Applying for finance through the wrong lender could place you at risk of legal action

A recent settlement has highlighted the risks created when buyers ignore the requirements of the Subject to Finance clause on the Offer and Acceptance.

In this case, the buyer made an offer subject to finance approval from the ANZ. But, rather than applying for finance directly to the bank, she chose to approach a finance broker to act on her behalf.

It soon became apparent, however, that the buyer did not qualify for a bank loan and the broker issued a finance decline on their own letterhead.

However, the broker’s finance decline letter failed to satisfy the requirements of the Subject to Finance clause.

First, it failed to show evidence that the buyer had used their best endeavours to obtain a loan from the nominated lender, as required by clause 1.1. Second, it failed to satisfy the definition of a Non-Approval Notice, which requires the notice to be from the lender specified in the contract.

Of course, in most instances, common sense prevails and the seller agrees to end the contract and release the purchaser’s deposit.

However, that’s not always the case.

In 2011, the Court of Appeal of the WA Supreme Court upheld a ruling that a purchaser pay damages to the seller after they failed to use their best endeavours to obtain finance through the lender nominated on the contract.

To avoid facing the risk of legal action, buyers should remember the following:

  1. The Subject to Finance clause is a fundamental term of the contract and should not be treated lightly.
  2. When a contract is made subject to finance approval from a nominated lender, the buyer must make a genuine attempt to obtain finance through that lender.
  3. Where finance is declined, a letter to that effect should be issued by the nominated lender.

If have questions about writing an offer, call me on 0419 538 838 and I’ll do my best to help.

Image: Julien Haler on Flickr

About the Author

Peter Fletcher

Peter began his real estate career in 1985 selling tin shacks and red dirt in Kalgoorlie. Moving to Perth in 1989 he quickly moved into agency ownership. It wasn't long before Peter experienced the heartbreak that came when a dishonest property manager stole tens of thousands from his agency trust account. Determined that no client would suffer from the event, he worked late nights and non-stop weekends to recover the losses. By 2006, Peter had built a thriving agency managing over 600 rental properties. He then sold the business, taking time out of the industry while completing Honours in a Bachelor of Arts. Peter is now the Managing Director of Residential Settlements in Burswood and an active Army reservist. Peter has had just one hot shower since the 10th of May 2008.