Agreement for Sale and Purchase
The first port of call is to make yourself familiar with the mortgagee’s form of agreement for sale and purchase. This is typically amended considerably from the standard form and designed to give the mortgagee maximum protection. This includes providing the mortgagee the opportunity to cancel the sale, the general exclusion of the risks that are usually taken by a vendor in a voluntary sale situation, as well as removing many of the standard rights normally afforded to a purchaser. Below are some of the key factors that purchasers should be made aware of before buying at mortgagee sale:
1. No right to Vacant Possession – By and large, a mortgagee selling at mortgagee sale will not guarantee vacant possession on settlement unless it has entered into possession of the property. This can cause problems if the owners are still residing in the property at the time of sale. The mortgagee is not under any obligation to ensure that the property is vacated prior to settlement. Accordingly, if the mortgagors refuse to vacate the property, it will be the purchasers responsibility to take action to have the owners removed, including possibly seeking an order from the Court to evict the occupants. Even if the mortgagors do leave the property prior to settlement, the mortgagee is not under any obligation to ensure that the property is clear of any chattels or other rubbish that may have been left at the house. Again, the responsibility falls to the purchaser to have this removed.
2. Mortgagee’s right to cancel – properties sold at mortgagee sale are usually sold unconditionally upon signing the agreement. Once the contract is unconditional, it is binding in all respects on the purchaser. However, mortgagees often insert a clause which allows the mortgagee to cancel the contract at any stage prior to settlement if the mortgagee is unable for good reason to transfer the title to the purchaser, or for some other reason. In many cases, the contract will also contain a clause that states that the mortgagee can cancel the contract for whatever reason, so to allow for the situation if the mortgagor repays the loan in full prior to settlement, or if the mortgagor sells the property for a better price.
3. Vendor’s warranties removed – the standard vendor’s warranties contained in the standard agreement for sale and purchase will generally be removed from a mortgagee’s contract or auction documents. Therefore, there is no obligation to provide warranties relating to the provision of a Code of Compliance Certificate for works completed on the property, or warranties relating to the working order of the chattels. The onus falls to the purchaser to satisfy themselves that they have a made the appropriate enquiries and investigations in this respect.
4. Chattels not included in the sale – unless specifically stated on the contract, a house sold at mortgagee sale is sold exclusive of any chattels. The mortgagee security is over the property, unless separate financing statements have been registered, the mortgagee generally will not have security over chattels and therefore does not have authority to sell those chattels. Because these are not included in the sale, the purchaser is at risk of the mortgagor removing these items prior to settlement, as is there right to do. Chattels could include carpets, curtains, stove, dishwasher or light fittings.
5. Risk of damage – the risk of damage to the property passes to the purchaser immediately upon becoming unconditional. A purchaser at mortgagee sale should arrange for insurance of the property at that point to protect themselves against the risk of the property being damaged prior to settlement. If purchasing at auction arrange insurance cover before bidding.
6. Unconditional purchase – the most common method of selling a property at mortgagee sale is by mortgagee auction. As with auctions generally, purchasers are expected to be bidding unconditionally and are expected to have completed their own due diligence in anticipation of the auction. Given that the vendor’s warranties will have been removed from the auction contract, it is even more important at mortgagee sale that purchasers make thorough investigations before attending the auctions. This includes searching the title, making a thorough investigation of the property which may include obtaining a Council Land Information Memorandum or builder’s report. If a successful purchaser at auction subsequently discovers issues with the property, they do not have any right of recourse under the terms of the contract. This makes it even more important that the appropriate investigations are made prior to attending the auction.
Due to the risks involved purchasers normally make deductions on how much they are willing to pay at mortgagee sale. Given the amount of press lately detailing accounts of situations where mortgagors have removed chattels and have otherwise damaged the property prior to settlement, it is even more important to ensure that clients are made well aware of the risks involved in purchasing at mortgagee sale.
The better prepared you are, the lower the risk.