in touch with Christopher. Thank you so much for your time today Christopher. I certainly learned a lot. To wrap up, for next week our conversation topic is going to be how to weed out poor properties prior to inspection. I think I might have a few tips, I don’t know. 
Marcus Roberts: Yeah, absolutely. Especially when you’re going through real estate, domain or similar in saying at time dozens of properties, how to get that down to a manageable 8 to 15 that you’ll see alongside five coffees. 
Michelle May: That’s right. Always if you have any questions, please let us know at [email protected] Look forward to … 
Marcus Roberts: That’s at [email protected] [email protected] Thanks everyone and have a great week. 
Michelle May: Bye. I was … 
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