Conditions vs warranties and how they affect the buyer’s right to delay settlement
To ensure the property settlement experience is as smooth as possible for both buyers and sellers, it is important that inclusions to a standard contract are worded correctly to protect the parties’ legal option/right to delay settlement.
For example, a buyer needs to specify any special conditions clearly to ensure they are protected in the event of a dispute. Buyers should also know that while they have the right to delay or cancel a settlement if agreed conditions are not met, they may not have that right if a warranty is not fulfilled after acceptance.
In Western Australia (WA), a property offer is usually made through a standard contract for the sale of real estate comprising the O&A (short name for the ‘Contract for Sale of Land or Strata Title by Offer and Acceptance’ form) and General Conditions (short name for the Joint Form of General Conditions for the Sale of Land).
Let’s look at how Conditions differ from Warranties in the O&A when conducting property settlement in Perth; what to look out for during pre-settlement inspections; and what rights and responsibilities buyers and sellers have to delay settlement in the event that a condition or warranty is not adhered to.
What is a Condition?
A Condition clearly states what must be done, by whom, by when, who pays for it, and what the consequences are if it is not done by the due date.
In the WA property market, there are three main types of conditions:
- General Conditions – Set by law, these are a standard part of most property settlement contracts which outline the responsibilities and rights of buyers and sellers.
- Finance Conditions – If a buyer needs to finance their purchase with a loan, they need to read the small print to eliminate the risk of unintentionally accepting unreasonable conditions.
- Special Conditions – These are extra clauses added to the O&A specific to the property being transferred. They can be made by buyers or sellers, and must be signed and dated by both to express agreement.
Regarding Special Conditions, buyers and sellers should:
- Ensure the extra clauses are worded precisely and accurately to avoid disputes and extra costs.
- Seek expert advice to ensure they are drawn up correctly.
The proper wording for conditions include “the Seller shall”, “the Buyer must”, of “this contract is conditional upon the Buyer”.
Buyer example. The seller agrees to the buyer’s condition that the 10cm crack on the front pavement next to the letterbox must be repaired by the seller at the seller’s expense before settlement. If this condition is not met, the buyer has the right to delay settlement until the crack is repaired.
Seller example. The buyer (making an offer conditional on the sale of another property) agrees to the seller’s condition or ‘48-hour clause’ which allows the seller to accept an unconditional offer from another buyer if the first buyer cannot make their offer unconditional within two business days after the seller receives that second buyer’s offer.
What is a Warranty?
A warranty (also called a ‘representation’) is a promise usually made by the property seller to the buyer. For example, the seller includes warranties in the O&A that the air-conditioning system, gas fittings, reticulation, electrical fittings and plumbing system are in working order at settlement.
A warranty is only a statement. If the clause says, “The Seller warrants”, even if it is included as a Special Condition, what follows is a warranty by definition not a contractually binding condition.
Unlike a condition (formally documented and agreed in the O&A), if a warranty is not met, the buyer does not have a legal option to delay settlement until, for example, the leaky taps are replaced or gas fittings are repaired. Efforts to resolve the dispute through legal or consumer rights channels must be undertaken after settlement has occurred.
Buyers usually have the right to conduct a final inspection (called the pre-settlement inspection) of their new property up to a week before settlement day.
Prudent buyers have already inspected the property at least once before signing the contract, recording anything not in working order under ‘Special conditions’ in the O&A contract to be actioned and paid for by the seller before the buyer moves in.
The final inspection provides the opportunity to conduct these due diligence activities:
- Check if special conditions and warranties have been met.
- Inspect that the state and condition of the property has not deteriorated since the O&A was signed.
- If any agreed special conditions have not yet been met, the buyer can ask the seller to rectify them before settlement. This means the buyer has a right to delay settlement without penalty.
- If any agreed warranties have not yet been met, the buyer can ask the seller to rectify them before settlement. However, if the seller declines to do so, the buyer does not have a right to delay settlement without penalty.
If the buyer should spot a pre-existing condition at final inspection that they would ideally want fixed, but had not raised at earlier while signing the O&A contract, this has not been made a condition of the offer and so cannot be a valid reason for delaying settlement.
Ideally, conduct your final inspection five or more days before settlement, and after the previous resident has moved out (sometimes this may not be possible). Ensure you have time for any outstanding issues to be fixed, or for a new deal to be renegotiated if required.
Know when you have the right to delay settlement
To get the most relevant advice for property conveyancing, engage a competent residential conveyancing professional with local experience, as laws differ across different states.
As a buyer, if you find that a condition has not been met, you may be entitled to delay settlement until it is rectified. The party responsible for the delay (i.e., the party who did not comply with the condition) may be liable for penalty interest for the delay.
Conversely, if the buyer finds out during final inspection that a warranty or representation has not been met, they cannot legally delay the settlement. Instead, they have the right to get the seller to pay for repairs and other corrective actions after the settlement.
In WA, penalty interest applies after three business days. The specific terms and conditions depend on the actual contract signed and agreed between buyer and seller, so make sure you know your rights when settlement is delayed.
Want more information on conditions and warranties?
Hopefully, this article has given you a better idea of what your relative rights are regarding conditions and warranties to protect your purchase. To prevent exposing yourself to risks you are not aware of, it is best to seek professional advice on exact wordings before adding conditions into your offer.
Allow our experienced conveyancing practitioners at KDD Conveyancing Perth to help you draft watertight conditions that ensure you are protected, and achieve the outcome you desire. Work with experienced and knowledgeable conveyancers who understand the settlement process in Western Australia. Contact KDD conveyancers on (08) 9296 8717 or by email today.