To Comply or Not to Comply
Recently a client of ours was told by her solicitor, a couple days before settlement date that the developer was insisting on settlement taking place without a code of compliance certificate being issued by the local council. On close inspection of the agreement it stated that settlement could take place without the certificate being issued and while it stated that the developer would use his ‘best endeavours’ to obtain the certificate it was rather vague as to what would happen if it was not issued. It was not vague however about settlement, that would take place, end of story.
It became clear that if the purchaser did not settle then they would lose the deposit ( which was being held in the developers solicitors trust account) and the developer had all the usual legal remedies at law to either enforce settlement or to re-sell the property and recoup any shortfall from our client plus legal and other costs incurred. The reality was that our client was totally unable to settle as, a condition of obtaining finance from the lender was, that the code of compliance would be issued before settlement.
It is vital that professional advice be obtained before signing any agreement for sale or purchase of real estate especially when purchasing off plans or a developer. The developers’ solicitor will have prepared an agreement which is not the standard sale and purchase agreement but will include various extra clauses pertinent to developments generally. As it is the vendors’ solicitor who is preparing the agreement it is up to him to endeavour to get the most favourable terms on behalf of his client. Hence the not uncommon clause stating that ‘obtaining a code of compliance by the vendor / developer is not a pre-condition of settlement….’ If this clause is not altered prior to signing, then the purchaser is at real risk as our client was.
From a lenders perspective, when making the decision to lend to a client they are always looking at ‘worst case’ scenarios. Part of their decision to lend is the saleability of their security in the event of a mortgagee sale. A property without a code of compliance is deemed less saleable and therefore may not attract the best market price. Despite the unfortunate circumstances of a mortgagee sale the lenders goal is obviously to protect his position and achieve the best market price. Also, if a code of compliance has not been issued then that is a signal that building work may need to be completed and once again in a mortgagee sale situation this responsibility falls back on the lender.
A few other facts that are important to the story………
Our clients had, many months earlier, approached a lender directly and obtained a pre-approval with no specific property in mind. It is important that you have pre-approval fully explained to you because in this instance if the client had understood the conditions of the pre-approval the client would not have gone unconditional on finance in the manner that they did.
A pre-approval certificate is:
Proof that the lender is interested in you as a client but you cannot ‘pass go’ yet as I would normally expect the following conditions: An expiry date on the certificate of approval (because circumstances may change), a sale and purchase agreement satisfactory to the lender, and if it is a private sale they would also request a registered valuation. Other conditions may apply. Unfortunately on the basis of the lenders pre-approval certificate the client went unconditional on finance without paying attention to the conditions still outstanding.
Close to settlement date our client chose to approach us to become their mortgage broker, and it was only then, by providing us with all the necessary documentation that we helped them discover the predicament that they were in.
Lessons that can be learned from this situation:
- A pre-approval certificate is simply just that. It cannot be totally relied upon to go unconditional on any property because it generally will contain conditions that still must be met.
- A letter of offer is generally unconditional and can be relied upon, a copy of which should be provided to your solicitor prior to becoming unconditional.