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September 19, 2013

Contract-killing clauses

By ROB BALANDA

The variety of clauses investors use is almost limitless.

As a solicitor I’m regularly surprised by the variety and creativity of clauses I’m called on to draft from investors, which can, at times, add a bit of colour to my professional life.

One vivid example I recall is when a foreign investor engaged me to represent him on the purchase of a penthouse in a new development, to purchase off the plan for millions of dollars. He had the cash to buy the property, so the developer was keen to oblige his every wish.

His fundamental issue was that the ensuite to the main bedroom on settlement must have a noiseless flushing toilet. That’s right, a toilet that flushed without any noise at all. If the toilet didn’t comply, there was no deal.

And so, as the buyer’s solicitor, I received an inordinate amount of attention from the senior partner of a national law firm representing the developer, who sent numerous drafts of a clause to be included in the contract that put this issue to bed and gave the buyer the comfort to sign the contract.

It all turned out well and on settlement date it was my job to test out the toilet to ensure it complied with this fundamental requirement.

Another noteworthy aspect about the transaction was the origin of the buyer.

The standard documentation that I sent to the buyer requested him to provide me with details of his place of birth and his occupation.

Readers might be amused to know this gentleman, who was acquiring a multi-million dollar property, returned the forms with the following notations:-

  • Place of birth: Colombia
  • Occupation: farmer

So that’s where the money came from!

ESCAPE CLAUSES

Cunning investors regularly brief me to prepare clauses to be included in their contract of sale, with the sole purpose of allowing them the ability to exit the contract if they simply change their mind. That is, an escape clause.

There are a lot of such clauses investors can use, some transparent and others where the real purpose of the clause is carefully disguised.

Things must be a lot easier on this score in the US, as a couple of investors have told me over the years, after attending a seminar by the great author and investor Robert Kiyosaki, that you should always include such a clause in your contracts and you can put down any reason, giving you the ultimate say about whether you proceed or not.

The big man himself even suggests, I’m told, that you can make a contract “subject to approval of your dog”.

Well perhaps you can in the US but you definitely can’t in Australia.

Any such escape clauses used here must be real and genuine and you won’t get away with using this American style of clause here if you want to ensure your contract is legal and watertight.

You can, however, make it subject to the approval of your business partner or spouse.

TRAPS WITH SUPER FUND PURCHASES

There’s nothing like necessity to create real ingenuity in the marketplace. This is no better exemplified than with the big head of steam that has been building in the investment property marketplace in the past couple of years, with selfmanaged superannuation funds entering the market and financing their purchase with borrowings.

After former Prime Minister John Howard introduced the ability for super funds to finance the purchase of properties acquired by them, it took several years before there was any real interest in the marketplace with this strategy. I recall looking at the figures published by the Australian Taxation Office (ATO) several years out from the-then Prime Minister’s introduction of this strategy and was surprised that there were only some 500 super funds, according to the ATO’s records, that had taken advantage of this opportunity.

My guess for this shyness was that we were still in the biggest boom in modern history and people were just making money so easily.

The slowdown in the market and the coming of the GFC has brought with it real creativity and now almost every financial planner or investment adviser is promoting this strategy.

We now see almost overwhelming numbers of information seminars on this topic filling the pages of business and property magazines and national newspapers.

Despite this, I despair at the number of people making fundamental and fatal errors.

So, for the greater good and your continuing education, here are those fatal errors as I see them come across a solicitor’s desk.

  • Firstly, all the money must come from the super fund. Even the deposit. All too often I field a telephone call from a member of a super fund after they’ve signed the contract of sale and before settlement, advising me that they will be directing me as their solicitor to ensure that the lender refunds to them personally the amount of the deposit (which came from their own money rather than the super fund). This is fatal. All the money including the deposit must come from the super fund and if you find yourself in this scenario, you’ll need to instruct your solicitor to request a termination of that contract of sale and enter into a new one where your super fund actually pays the deposit.
  • Otherwise this purchase doesn’t comply with the law and you’re in big trouble if this is ever uncovered during an audit.
  • The buyer in the contract should not be your super fund.
  • Your super fund will not be acquiring the property. The property will be acquired by a new company called a custodian trustee, which you’ll need to establish before the contract of sale is entered into and the name of the buyer in the contract will be the name of the custodian company.

About Rob Balanda

Rob Balanda is a partner of MBA Lawyers at the Gold Coast and the author of the ‘Made Simple’ series of publications available from www.businessmall.com.au

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