Brian Cannan: I have Greg Jemmeson with me from Jemmeson Fisher Solicitors and Accountants. We're here today to talk about exchanging contracts. Good morning, Greg.
Greg Jemmeson: Morning Brian.
Brian: Why don't we talk about the agent's authority to exchange contracts
Greg: Ok now, under the Property, Stock and Business Agents Act, the agent is authorised to exchange contracts. However, if a principal vendor or purchaser is being represented by a solicitor, then the agent is not entitled to exchange contracts unless they are expressly authorized to do so.
Brian: "Expressly authorized" I hear that word a lot. What does that mean to you?
Greg: Okay, now expressly authorized in best practice would be in writing. Okay. Now of course, examples of that would be at an auction. It might be on a weekend, lot of solicitors are not available on the weekend. So, if the purchaser desperately wants to purchase a property and obviously the vendor wants to be bound, then of course, the agent needs to attend to the exercise and the process of exchange on that weekend.
Brian: So do they need, when you say expressly authorized, by the solicitor or by the vendor?
Greg: That can be expressly authorized by the vendor and purchaser. Now, there are many templates out there that are provided by industry bodies, which parties would sign which would set out that they're authorized to exchange that the respective parties have been delivered a copy of the contract that they are aware that there is a cooling off period, that the contract has been handed back to the agent so they can deliver it to their respective solicitors or conveyancers.
Brian: So what I'm hearing from you is that if I'm an agent, and I'm going to exchange a contract, I want to get express permission to exchange that contract and that best practice would be in writing.
Greg: Certainly is.
Brian: If you didn't have it in writing, I'd recommend to the agent, I wouldn't do it.
Greg: Of course not, no. Because then you run then an evidentiary test here where if a purchaser or the vendor then is looking for a loophole to get out of the contract, if there's nothing in writing expressly authorising the agent, the agent then puts themselves into a potential negligence situation. Now a couple of things where it goes wrong for the agent is when it's been exchanged, they must get the contract to the respective solicitors or conveyancers within two business days. This is obviously to conserve the cooling off rights for the parties. The other thing too is that agents have authority to only fill up the black box on the front page.
Brian: Okay, so we're getting to the now to do's and don'ts of filling out a contract and exchanging so why don't we start that with that so what are the pitfalls for agents and exchanging and filling out the contract.
Greg: Okay, so firstly, first off, we need to make sure that we have a full contract with all of the required documentation. We need to make sure that both copies of the contracts are identical. A common thing that we see is that we will have a contract fax to us on a Monday after it was exchanged on the weekend, the agent puts it through the fax machine, but they don't realize that some pages are double sided, so we don't get the full contract. Okay. The other thing is that they need to make sure that both parties sign on the front page, it's witnessed.
Brian: Do they need a witness? Some people saying it doesn't have to be witnessed.
Greg: Best practice again to witness it.
Greg: Okay, not on every page, just on the front pages is the only requirement for signing.
Brian: Should the purchaser and the vendor initial every page?
Greg: That is not a requirement at law. And, when some contracts are quite large, it becomes a large exercise. So, no just the front page is sufficient at this stage.
Brian: Are there special conditions?
Greg: Now of course, if there are any amendments to special conditions the agent should not be then attended to exchange. As I said earlier, the agent is highly entitled to fill up details in the black box on the front page.
Brian: If at private treaty, auctions, we have many auctions where we, the vendor's solicitor has agreed to terms with certain buyers. And we'll come to that probably later again, but terms and the agent then needs to change those special conditions under authority from the solicitor.
Greg: If they're under authority from solicitor to insert special conditions in respect to a purchaser then they're entitled to that because they've been given express authority from the solicitor to insert in respect to that purchaser. But then say it's just a normal private treaty on the weekend. The problems that the agent faces is they can't make changes to the deposit which makes them potentially liable, as we know a contract normally says 10%. If the agent then only takes say 0.25% and asked for the balance with at the end of the cooling off period, the agent has the potential to make themselves liable if that balance is not paid at the end of the cooling off period. This is now going outside of what the agent is authorized to do.
Brian: So you're saying the agent should actually take the full 10%?
Greg: They should, unless I have authority and have been advised by the vendor's solicitor or conveyancer.
Brian: Could the vendor agree to it?
Greg: Again, then what we're running into the realms of these potential legal advice because we're talking about the technicalities of a deposit and when things go wrong, can the vendor then sue for the balance of the 10% and unless they put themselves into that position where they become potentially liable for the balance themselves for not advising their client correctly.
Brian: As you know, the majority of contracts are exchanged on 0.25% and not 10%. And that would be the standard practice and agents listening to you now are going to become very concerned. So what should they do?
Greg: Again, if they've got a good relationship with the vendor's solicitor maybe the vendor's solicitor can provide them with a clause, which they have expressly authorized to be inserted, which allows for the 0.25% to be paid, and then the balance to be paid at the end of the cooling off period. But that then means the agent has avoided the risk if they have those terms. If the agent does not have that authority to insert a clause to that effect, they have the potential risk hanging over them.
Brian: I know some agents have that clause and just inserted without the authority. How do you feel about that?
Greg: That's risk management and look, a lot of times they'll get away with it and it will be all fine until the day happens where it goes over the cooling off period and the purchaser then decides to rescind once it's out of the cooling off period and then they have to then try and chase them for the balance of the 10%. If they're even able to do that.
Brian: You're saying that the agency could become somewhat liable?
Greg: Potentially liable, yes.
Brian: What other pitfalls would you say about exchanging contracts?
Greg: Probably one of the best ways to go about it would they give you another case study of a previous case which really set out why we need express authority. This was an auction situation on the Central Coast many years ago. What had happened here was the auction was carried out on site. The property was passed in, never met reserve the potential purchaser then entered into the kitchen with the vendor they sat down with the agent and then they proceeded to negotiate a sale. Now, as we know, there's no cooling off period if contracts are exchanged on the day of an auction occurring up until midnight, okay, so they proceeded to strike a bargain. The agent then had the vendor sign the contract. The purchaser then signed a contract. The details were inserted as to purchase price. The agent then proceeded to pick up both contracts and waves them and do a pantomime saying they now exchanged. He then took them back to his office, placed them in an envelope Express post them to the respective solicitors. On the Tuesday, the auction occurred on a Saturday, on the Tuesday following the auction, the purchaser's solicitor rang up and said "We're now exercise our rights under the cooling off period and withdrawing from the purchase". Now, of course it ended up in court. And what came out of this was that the agent by waving the two contracts like this, partly performed the pantomime of the exchange. What he failed to do was physically put the purchaser's contract in the vendor's hand and the vendor's contract in the purchaser's hands. So the physical exchange technically did not occur until the respective solicitors received the contracts on the Tuesday. Contracts were signed and made on the Saturday but they weren't physically exchanged on the Saturday. The courts held it was an exchange until the Tuesday the purchaser had the right to then cool off.
Brian: So you're saying just performing that is not an exchange?
Greg: Not sufficient.
Brian: Each party has to hold the contracts?
Greg: Physically hold and now of course, most agents now have a form which is giving the express authority to exchange and those forms will also generally say that the vendor agrees that they have received the purchaser's copy and the purchaser sign saying they received the vendor's copy. Okay. But I can still tell you that at least once every six months we come across this problem. And it's not unusual a solicitor's job is generally to find a loophole if their prospective purchaser wants to get out of the contract. And this is a common mistake in the industry about the exchange process. Or agents exceeding their authority by inserting special conditions of which they have no authority to do so.
Brian: Very interesting, I think you just scared a lot of agents, but it's great that they get to learn about this and learn it from you. Thank you.
Greg: Thanks Brian.