TOP 20 contract clauses Every real estate Agent should know about

Buyers often face clauses in contracts and the specific of these clauses may vary from state to state in Australia. The clauses below are not an exact description of the laws, rather an indication of potential risks and important nuances in contracts that can make an agent’s job easier.

1. Exclusion of Representations Clause

Most contracts include a clause stating that ‘The Buyer enters this contract without relying on any advertisement, inducement, or promise, whether verbal or in writing, unless expressly contained in this contract‘.

These clauses aim to eliminate or exclude your ability to make any legal claim if these representations turn out to be false.

Common scenarios include when a vendor or their real estate agent makes promises to fix items in the house before settlement, assures that a park will be constructed nearby, or guarantees that views will remain unobstructed in the future.

2. Finance Contingency Clause

While a “Subject to Finance” clause is commonly included in Contract of Sale agreements, some buyers opt to exclude this clause to enhance the attractiveness of their offer to the seller. However, with increasing interest rates and lenders becoming more stringent in their home loan assessments, it’s crucial not to presume that your finance will be approved, even if you’ve obtained pre-approval!

3. Property Condition Clause

When purchasing a property, buyers face significant risks related to defects and infestations, such as termite damage. It’s highly advisable for buyers to conduct due diligence reports, including pest and building inspections, and in some cases, contamination assessments. Hidden defects or infestations can incur substantial costs to rectify.

4. Early Occupancy Clause

If a seller agrees to permit the buyer to occupy the property before settlement, the contract may incorporate an early possession clause outlining the rights and obligations of both parties. This clause typically addresses pertinent details such as dates, fees, and procedures in the event of delayed settlement or contract non-completion.

In cases of short-term early occupancy, specific details may be outlined through a special condition. It’s important to recognize that early occupancy under a license agreement or special condition does not grant the buyer legal rights akin to a residential tenancy agreement. Consequently, if the buyer fails to fulfill the contract, they are required to vacate the property. 

5. Agent Introduction/Indemnity Clause

Often, vendors include a clause in the contract requiring the buyer to confirm that they have solely interacted with the agent specified on the contract’s front page. Additionally, the buyer typically indemnifies the vendor against any breach of this confirmation.

In essence, if the buyer engages with another agent (typically a previous agent no longer retained by the vendor) and that agent sues the vendor for commission, the buyer is liable for paying that commission and associated expenses. This clause can lead to unexpected expenses for the buyer if they are found in violation.

6. Sunset Clause

Sunset clauses are commonly found in contracts for off-the-plan property purchases, but they can also be present in contracts where the sale is conditional upon the buyer selling their existing property.

In such cases, the sunset clause allows the buyer to terminate the agreement if he is unable to sell his home within a certain time frame. Likewise, it can benefit the seller by allowing them to re-list their property for sale if the buyer delays the process.

7. Interest for Late Completion Clause

In the event of late settlement, often due to delays from the buyer’s bank, contracts typically include a clause imposing interest for tardy completion.

This interest rate can surpass the mortgage rate significantly.

Buyers may find this unfair as the delay is often caused by their bank rather than themselves. Conversely, if the vendor is behind schedule, it’s common that buyers cannot levy interest on them, which can come as a surprise.

8. Penalty Clause

A penalty clause is usually invoked in cases of contract breach, outlining the compensation the breaching party must provide to the other party for its non-performance, typically in monetary terms.

Such clauses serve to protect both organizations and individuals from potential risks, dissuading the breaching party from resorting to litigation to avoid paying.

However, modern contracts often feature a deposit amount lower than 5-10%, while the penalty amount, conversely, exceeds or is comparable to 10% of the deposit, potentially resulting in legal repercussions.

9. 14-Day Notice to Complete

In the event of a late settlement, it’s customary for the contract to include a provision allowing the vendor to issue a Notice to Complete, which makes time ‘of the essence,’ requiring settlement within 14 days.

Upon expiry of the notice period, if settlement still hasn’t occurred, the vendor has the right to terminate the contract.

10. Deposit Clause

Another frequently seen special condition enables the vendor to utilize your deposit before settlement, provided it’s applied to their own purchase, stamp duty, etc.

The broader the clause, the greater the risk. If the clause permits an “unconditional” release of the deposit—allowing the vendor to use the deposit funds early for any purpose—it can be challenging to recover the money (without resorting to legal action) if, for instance, you need to rescind the contract.

11. Solicitor’s Approval Clause

A solicitor’s approval clause is typically included in Agreements for Sale & Purchase, although the exact wording may vary. Generally, it allows the agreement to be subject to your lawyer’s approval regarding title, form, and content.

However, it’s important to note that this clause doesn’t grant unrestricted cancellation rights. Courts have ruled that solicitor’s approval clauses can only be utilized to cancel the agreement based on conveyancing aspects of the purchase.

12. Incapacity Clause

In the unfortunate event of one party’s death or incapacity, a special condition is often included in the contract, enabling the other party to rescind the agreement at their discretion.

13. Exclusion Clause

Exclusion clauses, also known as exemption clauses, are contractual terms that limit or exclude parties’ liability for losses or damages arising from contract performance. These clauses may cover various types of contracts, including commercial, service, and consumer agreements, and are interpreted based on their natural and ordinary meaning.

14. Guarantor Clause

When purchasing property under a company name, it’s essential to be cautious as you might unknowingly provide personal guarantees if you’re a director. Vendors often require this provision.

15. Land Tax Adjustment

Certain vendors attempt to transfer their land tax obligation, if applicable, to the buyer by adjusting it proportionately in the contract, alongside the purchase price. This adjustment may be indicated by ticking a box on page 2 of the contract or through a special condition overriding an initial “no” marking.

16. GST Clause

Custom GST clauses are sometimes necessary, especially in cases involving brand-new properties and the use of the “margin scheme” method. However, poorly drafted or ambiguous clauses can lead to confusion or disputes over GST payment responsibility. Seeking expert advice on these matters is crucial.

17. Subject to Sale Clause

A Subject to Sale clause provides a buyer with an option to withdraw from a contract without repercussions if they are unable to sell their current property. While crucial for buyers relying on the proceeds from their existing property sale, these clauses present a notable risk to sellers. There’s a possibility that the contract may collapse, causing the seller to miss out on selling their property to another buyer without the complications associated with a Subject to Sale clause.

18. Exculpatory Clause

An exculpatory clause absolves a party from liability for damages arising from contract performance. Essentially, this means that if one party is shielded from legal action for foreseeable risks, the other party must acknowledge and accept this condition. Examples of documents incorporating exculpatory language include disclaimers, such as those found in health waivers signed when enrolling for services like therapeutic massages or gym memberships.

19. Cancellation Clause

Once a contract is established between two parties, exiting it before meeting all terms and conditions can be challenging. Common reasons for contract termination include force majeure events and breaches of contract. However, parties may choose to include a cancellation clause during contract drafting. These clauses outline conditions and terms under which one or both parties can prematurely terminate the contract. Typically, this involves providing written notice of termination.

20. Arbitration Clause

An arbitration clause entails the involvement of a neutral third party to facilitate dispute resolution between two contractual parties. This process offers a less formal avenue for resolving conflicts that may arise during the contract’s duration. Typically, both parties agree to prioritize arbitration as the primary method of resolving disputes. This approach can help expedite resolution, minimize legal costs, and preserve the working relationship between the parties involved.