Rose cottage, by UGArdner

How Foresight and Smart Contracts Can Prevent Homeless Clients

The complications involved with ‘subject sales’ need to be anticipated before writing up the Offer and Acceptance.

A subject sale case occurs when a client is looking to buy a house, but needs to sell their existing house in order to do so. Unsurprisingly, these cases are fairly common as many people looking to move need the money from the sale of their previous house to be able to afford the new one.

Ms Florence, a single pensioner looking to downsize, is in a bind. She’s unable to settle on the sale of her home as the because the owner of the home she’s buying is unable to settle, because the tenants of the home they are buying aren’t moving out until a week after Ms Florence’s settlement date.

The situation is complex and, for Ms Florence, confusing.

Here’s how the subject sale chain looks:

[Buyer moving in -> Ms Florence moving out -> Her seller moving out -> Tenants leaving] [Tenant's aren't leaving yet -> Her seller not moving out -> Ms Florence can't move out -> Buyer still looking to move in]

The man selling his home to Ms Florence does not have to proceed with settlement because his contract requires vacant possession, and therefore can’t proceed until the tenants vacate. Ms Florence’s contract to buy is subject to selling her original home, but her contract to sell is not subject to her purchase proceeding. So while her buyer can charge her expensive penalty interest for delaying settlement, she has no such right.

Ms Florence –  who has only one property to her name – now faces two undesirable options:

  1.   Having nowhere to live, or
  2.   Paying around $130 penalty interest per day if she delays settlement until she can move into her new house.

These options are not at all good for Ms Florence. Although they’re not great for Ms Florence’s buyer either – he faces having settlement delayed – at least he has the option of charging Ms Florence penalty interest.

What are the solutions?

In the short term the problem can be overcome by negotiating with all of the parties up and down the subject sale chain. These negotiations would include helping Ms Florence by arranging possession prior if the seller of Ms Florence’s new home is willing to do a double shift.

But while alternative solutions such as these exist, the best solution is prevention.

When a seller has informed you that they’re looking to buy a home as well as sell, think ahead – make sure the Offer and Acceptance is written in a way that allows settlement to be delayed if their purchase is delayed as well.

A clause specifying something along the lines of “…subject to Ms Florence successfully purchasing her new home” would have protected Mr Florence from her current situation *.

Going the extra mile to take into account the interests of all parties to a transactions will pave the way for a great client relationship.

What would you do if you were the real estate agent in this situation? Let us know in the comments.

*Note: This is general information and observation only, and does not constitute legal advice. See a lawyer for specific advice on writing Offer and Acceptances.

Image by UGArdner via Flickr.