Posted by: Tom Wood | Date: 8 May 2020
The contract price is one of the most fundamental parts of a contract, whether for a house, unit, land, commercial or industrial property, or a business.
Sometimes parties to a contract want to agree to reduce the price after the contract is signed. Maybe unexpected major problems have been revealed by due diligence or building and pest inspections. Maybe a buyer can’t get finance approval and there are no other buyers around. Maybe COVID-19 is financially affecting one or both of the parties, as is happening so much at the moment.
Sounds easy to do? Just an exchange of emails, you may think.
It is important not to treat an agreed price reduction casually.
It is true that an agreement in writing, including by correspondence, can effectively vary the contract. However, there is a sting in the tail. A buyer will still have to pay stamp duty (called transfer duty) on the full price, unless the price reduction is documented in a Deed of Variation.
A Deed of Variation is a simple document which can save a buyer a lot of money. Legal fees for such a Deed are not major. The buyer should compare the anticipated legals against the duty saved. If the duty saving exceeds the legals, it is probably worth it; if it doesn’t, then maybe a Deed of Variation would be overkill. However, for accounting and tax purposes, it is always best to have clear written evidence of the price paid for an asset.
What about a price increase? For example, the parties may agree to add an asset to the contract which causes the price to increase as well.
The difference here is that duty is payable on the higher amount even if there is no Deed of Variation. The buyer will have to voluntarily advise the Office of State Revenue of the higher price, and pay the higher amount of duty.
A Deed of Variation is a good idea for a buyer where there is a price increase, regardless of the amount of the additional duty. The Deed provides easy evidence of the actual price paid, for accounting and financial purposes.
FC Lawyers can help you with advice on any proposed contract, as well as varying any contracts already entered into. We recommend that legal advice be obtained before signing a contract.
Contact our team today to discuss any property contract or transfer duty issues.