Sale contract - terms

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armchairlawyer

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2 August 2020
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Hello, I have a sale contract with a term included under the heading Title as follows:
12.2 The Seller may mortgage the Land at any time

My question is, is this standard for a contract on a property? There are no other references to anything related to this clause in the document. The seller is a developer.

Thanks in advance.
 

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Paul Cott

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26 May 2014
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Hi,
It is not that common but I am seeing a clause like this more and more, probably as a result of the current environment. If you do not want it there, see if you can negotiate to have it deleted.
 

armchairlawyer

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2 August 2020
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Ok thanks Paul. What is the effect of it being in the contract? That is what I don't really understand. Up to when can they mortgage the land?
 

Rod

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To benefit the developer. Maybe short term loans. Certainly not in your interest to have that clause.

It can be a hindrance to you if there are issues because the mortgagee is not releasing the title.
 

Rob Legat - SBPL

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This response is along the lines of what happens in Queensland. I expect Victoria will be similar, but each state has its own property laws.

You often see this type of clause in developer contracts, also known as ‘off the plan‘ contracts. They can be necessary to allow the developer to be able to complete the property for sale. Most developers are heavily/solely reliant on a financier to fund the project completion - and the contracts can have a long term on them depending on where in the build they are signed. Developers can often find themselves in situations where the debt needs to be refinanced, or additional finding sought to overcome additional costs due to delay, budget revisions, fixes, unexpected issues, general council twaddle, and the like.

Without a clause allowing them to mortgage the property they wouldn’t be able to complete, and the contract would need to be terminated - and without the clause that can give the buyer a right to terminate for the seller creating an encumbrance over the property during the contract period.

The general rule is that a seller must give your clear title at settlement, except for any encumbrances specifically disclosed as staying on the title in the contract, or ones which are essentially automatic Crown reservations. This is done practically by providing relevant release instruments at settlement. If the seller doesn’t do this, you’re entitled to refuse to settle.
 

armchairlawyer

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2 August 2020
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Ok that's great to know. The contract is in Qld. There is also this clause which I am concerned about:
SELLER'S RIGHT OF ASSIGNMENT

22.1 The Seller shall have the right at any time prior to the Settlement Date to transfer or assign its interest in the Land or the Lot or this Contract and upon receipt by the Buyer of notice of such transfer or assignment the Buyer acknowledges and agrees that the terms and conditions hereunder shall remain binding upon the Buyer and the Guarantors and shall be enforceable against the Buyer and the Guarantors by the assignee or transferee of the Seller's interest as if the assignee or transferee were the Seller named herein.
 

Rob Legat - SBPL

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Similar situation to the mortgaging but way less likely to happen. Developers often 'need' a large degree of flexibility in getting things to settlement. I wouldn't be overly worried about it - on the basis that the developer is unlikely to agree to remove the clauses.

You'd have more luck removing the 'right of assignment' than the 'mortgage' one, if you're looking for where you can push.