Ep 34. Top 3 Tricky Clauses with Jared Zak
In this episode, Michelle chats with Jared Zak from Dott and Crossitt about the 3 tricky clauses when getting your contract reviewed.
Here’s what you’ll learn from today’s episode:
What are some clauses to look out for?
What is a release of deposit clause and how can it work against you?
Do you need to worry about Land Tax adjustment?
Are late fees something to worry about?
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
Jared Zak - Dott & Crossitt
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This podcast has been produced and edited by Snappystreet Creative
Please note that any views or opinions presented in this podcast are solely those of the speakers, and do not necessarily represent those of any business. These views and opinions are general in nature, and do not take account of your personal objectives, financial situation and needs. Please consider whether it applies in your circumstances and seek professional advice wherever appropriate.
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VIEW TRANSCRIPT
Michelle May: Hello and welcome to another episode of the Buy Your Side podcast, the property podcast to help you make smarter property buying decisions. My name is Michelle May, and I am the principal of Michelle May Buyers Agents here in Sydney. Now, I always talk about getting your contract reviewed. No matter how many selling agents tell you, “oh, they're all the same, don't worry about it, we'll do the right thing by you.”
Now, that's all great, but do you actually know that there's quite a few tricky clauses in a contract that you may have never heard of. This is why today I am very honoured to have Jared Zak, who is the principal of Dott and Crossitt Conveyancing and Solicitors with me today, who is going to talk us through three or four of the most tricky clauses in a contract and things that you really should be aware about and also discuss with your solicitor or conveyancer.
Hey Jared, how are you?
Jared Zak: Good, thanks Michelle. Thanks for having me.
Michelle May: Thanks for coming on the show. I'm very excited to have you here because even though obviously I get a lot of contracts sent to me, even to me they look very, very similar every single time. So it's great that you are willing to talk our listeners through some clauses that you really should be paying attention to.
Just why don't you hit me with the first one?
Jared Zak: Yeah, but before I do that, just a comment on your intro. It was absolutely spot on, but it is actually something relatively unique to New South Wales. I think, you know, if a sales agent in Queensland told you that all contracts are the same and don't worry and just sign, it wouldn't be the most untrue thing an agent's ever said because they're pretty standardised up there in Queensland. In fact, they're actually drafted by Queensland agents.
In New South Wales, it's completely different. And, and I don't even know what the reason is. It might be sort of cultural. Someone once told me that New South Wales is the second most litigious state in the world.
Michelle May: Yes, I've heard this as well.
Jared Zak: And that will make sense. These contracts they're not pleasant. There's a lot of little nasty clauses in there. They're not uniform. There is an element of the contract that's uniform, these sort of watermarked pages, which are produced by the law society, but then you have at the back of those five to ten pages usually of so-called special conditions and that's where the vendor’s Solicitor says, “forget your printed conditions produced by the law society. We want to make it more in favour of the vendor.” And there's probably about three or four clauses which come up time and time again and it might be useful for your listeners to have a bit of an understanding of those.
Michelle May: Well, thanks for that clarification. I wasn't actually aware of that, but obviously in Australia, every state has different rules around what can happen in real estate. But, so here in New South Wales you've got the standard contract. You've got special conditions. So which one is the first one you think we should be paying attention to?
Jared Zak: I wouldn't worry so much about the printed conditions. Don't try to read them. I can't remember the last time I read them.
Michelle May: Maybe you have trouble sleeping, you know, just put yourself to bed.
Jared Zak: They're generally pretty fairly drafted because they're produced by the law society. If you want to read something in your own time, check out the special conditions because that's where the nasties are. I'd look out for things like release of deposit clauses. I would look out for land tax adjustments. I'd look out for late fees. And probably as a fourth thing as well, I'd have a bit of an understanding of, if you are able to put down a lesser deposit, which we encourage all our buyers to try and negotiate, how you'd actually do that, what that looks like and what that means if you actually default.
Michelle May: Yeah. Okay. So first of all, release of deposit. Let's break it down. What does it actually mean? What does it mean for the buyer in particular? Of course.
Jared Zak: So the normal transaction runs like this. You have an exchange or signing date. That's where you sign the contract and you put down a deposit. Usually a 10% deposit, sometimes a 5% deposit. You then have a normally 42 day settlement period with which both parties race off to their bank and arrange all the various things that need to happen before settlement so the buyers are arranging finance, the vendors are arranging for their mortgage to be discharged, and there's a whole lot of searches that conveyancers are doing. Now at the end of that 42 day period usually, could be longer, could be shorter, we then settle and you pay the remaining 90% plus your stamp duty and you settle. Now, the whole idea of a release of deposit is, if we go back to the point that you exchange contracts, and the vendor says, I want to get early access to that deposit, even though we're not going to settle for another 42 days. I want to get early access to that 10%, or 5%, which would otherwise be in the real estate agent's trust account, and I want to go and spend that on another property.
Now, why would they want to do that? Well, it may have to do with Sydney house prices or New South Wales house prices they're so high and there's so much equity tied up these days in your house, they just may not have the money lying around to go and buy another property. Because don't forget, they've gotta give you vacant possession in 42 days time. So you can kind of see where they're coming from. But it does impose a risk because that money is no longer sitting safely in the Ray White or the McGrath or the Belle Property Trust account. It's now gone out into the ether and anything can happen. And in fact, in some cases, some things have happened to my clients.
Michelle May: Because, am I wrong in my understanding, and I've mentioned this before in other episodes, that if it isn't specifically specified that the release of deposit is to be used for the purchase of a property, that vendor may well go out on an expensive, all paid, all-inclusive, holiday in Bali, or buy a boat or, some Tiffany jewellery for their wife, that's correct right? They can literally spend it on anything.
Jared Zak: Yeah, absolutely. There's two types of release of deposits. There's one that's bad and there's one that's really bad. And the one that you just described is the really bad one.
Michelle May: Right. So does it come with a small asterisk? This one is bad. This one's really bad.
Jared Zak: You've got to get your solicitor to review that. It's really important because that one you described, it's just a no. Where I've seen those clauses Michelle they haven't actually been to go on a holiday. It's actually been to pay down debts like Amex bills and credit card bills. That sort of to me indicates some kind of financial distress. That is the real risk in release of deposits. The real risk is actually not that they're going to go spend it on a trip in Bali. It's actually not that they're going to go to the casino and spend it. It doesn't matter. You still pay the deposit. And so long as you settle in 42 days time. It doesn't matter but that's the big proviso so long as you settle. Now why wouldn't you settle? If we come to 42 day time and the vendor can't settle, how could that possibly have happened? The main way that it could happen is what we call the three D’s. Death, Debt, and Divorce, but the big one is probably Debt, and this has happened to one of my clients. We've gone to the 42 day settlement, we've gone to settle and his mortgagee, his bank, has said, we're not going to give you the title. We've got a mortgage on this property and there's not enough money coming in to pay out our mortgage. And we actually trump anyone else.
So, I'm really sorry, but even though you've entered into a contract for sale, we're not going to let the vendor sell it to you. Now in that particular case, we said, well, this is a stuff up. Can we get our money back please? Our deposit? And he said, I'm really sorry. I took that money and I spent it, in this case, he did actually buy another property with it. He bought it down south in Cronulla. But guess what? He defaulted on that property, he's lost it. It actually happened to a client of mine. Looking back at it, it was really regrettable. We did advise our client not to do it. In hindsight, we should have just been absolutely adamant that he can't do it. But he took his own advice on that one.
A couple of things in hindsight that I look back on and think were big red flags, that probably if I see them again, I'll never, ever, ever allow my client to agree to it. The first one is the financial distress of that vendor. It was obvious when you look at the title search he didn't have one mortgage to CBA. He didn't have one mortgage to Westpac. He had a whole lot of mortgages to a whole lot of unknown financiers. Mango Mortgages and Easy Finance Proprietary Limited. It was just a cast of thousands on the title search. So in other words, he's very highly indebted, so the probability of him not being able to give a good title at settlement was actually quite high.
The second thing which made that risk really high on that one is the long settlement date. So if you have a settlement date, which is the normal date of 42 days, there's only so much that can go wrong during that period. It's a relatively short period of time. You're going to have to be a little bit unlucky for something to go wrong with the vendor. In this case, it was a six month settlement period. So generally, the longer that you give something to go wrong in property or in life, the more likely it is to go wrong.
Michelle May: Yeah. That's probability for you, isn't it? So would a lot of contracts have a release of deposit clause in there?
Jared Zak: Yeah, I'm seeing them now at least 50% of the time which is a little bit frustrating because they're not always needed. A lot of the time, and my firm's a little bit guilty of this as well, when we're acting for vendors we'll just put them in the contract in case they're needed. And they get negotiated and then it's a bit of a waste of everyone's time really if they're not needed. They're allegedly needed about 20% of the time. We often do agree to them, we agree to those clauses that are the clauses where you can only use it for another house purchase and we only do it so long as it's a house purchase in New South Wales. As long as we can get a front page contract so we can know whose trust account it is. So long as there's nothing that gives us notice that the vendor is in particular financial distress. So as long as we can see if there's one mortgage on the title. And the other thing that we'd also just look at is whether the settlement date is unusually long. Providing it ticks all those boxes then we may, with the client's obvious authority, agree to a release of a deposit clause.
Michelle May: Excellent. Well that's obviously something we definitely need to look out for and obviously question your conveyancer or solicitor about this as well if you want to leave in those things you mentioned Jared, they make absolute sense. I never even thought about searching how many mortgages this vendor may well have. Excellent. That's an excellent point.
Number two, what would be your number two thing to look for?
Jared Zak: The one that comes up a lot now, and it panics people a lot and there's a lot of misunderstanding about it, is probably the land tax adjustment. So that's actually not a special condition. It's actually a box that's ticked on the second or third page of the contract. It just says, land tax adjustable, yes or no. It creates a lot of confusion because most people don't pay land tax. Moms and dads who are buying their principal place of residence, they're not going to pay land tax on that property, there's an exemption.
So when their conveyancer or solicitor says to them, Hey, the vendor wants you to pay their land tax. It's really offensive. It becomes a really big issue then. What do you mean? I don't pay land tax, it's my principal place of residence. So what does it actually mean?
Well, what it means is we're actually talking about the vendor, and the vendor almost certainly is an investor who is selling you a property, for whom it's not his principal place of residence, and he pays land tax for. He wants you to contribute to his yearly land tax bill, not forever a day, just for that year.
So why would he want you to do that? Well, you have to look at what land tax is. Land tax is a yearly charge that is charged by the Offices of State Revenue New South Wales on the 1st of January every year. They'll look at your land holding and they say, you owe us $20,000. Now they charge you on the 1st of January. They collect payment around March, and if you sell your property midway through the year, you do not get a refund. Okay. The Office of State Revenue is nasty like that, you do not get a refund. What they say to the investor is, well, good luck that you've sold your property. But the land tax is charged on the 1st of January, it's for the whole year. You don't get a refund. So if you want to have a refund, if you want to have an adjustment, speak to your buyer. And that is what a land tax adjustment is. It's, hey, I've paid $20,000 worth of land tax in January. I've sold the property, on let's say the 30th of June. Ipso facto, I want you to give me a further $10,000 on top of the purchase price. So that's where they're coming from. It still doesn't make it fair because you know, when you'd sort of say, well, that's your problem, not mine.
Michelle May: Just to interject the land tax that that vendor has paid and the land tax adjustment that is mentioned in the contract, could he ask you to do that over all of his holdings or just one particular property?
Jared Zak: Yeah. It's an interesting question. He can only ever make you do it for that particular property. But it's an interesting question. He can sometimes make it so that you don't get the benefit of any land tax threshold. So what I mean by that is land tax, even if you are an investor and you do own multiple properties, you won't pay any land tax on the first say a million dollars worth of property. So if you own one investment property worth a million dollars, you will not pay any land tax. Now if you own two investment properties worth a million dollars each you're going to be above the threshold by a million dollars. So you will pay land tax. Now, what they'll sometimes say in the contract, not only do you pay my land tax, but you pay it as if I don't have the use of a threshold. Does that make sense?
Michelle May: Hmm. I'm not sure I like that.
Jared Zak: Now that's sort of doubly nasty as well. Sometimes you can sort of look at, you know, someone's selling you a $750,000 apartment in Sydney, and there's a land tax adjustment there. You might look and say, well, guess what? There's no land tax on that property because it's $750,000. Well, no, because some vendor solicitors will put a clause in there that says, you don't get the benefit of any threshold because we don't get the benefit of any threshold. Does that make sense?
Michelle May: Yes. Well, my socialist heart says, you are lucky enough to be an investor and own multiple properties. You pay what the government asks you to pay. But hey, that's just my thinking.
Jared Zak: But that's how most solicitors acting for buyers would put it. I guess it's slightly different if you are an investor. And that’s why it'll often come down to that when at negotiation point. The vendor might say, well, you're an investor, you've got your head around land tax. You've gotta pay land tax. It's a tax deduction, so you should adjust. But most of the time it's just really a nasty try-on that these big investor vendors will try and pass on, and it should almost always be negotiated.
Michelle May: Well, that's a really interesting clause actually, because yeah, it is in every contract, and I always see the box and, sometimes it's ticked, sometimes it's not. So it's really good to have a firm understanding about what that actually means.
Jared Zak: On that point, Michelle, and here's a little note for you. I'm sure you'll be aware of this, but not everyone is. If you see a box like that, that's not ticked. So it's not ticking either adjusted or not adjusted. That doesn't necessarily mean the solicitor's stuffed up and hasn't made an election. The rule is that whichever box pertains to the capitalised terms, that one will prevail. So that's a little tip. If ever you look into it, and go hang on, they haven't ticked a box, thankfully in the New South Wales contract for sale, the not adjusted is in capital terms. So that, in other words if nothing's ticked, the default is it's not adjusted.
Michelle May: Yeah, I was aware of that. It's funny, isn't it, because you have to always explain it to clients. Again, I think this is really important why you should always work with a really experienced solicitor who's just willing to take the time to explain these things to you because it's a massive commitment all around the country, but particularly here in Sydney, where property prices are crazy. So if you don't actually know what you're signing you might want to reconsider and think about what you're doing before you sign your life away.
But thank you for that. Number two, and then we've got number three. What would you put on number three for people to really get their head around?
Jared Zak: Well, it's a really simple one to digest, but it just comes up time and time again and it's the late fees. So it's almost always negotiated, late fees. So if you are late to settle as a buyer, the vendor, almost certainly charge you late fees on that. And I guess the reason is, well, there's many reasons. I guess it's just basically to compel you to not take forever in a day to settle. It's to pass on some of the mortgage costs that the vendor or mail may not have. Yeah. It's a little bit of a penalty basically that's sort of essentially what it is for being late. So trying to encourage you to be on time.
Now the question is, what's the appropriate rate to charge? Well, most vendors at the moment will start with 10%, so 10% per annum per day. So on a million dollar property, I think that works out to be around about $300 a day. Not sure how good my maths is, but it's going to be around that. So it's not, it's not something that's necessarily going to bankrupt you if you're a couple days late, but it's going to be very, very annoying. And obviously if it's a massive purchase price, if you're looking at $3m or $4m then 10% becomes a very significant amount. And if it's a 10 or 14 day delay, then yeah, it becomes a very significant thing.
Michelle May: And this is, even if it's not your fault, even if it's your bank just messing stuff up, but it's completely out of your control. You're just late and it is what it is.
Jared Zak: Oh, it's almost always the bank's fault. Purchasers are normally pretty good. It's normally their banks. And before you even ask the question, Michelle, chances of trying to get your late fees back from your bank, it's slim to none. Every now and then they might throw you a couple of hundred bucks, but it's trying to get blood from a stone, those guys. So it is important that you negotiate it, but your solicitor is not going to get it taken out of the contract. The best they can do is maybe bring it down to about 6%, 5%, will be a great result. The reality is, most of the time it finishes somewhere in between around about 8%.
Michelle May: What about if the vendor's late? Do they actually get any kind of, is there any recourse for the buyers? Because obviously they want to get in, they're ready to go. They've made this commitment. They already have the moving van already at the end of the street, cleaners etc What happens?
Jared Zak: Great question. And it sounds like you already know the answer. Absolutely nothing. It is so unfair. It is so one-sided. If the vendors are late. Nothing. And you might say, well, why isn't my solicitor negotiating that? Sometimes you don't even bother because it just never gets agreed. It's just basically a rule since the beginning of time, the vendor's contract. If you want to buy the property, buy it. Otherwise don't, that's sort of the attitude you get.
Michelle May: Is that the same then if the vendor pulls out of the contract completely?
Jared Zak: No, that's different. So we're talking about late fees here. You've still entered into a contract for sale at the end of the day.
Michelle May: It's going to happen. Just not on that particular day.
Jared Zak: Essentially it's 14 days, isn't it? You only have one thing you can do as a buyer if the vendor is late, and that is issue, what's called a notice to complete. And that notice to complete basically says, You are hereby noticed that you must complete the transaction, you must convey the property to me within 14 days. If you do not, then we are entitled to terminate and we can then take whatever action a termination allows us to do. And there's a few things you can do then, if you're in a position to terminate, you can sue for specific performance. So you can go to the Supreme Court and say, I've had a contract here. They have to transfer titles they haven't done it. And the court will actually say, well there it is, it's done. But if you just fall out of love with the property, if you're sick of this kerfuffle, then the other thing you could do is sue for damages. And you'd have to work out, well, what have I actually lost here? Have I lost accommodation? Have I lost the opportunity to be in the market, it's a bit messy. Not many people would go on that route. Most people would either sue for specific performance or they'd do nothing. They just get their deposit back and go.
Michelle May: Gosh, that sounds really, really stressful and I wouldn’t wish it upon anybody. So these are the top three, but obviously there's so much more to the contract. And with a release of deposit, you touched upon the option of 5% to 10% deposit. Now obviously with house prices being the way they are, from my end, I'm seeing more and more people asking for a 5% deposit and possibly even sometimes a deposit bond. Can you run us through what actually that all means?
Jared Zak: Yeah, look I'd encourage buyers, buyers agents, and solicitors out there to always try and go for a 5% deposit. I guess on the assumption or on the principle, that the money's always better in your hands than anyone else's. Interest rates are starting to mean things again, so you can have it in your bank account and it's just a lot of money to come up with.
So 5% is the new 10% as far as I'm concerned. We probably see it negotiated in more than 50% of the time. Now, one of the reasons why vendor solicitors often agree to it is they'll often put a clause in there that says, yeah, we'll let you put 5% down on exchange, but we really want a 10% deposit so you can pay the other 5% at settlement.
And it doesn't make much sense to so many people, well, why would I pay the other 5% of settlement? Cause I've gotta pay you the remainder of the purchase price anyway. The reason why the solicitors do that, and they put this clause in there, it matters when there's a default. If the buyer defaults, then automatically the vendor will take the 5% in the trust account and they'll automatically get a very simple claim for the other 5%. It's a very simple, almost one page document they put in the Supreme Court. If they don't characterise that a payment as a 5% deposit, then they're left to sue the buyer for damages. It's a far more complicated, involved and intensive, from a documentary perspective, claim in the Supreme Court.
So that's why they do it. I don't get too hung up about it because I always think, you know, if the money's not there, it's not there. If the buyer can't complete, then it's really just the 5% they're going to get. But that's what vendors do. Now, the reason why I went into that detail is because a lot of clients want to negotiate a 5% deposit. And they'll operate on that assumption. They'll put the 5% deposit down and they'll get the contract in front of them and it will say 10% on the front page. And they'll go into a panic. What do you mean? I said five. You said five. We all said five. Now relax, 5% is agreed, but it's all part of the window dressing that vendor solicitors try to put in place in case you default. They say, well, it wasn't a 5% deposit, it was a 10% deposit. You said it simplifies their claim. So don't stress out about it, that's just the way they do it.
Michelle May: Yeah, yeah. I come across this a lot, where we go, oh, and we're filling out the front page of the contract, and, and the buyer does exactly that. They go, oh, hang on a minute. It's like, no, it's all okay. It's all been negotiated. Very good points you make there.
What about deposit bonds? I mean, they're a lot rarer, I would say nowadays, aren't they?
Jared Zak: Yeah, they're not commonly used still. A deposit bond is basically for someone who just simply doesn't have any cash, to buy the property. It's all tied up in a fixed deposit or in another property that they're selling where they haven't managed to get a release of deposit, but they've got a very highly rated financial institution to say, here is a piece of paper that says if Joe Blogs defaults at settlement. I as QBE or whoever it is, the underwriter will pay the vendor 10%.
Now, vendors used to really hate those back in the day. They just were very traditional and vendor solicitors that is, and they prefer the cash. It is actually not a bad alternative for both buyers and vendors. And I'll tell you why I think it is. Firstly, it's fine and it's all legit. It works. We've seen vendors claim on them and we've seen a lot of buyers use them. But the biggest risk these days in conveyancing, the biggest risk I see right now has nothing to do with the market and the clauses we're going through. It's to do with cyber fraud. Okay? It's to do with scammers, impersonating solicitors, impersonating agents on email and saying, Hey, you've got your deposit due tomorrow. Transfer me this sum, to this account and they're so good. They copy the email signature. They almost get the emails exactly the same. And we have had so many clients almost make this mistake. And I know of a lot of people for whom they have lost hundreds of thousands of dollars. And that's because in property transactions we're flinging cash around. We're transferring cash. Okay, so the good thing about the deposit bond, it's just one less massive transaction that you have to make and that's why I like them a lot.
Michelle May: That's a really interesting point because there's lots of solicitors who straight off go no, we're not accepting that at all. Whereas now it's actually making a case to actually, Hmm. You should consider it. Cyber fraud is on the up and up. I mean, I don't know how many emails I've had in the last couple of months saying, oh, we're so sorry, but we've accidentally released all your private details to all these, different entities. Honestly, I'm changing my passwords every other day. Which is very scary and I know I'm not the only one. You know, it's happening to everybody out there. So you make a good point.
Jared Zak: They attack people in the property industry because they know that is a market where large sums of money are guaranteed to be changing hands.
Michelle May: Yeah. Well this is why I don't have a trust account, you see, I let the real estate agents deal with that and the solicitors. There's massive risk involved, obviously with the amounts of money that are changing hands, like you said.
Well, thank you so much, Jared. I really appreciate you taking the time to sit down with me and run our listeners through, you know, the most contentious, I suppose, risky clauses and special conditions in a contract that we haven't just covered, that just popped in your head. How do people get in touch with you if they are in need of a good property solicitor?
Jared Zak: I think we covered everything. There's a lot of other technical changes, but they're the big four. It's certainly the big four that I always think it's important for customers to sort of own their transaction a bit, to not be passengers and to understand some of these risks. Not every single amendment or clause in the contract is capable of being understood in the short period of time that transactions happen. But those four, I think are. But you know, it is still obviously very important to have your contract reviewed by a competent conveyancer or a solicitor. They're equally competent, either of them. I've had some very good solicitors, some very bad solicitors, and very good conveyancers, very bad conveyancers. My own firm. You know, we'd love to be able to assist any of your listeners there today. We are, I think New South Wales largest conveyancing company by volume.
We found last year. So we've got a lot of very competent staff. We've got 10 licensed conveyancers and 6 offices throughout the state, including Queensland. If you just wanted to go to our website there's a, get a quote button, on the front page, so it's www.dottandcrossitt.com.au
Jared Zak: It's not CrossFit, which we sometimes get.
Michelle May: That's a different exercise altogether.
Well thank you Jared. I loved having you on. I hope you come back again very soon to explain more about what happens in the real estate world, and how you really should be looking at your contracts very carefully. It's been a pleasure. Thank you so much and talk to you soon.
Jared Zak: No worries. Thank you, Michelle.
Michelle May: Now for those of you who've been listening, I hope that's enlightened you a lot, because I found it very interesting indeed to learn more about what is actually in a contract of sale. And particularly for you as a buyer, you start off at a disadvantage. So you need to make sure that your conveyancer or solicitor works very hard to equalise the balance of power as much as possible. Thank you for listening, and until next time.