Many buyers assume the “Subject to Finance” clause gives them an easy way out of the contract if they cannot get a loan. The clause must be followed strictly, however. It can also operate unreasonably in several ways:
- The clause contains several strict time limits including that the buyer must apply for finance “immediately”. That means what it says: you do not have a few days to make a loan application. You should be ready to make your loan application on the day you sign the contract or, if it is signed late afternoon or on a non-business day, by early morning the next business day. You must also notify the seller promptly if your finance application is approved, rejected, or not approved by the latest time for finance approval stated in the contract. If you do not adhere to these time limits strictly and you cannot get a loan you cannot get out of the contract under the Subject to Finance clause. You will lose your deposit and may be liable to the Seller for an additional amount as damages.
- If the contract names a lender you must apply to that lender for finance. You may also apply to other lenders if you wish, but if you do not apply to the lender named on the contract and you get a refusal from another lender, you cannot use that refusal to get out of the contract. The named lender must also either refuse your application or not approve it before the latest time for finance in the contract. This problem can be avoided by simply not naming a lender on the contract: is not compulsory to do name one.
- The contract says that you must proceed to settlement if you receive a Finance Approval. Finance Approval simply means that the lender issues a letter stating that it will lend you the money. The lender is not, however, legally obliged to lend you the money just because it gave you a Finance Approval letter. Although it does not happen often, the lender may later decide not to lend you the money after all. In that case, however, you could no longer get out of the contract under the Finance clause because you have received a Finance Approval. We have seen this happen in unusual cases.
The requirement to apply for finance immediately and the problem in the third bullet point above can be avoided only by negotiating with the Seller to include a special condition in the contract which amends the Subject to Finance clause. This amendment would give you:
- A reasonable time to make your finance application; and
- The right to terminate the contract if the lender gives you a Finance Approval but refuses to make loan funds available at settlement for any reason which is not your fault.
We can give you the wording of the necessary special condition at no charge on request.