free business contracts

Contract Basics

I’m not going to attempt to cover all the ins and outs of the law of contract for the sale of a property. For one thing, volumes of legal textbooks are written on the subject and the courts still get tied in knots by different interpretations of contract terms. For another, I’m not in a position to give specific legal advice! I can give you the benefit of my experience but you can’t rely on this general survey, or the example documents shown, as the basis of any specific transaction. You really need to get advice from a qualified legal professional on the specifics of any project you may undertake.

You’re in the property business, not the litigation business. After 20 years of buying and selling, I strongly recommend that you stay out of court and stay away from litigation lawyers. They will only cost you money and take your eye right off the wealth building ball. If a contract is destined for court and you’re the plaintiff, let it go. It is rarely worth the money, time and energy it takes to pursue the matter. The requirements for, and the process of, exchanging contracts for the sale of property in Australia varies from state to state. For example, in New South Wales the vendor is obligated to produce a contract with all the necessary searches carried out, including a titles search, the main roads search, a town planning search, a rates search and a land tax search.

However, in Queensland contracts are entered into subject to the purchaser carrying out those searches, and the contracts are conditional upon those searches not revealing anything that adversely affects the value of the property. Any such revelations can give the purchaser the right to terminate the process.

In my opinion, the two basic points about contracts are:

• find yourself a good solicitor

• pin down all the terms and conditions of the purchase or sale you are pursuing, and include them in your documentation.

Recruiting a good solicitor

When I am recruiting a new lawyer, I have two basic requirements. They need to be experienced in property and in contract law and have a client base that is active in the property business. You can ask a solicitor about that, and maybe even discuss what kind of clients they have acted for and what kind of deals they have been doing. They can give you a general idea about this and may be willing to get permission from clients to discuss specifics in more detail. This gives you security about your solicitor’s competence in buying and selling a property and in negotiating with vendors’ solicitors.

I want to like my solicitor. If you build up a rapport, you’re more likely to spend some time together informally even if it’s just lingering at the beginning and end of meetings. This is often where ideas for deals and opportunities arise. It’s also your chance to get educated about contracts and processes that will be helpful to you in understanding the property business better. And there’s even the possibility that your solicitor will be willing to finance some of your acquisitions. In my experience, solicitors are generally too busy to go out and develop property opportunities themselves so if they find someone who is ready to go out and make things happen, they are willing to open a few doors.

Contracts

For many years now, I have used a legal conveyancer to handle all of my conveyancing, that is, searches and settlements of property. We prepare our own contracts using the standard real estate forms (available in all states) and then add our own terms and conditions. This gives us an edge in being able to buy property on terms and conditions that suit us, notably the ability to purchase ‘subject to due diligence’ which secures the property and buys us time to carry out all the required searches, without being gazumped.

We discussed how conductors can take too long gathering information prior to contract and get ‘beaten to it’ by capitalists. Gazumping is where a vendor agrees to sell you a property but then sells it to someone else who offers more than you did. Laws vary in different states and some offer protection against this happening. 

Options

Instead of signing a contract, you can enter into an option, whereby you pay a ‘consideration’ (money) which secures you the right to enter into a contract at a later date. In my experience of options, it’s still advisable to attach a standard contract to the option document. This ensures the vendor granting the option can’t produce a contract at a later date on different terms and conditions.

Controlling the asset

One of the key factors in accelerated wealth building – being in the right place at the right time – depends on your ability to gain control of an asset (and the associated opportunities) when you find one. Preferably:

• quickly enough to avoid being ‘beaten to it’ or gazumped by other opportunity-seekers

• on terms that allow you to make sure that key aspects of your plan (search results are acceptable, finance comes together and so on) will come to fruition prior to commitment

• on terms that allow you to start improving the value of the asset (for example, by renovating, re-leasing to higher-value tenants, or getting permission to rezone or subdivide) prior to settlement.

This means just buying the asset may not be your best course of action. You can control the asset equally well, and often more advantageously, by negotiating a conditional contract or by taking an option on the property. Either of these methods allows you to tie up the property, with a window of opportunity in which to realize (or begin to realize) its intrinsic value before you even settle. You can secure finance on the basis of the improved value (increasing your borrowing capacity) and even make settlement conditional on having realized a profit (for example, if and when rezoning and subdivision take place)!

Hidden pitfall

In some states of Australia, when you have contracted to purchase a property you accept the risk of damage to the property during the term of the contract. This means you should always take out insurance for any improvements (such as replacement of fixtures and fittings) plus removal of debris and related matters.

A friend of mine purchased a pub and during the contract period prior to settlement, it caught fire, causing damage to nearly 50 percent of the internal section. My friend had taken out an insurance policy to replace the buildings but didn’t have a policy for removal of debris or loss of profits. When settlement time came, he couldn’t settle. His financier didn’t want to fund a business that couldn’t immediately generate an income. So on top of everything else, my mate was sued and had to sell other assets in order to settle on the pub which took months to rebuild to get the business on track.

If you’re purchasing a standard house, you need to have insurance at the date of the contract (in some states) at the date of settlement for replacement and removal of debris. Your lawyer will advise you when the risk passes to you. You may wish to add a simple clause to the purchase contract, stating that risk does not pass until settlement takes place.

>>> Coming Next: Using An Option

Please note: This is an extract from the Success From Scratch – it may not contain the exercises from the full version of the book/audio set, for full version please contact us or follow our blog for more.

Thank you,
The team@Custodian