In NSW, Contracts for the sale of land are not subject to finance, unlike contracts in Queensland and Victoria which contain a finance condition. Contracts in NSW are unconditional as to finance either immediately on exchange of contracts or on the expiry or waiver of the cooling off period.
As a result, if a purchaser enters into a Contract in NSW without unconditional finance approval, and they are unable to secure finance to complete the contract, then they will be liable for damages for breach of contract.
In a recent decision, the purchaser was able to transfer that liability to their solicitor.
The decision is Lemongrove Services Pty Ltd trading as Reimer Winter Williamson Lawyers and Anor v Rilroll Pty Ltd and Ors  NSWCA 174 (17 July 2019) a decision of the Court of Appeal Supreme Court NSW (Payne JA, Bell P and Simpson AJA agreeing).
The contract was for the purchase of land and a café business conducted on that land at Huntley’s Cove. The purchaser was Riroll Pty Ltd as trustee of the Hanshaw self-managed superannuation fund. The solicitor acting for the purchaser was Mr Brischetto of Reimer Winter Williamson Lawyers.
Before they signed the contract, the Hanshaws instructed their solicitor to ask that the contract be made ‘subject to finance’. The purchaser’s solicitor submitted a special condition to the vendor’s solicitors to make the contract ‘conditional upon the purchaser obtaining finance to enable the purchase of the property/business on terms which are reasonably satisfactory’ on 19 November 2014.
The vendor’s solicitor replied on 20 November 2014 that the vendor did not agree to make the contract ‘subject to finance’.
On 27 November 2014, the Hanshaws met with their solicitor and signed the contract. The two issues litigated in the appeal revolved arose from this meeting:
- Did Mr Brischetto tell the Hanshaws at that meeting that the vendors had refused to include a ‘subject to finance’ clause in the sale contracts? and
- Would the Hanshaws have refused to exchange contracts had they been told that the vendors had refused to include a ‘subject to finance’ clause?
Contracts were subsequently exchanged. Despite two valuations being obtained by the bank chosen by the Hanshaws to finance the purchase, the valuations were considerably less than expected and they elected to abandon the purchase.
Subsequently, the Hanshaws were sued by the vendors for breach of contract and agreed to pay damages which were agreed at $272,559.65.
The primary judge found in favour of the Handshaws by answering “no” to question 1 and “yes” to question 2.
The solicitor’s retainer and duty of care
The appeal was primarily a challenge to the factual findings that Mr Brischetto had not told the Hanshaws that the ‘subject to finance’ clause had been rejected by the vendors, and that had they known of this, the Henshaws would not have entered into the contracts.
The Court of Appeal rejected these challenges, and found that the primary judge’s findings were not ‘glaringly improbable’ nor ‘contrary to compelling inferences’. The Court dismissed the appeal with costs.
Significantly for our purposes, the Court of Appeal approved this description of the solicitor’s retainer and duty of care:
if there is a finding that the Second Appellant [the solicitor] failed to inform the Respondents [the Hanshaws] of the rejection of the “subject to finance” clause by the Plaintiffs, this constituted:
a. a breach of the implied term of the retainer to exercise due care and skill in the performance of the retainer, and
b. a breach of the duty of care owed to the respondents by the Appellants in accordance with section 5B of the Civil Liability Act 2002 (NSW).”
What should the solicitor have done?
The recollections of the parties of the meeting of 27 November 2014 differed, and solicitor’s file notes were unclear.
What was missing was an email or letter to the clients in which the solicitor advised of the rejection of the finance condition, and an email from the clients authorising the solicitor to proceed with an exchange of contracts despite not having a finance approval in place.
Is this decision of limited application or does this decision impose a general duty on solicitors concerning finance for a property purchase?
These are the factors that need to be considered:
- The contract in this case was for the purchase of a commercial property on which a café business was conducted. As such, it differs from a residential property purchase, for these reasons:
- Commercial property valuations can vary a great deal, depending upon the status of a tenancy;
- No cooling off period is applicable to a commercial property purchase;
- The purchasers are usually business people or investors, not home owners, and are usually more sophisticated when it comes to finance.
- In this case, the purchaser instructed its solicitor to include a ‘subject to finance’ clause in the contract. The solicitor made the request, but did not (adequately) advise his clients that the request had been refused.
- The purchaser’s bank was taking time to process the finance application. It might be some time before a loan approval might issue. There was a sense of urgency because the vendor was pressing for an exchange of contracts.
- There is a specific warning on page 6 of the Standard Form Contract for the sale of land in NSW about finance:
A purchaser should be satisfied that finance will be available at the time of completing the purchase.
The conclusion is that this decision is limited to the specific facts, namely, the solicitor’s failure to (adequately) advise of the refusal by the vendor’s solicitor to include a ‘subject to finance’ condition in the Contract.
The decision does not impose a general duty on solicitors to warn purchasers that the Contract is not ‘subject to finance’ before exchanging contracts, apart from the specific warning in the Contract.