Help! How do I terminate a contract?
There are various ways a buyer can possibly terminate a contract before settlement occurs.
A prospective purchaser should never sign sign a contract without it being legally reviewed first, or at least without a subject to legal review special condition. However, sometimes mistakes are made in the heat and emotion of the moment (especially by first home buyers), so what are the options to terminate a contract before settlement?
Firstly: if only the purchaser has signed the contract but not the vendor, and it's not immediately after the purchaser won an auction or under auction rules, then the purchaser can simply withdraw their offer, via an email to the real estate agent; something like: My offer is hereby withdrawn. The contract was never completed because the vendor never signed it.
If the purchaser signed the contract within the last three business days, and the vendor already signed it too, and if it's not under auction rules, then the purchaser can exercise their right to cool off. If the purchaser cools off (via them or their lawyer/conveyancer sending a formal cooling off email to the vendor's lawyer/conveyancer), the vendor is then entitled to require payment of 0.2% of the purchase price as the cooling off fee, regardless of whether any deposit funds have been paid yet (they or the real estate agent can send the purchaser a tax invoice for it).
If the contract has a subject to finance approval or Loan clause, and the purchaser fails to obtain finance approval (because, for example, the bank's valuation came back too low), then the purchaser can terminate the contract due to failure to obtain finance approval. It is reasonable for the vendor to require a letter of proof from the purchaser's bank, and some contracts will state this as a specific requirement. The purchaser is then entitled to a full refund of their deposit. Notice of termination must be provided before the deadline in the contract.
If the contract has a subject to building and pest inspection clause, and the inspector finds a major structural defect, or a serious pest infestation, the purchaser can terminate the contract and receive a full refund of their deposit - provided a copy of the inspector's report is given to the vendor's conveyancer. Once again, notice of termination must occur before the deadline in the contract.
Some contracts will contain customised special conditions that the purchaser's lawyer prepared, requiring the vendor to do something by a certain date - such as provide copies of missing property certificates, or updated documents. If the vendor fails to comply with a customised special condition, the purchaser could possibly terminate the contract within the stated timeframe and receive a full refund of their deposit. These types of special conditions must be carefully worded by the purchaser's lawyer (not the real estate agent) to be enforceable.
Termination of the contract can also occur due to certain events such as a party becoming bankrupt or insolvent, or mentally incapacitated. The death of a party does not necessarily end the contract, as the deceased's party's estate could still be responsible for the completion of the contract. The legal doctrine of frustration is another way a contract can be terminated, due to impossibility, but that is rarely applied in conveyancing contracts.
Perhaps the most dramatic way a contract can be rescinded (terminated) is pursuant to Section 32K of the Sale of Land Act (Vic). This can occur at any time up until settlement, if the vendor failed to include compulsory documents/information in the vendor statement/section 32, which have detrimentally impacted the purchaser and what they paid for the property, or their decision to purchase the property at all. It is extremely foolish of a vendor to deliberately withhold adverse information from a vendor statement/section 32 (such as a Section 137b owner builder defect report for recent illegal building work, or minutes from the most recently held Owners Corporation AGM where serious building defects were discussed). If the purchaser discovers hidden adverse facts before settlement, which the vendor should have disclosed earlier, then the purchaser can terminate the contract, and receive a full refund of their deposit, even if they purchased the property at an auction. And the vendor would need to sell the property again and pay commission to a real estate agent again = likely a financial disaster for the vendor.
Note: the above is general information and should not be considered as legal advice. Image via Freepik