Special Conditions and certainty – not so straight forward

I often see people assuming that conveyancing contracts are all standard and everything will work out fine. It is only when things go wrong and everyone is running for the exits that the paperwork suddenly assumes central importance.

Special conditions and contract law have developed over hundreds of years, and the basic principles are good to know.

Contracts for the sale of real property in Queensland most commonly use a Real Estate Institute of Queensland (REIQ) or ADL template contract. These template contacts contain a number of “standard” terms that are widely considered to be on fair and reasonable terms.

However, there are a number of issues that are not addressed by these standard terms. This is where special conditions are required.

Common Special Conditions

Special conditions can cover anything the parties want to agree on, but common ones include:

1. Conditions making the contract subject to a buyer’s due diligence investigations.
2. Conditions making the Contract subject to soil testing (to determine suitability for building).
3. Conditions requiring the seller to provide the buyer with evidence of final council approvals for building works on the property.
4. Conditions specific to the property – for example, an obligation for the seller to undertake certain repairs or works prior to settlement.
5. Counterparts clauses – to allow signing of the contract in a number of counterparts (where the parties each sign different copies of the same contract).

Special conditions are often prepared by the parties or an agent at the time of entering into a contract, without reference to either parties’ solicitor. Where these are not drafted clearly, it can have drastic consequences for both parties, as discussed below.

So how can it go wrong?

We recently received a fully signed contract where the special conditions section simply stated “due diligence”. This is not good. While the term “due diligence” may be considered to have a generally understood meaning (see further information on due diligence), in the present case there was a dispute between the seller and buyer after signing of the contract. The parties got into an argument about several things:

1. What was the scope of the due diligence investigations the buyer could conduct? Was it to include any investigations in the buyer’s discretion?
2. What rights did the buyer have if they were not satisfied with the terms of their due diligence investigations? Could they terminate? Could they only claim compensation? If they could terminate the contract, could they recover the deposit in full?
3. How long did the due diligence period run for? Could the buyer exercise their rights up until the time of settlement?
4. Was there an obligation on the seller to allow the buyer reasonable access to the property for conducting their due diligence investigations?
5. What happened if the buyer did not advise the seller of the results of the due diligence investigations by the end of the due diligence period? Could the seller terminate, or were the buyer’s rights automatically waived?

All of these issues would have been addressed by an appropriately drafted due diligence condition. In the absence of a clearly drafted condition, it became clear in the above case that the seller and buyer each had different intention as to what was meant by the “due diligence” special condition. Not surprisingly, each party’s interpretation favoured themselves!

Correcting uncertain terms after signing of a Contract

Where there is a dispute as to an uncertain contract term, this will need to be resolved by:

1. The parties mutually agreeing to vary the special condition to address the uncertainty; or
2. Through a dispute resolution processes, or even court proceedings.

In many cases, the parties are amicable and want to work together, but even when this is the case, usually time and money is wasted while the unclear clause is clarified. Any matter that requires parties to negotiate a resolution will often result in increased costs for both parties.

If there is a dispute then it is even worse.

The costs and effort to resolve uncertainty is significantly more than had an appropriately drafted and certain special condition been used at the outset.

What happens if the parties can’t agree on resolving an uncertain term?

If a dispute goes to court, there are a number of ways in which vague or uncertain special conditions can be treated by the court, including:

1. Finding that the uncertain term is void but without affecting the rest of the contract. Using the example of a due diligence clause, the buyer may lose their right to terminate if they are not happy with their due diligence investigations, but the contract stays on foot.
2. Finding that the uncertainty is fundamental to the contract, and therefore that the entire contract is void or not binding.

Conclusion

Buyers and sellers should ensure that special conditions clearly contemplate what action is to be undertaken, who is responsible for undertaking the action and by when, and what the rights are of the parties if the relevant actions are not undertaken or satisfactory. If you are not sure of whether a special condition is satisfactory, it is always better to receive advice on the condition before a contract is signed.

We are experts in clearly expressing what the parties want in a conveyancing contract.

Contact our Property team if you have any concerns regarding your property contract. We can assist you with this process and ensure that your interests are protected.