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Subject To Finance Condition Clause – Does It Actually Protect You?

March, 28th
Karen Yu
Lead Conveyancer @ Settled.com.au

The Subject to Finance Condition enables the purchaser to exit the contract and have any deposit monies refunded should their finance approval not be granted. This is a very common clause as it’s beneficial to buyers, however, they may not be fully aware of the requirements they must fulfil to trigger protection.

How most ‘subject to finance’ clauses work

Most standard form contracts stipulate that the purchaser may end the contract if:

  • their loan is not approved by the due date, but only if they immediately applied for the loan;
  • did everything reasonably required to obtain the approval;
  • written notice is served ending the contract with evidence of the loan rejection or non-approval, within 2 clear business days of the due date; and
  • the purchaser is not be in default under any other condition of the contract when the notice is given.

It’s important to carefully read the General and Special Conditions as every contract is different. For instance, sometimes the right to end the contract 2 clear business days after the due date is removed, meaning the purchaser must serve notice to end before the due date has expired.

Tricky situations

If the contract’s requirements to terminate have not been satisfied, buyers may not be able to get out of the contract even though formal approval has not been granted. For example, say the due date for finance approval and payment of the deposit both falls on a Wednesday. With the standard General Condition, the buyer has until Friday (2 clear business days after the due date) to serve notice ending the contract. On the Thursday, the notice is served but the buyer has failed to pay the deposit when due on 18 April. They are in default under the contract by failing to pay the deposit and thus no longer entitled to exit.

For another example, say the finance clause due date is 4 weeks from the Day of Sale. Once the date arrives, the purchaser decides to serve notice exiting the contract but their loan approval was neither approved nor declined. The Vendor may refuse to refund the deposit and object to the notice, alleging that the buyer did not do all things reasonably required to obtain the loan. The Vendor may argue that 4 weeks is excessive and that loan should have received approval or denial within typical loan processing times.

Relevancy when buying off-the-plan

Another circumstance to consider is when purchasing an Off the Plan property. The finance condition is rarely used. This is because often buyers enter into the Contract many months or even years before registration of the Plan is expected to occur. For lenders to grant approval, they need to complete a valuation on the property, however they cannot obtain access until quite close to the registration date. Another point to consider is that Loan offers often expire within a certain timeframe or have conditions which allows the lender to withdraw their offer if circumstances apply.

As one can see this is not as simple as walking away just because you have not obtained finance.

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