Solicitor’s Approval Clauses in Real Estate Agreements – An Easy Out?

When selling or purchasing a property, market conditions can create a sense of urgency to get an agreement signed.  This often happens after hours.  Vendors and purchasers know that they should really check the agreement with their solicitor before signing, but pressure to secure the deal may encourage them to sign the agreement anyway, and include a solicitor’s approval clause.

Vendors

A vendor’s solicitor’s approval condition will allow the vendor’s solicitor to address matters such as the risks of entering into the agreement, the warranties and undertakings the vendor is giving, the amount of the deposit, whether the dates make sense and whether the vendor’s bank will agree to release their security over the property.

Purchasers

Buying real estate is usually the biggest investment people make in their lives, so it is important to understand all the legal implications before making a full commitment to the purchase.

Traditionally a purchaser’s solicitor’s approval condition was included to allow the purchaser’s solicitor to check the property title and other conveyancing matters.  For example, the solicitor will check that all the easements needed to be able to use the property are registered and that the purchaser is happy to comply with any easements the neighbours have registered over the property.  The purchaser’s solicitor will also need to check any land covenants registered against the property.  There could be many issues, including specifications relating to the type and size of house allowed to be built, rules about contributions to right of way costs and building line restrictions.

The purchaser’s solicitor will also check any additional clauses that the parties have drafted, anything that has been deleted and whether the proposed dates are feasible.  For example sometimes contracts are mistakenly drafted with one of the condition dates actually falling after the settlement date. Vendor’s warranties are also sometimes deleted.  This can mean, for example, that work the vendor has carried out on the property does not have a code compliance certificate.  The purchaser’s solicitor can also consider whether any other clauses need to be added, such as a finance condition or a methamphetamine testing condition.

Broadening out

There has been a notable movement towards very broad purchaser’s solicitor’s approval clauses.  They often now allow solicitors to take into account all conveyancing and commercial aspects of the agreement and any other matters which the solicitor considers relevant.  This could include whether the purchaser can get finance, whether insurance is available and whether the property is a good buy, economically.  Sometimes the clause goes on to say that the solicitor may take into account the wishes of the purchaser.

An easy out?

This then begs the question, is this really a binding agreement or are the purchasers just taking an option over the property while they continue to scout the market for a better one?  Can the solicitor’s approval clause allow them an easy out, just because they have changed their mind?

Legally this is not the case.  By law, solicitors can only withhold their approval in a narrow range of circumstances and only for a genuine legal reason.  How broad those circumstances are depends on the exact wording of the clause.

Purchasers should be aware that disgruntled vendors can pursue them in court.  The agreement for sale and purchase requires purchasers to take all reasonable steps necessary to satisfy the conditions.  This does not allow an agreement to be cancelled simply because the purchaser has changed his or her mind.

The vendor may choose to sue the purchaser for any losses that result from the agreement being cancelled.  This may include a capital loss, if the vendor has to accept a lower sale price, when they eventually find a new purchaser.

There have been many cases in which the courts have not allowed solicitor’s approval clauses to be used to cancel an agreement.  These have included cases where dates did not properly align, or the purchaser did not understand the legal implications of a clause, or the commercial leases on the property were deficient.

What should you do?

Whether you are a vendor or a purchaser, absolute best practice is to allow your solicitor to review your agreement before you sign it.

Where it is not possible to have a solicitor review the agreement before signing, vendors should consider including a vendor’s solicitor’s approval clause.  They should also limit the number of days allowed for the purchaser’s solicitor’s approval.  Ideally only five working days should be allowed, or less, if possible.  The solicitor’s approval clause should be restricted to matters relating only to the property’s title.  If the purchaser cancels the agreement based on solicitor’s approval, the vendor should consider taking further legal action, if the circumstances warrant this.

Where it is not possible to have a solicitor review the agreement before signing, purchasers should include as broad a solicitor’s approval clause as possible.  This will provide the best opportunity to cancel the agreement, if needed.  However, if what a purchaser really wants is an opportunity to carry out a due diligence investigation on the property, then it would be legally safer to include a broad due diligence condition rather than a solicitor’s approval condition.

Summary

When buying or selling a property, we recommend that you speak to your solicitor about what clauses need to be included in the agreement, before signing anything.  If this is not possible, then ask your real estate agent to include a solicitor’s approval clause.  However do not regard that clause as an opportunity to cancel the agreement due to a change of heart or circumstances.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.