Generally, most property purchasers require some form of finance. The prudent purchaser before attending an auction or signing a contract of sale will obtain finance approval from the lender in advance. However, what can happen, unfortunately, is that where a purchaser considers that they have obtained finance approval and paid a deposit, the lender then says, finance has not been approved. Today this situation is becoming common, and the purchaser needs to be aware of how to minimise a lender withdrawing their support prior to settlement.
Every purchaser to a contract should appreciate that where they do not meet the settlement conditions with paying the final amount due on the day of settlement, a breach-of-contract will occur, and the vendor may sue the purchaser for their losses. Now, here’s the point, the vendor, has extensive rights under the contract of sale to sue the purchaser, and generally, where the purchaser is sued, they will suffer financial loss as a consequence.
Whether finance is being arranged directly with the bank or through a broker, it is important to obtain written confirmation directly from the lender, which means, confirmation that the loan has been unconditionally approved. Now, in today's economic environment with changed lending policies and deflation occurring with property, it will be a very rare case where are lending institution will provide an unconditional loan offer in writing.
Most lenders today will stipulate some form of conditions in their letter of offer to the client. These conditions may include that the lender will provide a deposit for signing upon the contract but does require a reassessment of the lending facility prior to settlement. Now, this is where the problem arises, which is the reassessment of the loan prior to settlement. With the property market conditions shifting, the value of a property which is purchased under contract today could significantly change within 30, 60 or 90 days. Alternatively, within that 30, 60, or 90 days the purchaser’s financial position could change, such as loss of employment, which will also impact on the reassessment by the lender.
Where a loan is not unconditional, the lender does have the discretion to decide whether or not they will continue to perform their obligation under the letter of offer up until the settlement date. Where the lender refuses to continue with the loan offer that has been put forward, the court will only order specific performance against the lender to complete the loan offer in very specific circumstances.
In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 a developer had a facility for $2.4 million with further advances to be made progressively. A clause in the loan facility said:
In the event that the mortgage loan is to be advanced progressively, such progress payment as may be required shall be made at the trustee's discretion.
Following several loan advances being made to the purchaser, the lenders notified the borrowers that no more funds would be made available. The borrowers raised a claim stating the trustees were in breach of the contract, as they failed to provide further funds. The court held the provision of the loan agreement was such that permitted the lender to withdraw extending further monies at their discretion.
This case demonstrates the importance of the loan offer to be read carefully with respect to the conditions that are being applied by the lender.
The lender may use various words in their letter of offer in order to reduce their risk from actually lending the monies, when the property has diminished in value, or the purchaser’s financial circumstances change as well.
Therefore, an important aspect for the borrower when a letter of offer is received, is to not procrastinate, and to review the letter of offer carefully, especially the conditions that are being applied under that offer, so that a fully informed decision may be made in respect to what actions must take place, in order to comply with the conditions of that offer.
As earlier mentioned, one of the serious risks for any purchaser in the current market conditions, is that where a contract of sale is signed, and there is no unconditional offer in writing, the lender at their discretion can refuse to complete the settlement, where the original loan application is no longer supported by the property value.
A wise purchaser will obtain loan approval in writing from the lender in advance prior to making offers on a property. Upon receiving the letter of offer in writing, the purchaser should then take that document to a lawyer to have it carefully reviewed, to determine what legal rights are being defined in respect to the lender's position, and the borrower's circumstance. Where the letter of offer provides a broad discretion to the lender to change the conditions of the finance offer, it is in the purchaser’s best interest to negotiate an updated letter of offer with the lender, in order to provide better certainty so that the parameters are clearly defined as to the withdrawal of the finance support by the lender. This will then protect the purchaser as it will be more defined under what circumstance the lender can withdraw their financial support under the offer.
Property purchases are increasing with risks, and it is prudent that all purchasers who are borrowing finances to settle on the property, ensure the letter of offer is clearly understood, and where it is not, then to obtain legal advice to avoid potential financial loss.