Terms of the Contract

– Finance Approval

By David Burrough

It is not uncommon that an agreement for the purchase of a motel contains a  "Subject to Finance" clause.  We continue our examination of the core terms of the motel purchase contract with a look at this condition. 

Where an agreement for the purchase of a motel is contingent on finance approval a comprehensive and clear finance approval clause is critical.  Ordinarily a finance clause will allow the purchaser a certain time within which to obtain satisfactory finance.  The approval date is usually 14 to 21 days from the contract date.  Purchasers should check with their proposed financier that they will be able to consider their application and issue an unconditional approval letter within this time frame.  This is particularly important over holiday periods such as Christmas.

It is important that the finance clause clearly stipulate that finance must be obtained on terms satisfactory to the purchaser.  This protects the purchaser where finance may be approved subject to onerous and unreasonable conditions.

A well drafted clause goes further to oblige the purchaser to notify approval, rejection or waiver to the vendor in writing within a specified time frame usually within two business days of the finance approval date.  Failing notification of approval, rejection or waiver by the purchaser within the specified time, some clauses deem finance approved.  Alternatively a clause may provide for termination by the vendor.  A purchaser should take care to ensure they are aware of the particular wording of their clause.

Most finance clauses provide that the finance rejection can not attributable to the purchasers own default and create a positive obligation upon the purchaser to seek out the approval.  This affords the vendor some degree of protection as the purchaser can not use finance approval as a scapegoat to avoid performance of his or her obligations pursuant to the contract.

It is critical that a finance clause is drafted with caution as the courts have found a number of finance clauses void for uncertainty for various reasons.  As a result a clear and comprehensive finance clause is beneficial for purchaser and vendor alike.  Accordingly we recommend you consult your legal advisor and consider the contents and terms of the finance before entering into an agreement.

David Burrough is Partner at Hillhouse Burrough McKeown and an industry leader / specialist in the tourism Sector . David can be contacted on 07 32201144 or email davidburrough@hillhouse.com.au