Buying a new property is both exciting and nerve-wracking. While we hope that the process will run smoothly, there is always the risk that this expensive venture won’t live up to what you want. You might find pests that the building inspection didn’t reveal. Or, the property might not be the dream home you had thought.
Fortunately, most sale contracts have a cooling-off period. Cooling-off periods exist to prevent you from being forced to stick to a wrong decision. So, what is a cooling-off period? And how does it work? We’ll answer all your questions and more.
What is a Cooling-off Period?
A cooling-off period is the length of time after the seller signs the contract of sale, where the buyer can pull out of the deal. Unlike a subject to finance clause, you don’t need to provide any reason or evidence for your decision.
Potential buyers put a lot of thought and consideration into their purchase. However, everyone has to make compromises and, given the current level of demand in the market, buyers can make rushed decisions. If you choose to back out of your contract for whatever reason, you can do so without legal penalties during the cooling-off period.
The cooling-off period is when you complete the final inspections and review your decision. You may need to pay a termination fee (0.25% of the purchase price) if you cancel the contract of sale during the cooling-off period. However, this is significantly less than the cost of buying the wrong house.
When is the property officially sold?
So, does the cooling-off period mean that the property isn’t officially yours? No. The property is formally sold when both you and the seller have signed the sale contract, as this is legally binding. Each party must receive a copy of the signed contract of sale.
The sale is completed when all the checks are made, the title and transfer exchanged, and the buyer has paid the purchase price.
The cooling-off period begins when all parties sign a contract of sale. However, as a buyer, don’t worry about losing your dream home. The vendor cannot cancel the contract during the cooling-off period – it’s exclusively for buyers.
Do all contracts have a cooling-off period?
In New South Wales, the cooling-off period must be in the contract of sale. However, the rules differ in other states. For example, it is not mandatory in Western Australia or Tasmania. Additionally, in other states, the terms and conditions vary. If you’re buying property in any other state than New South Wales, then it’s best to check how it works with Fair Trading.
You can waive the cooling-off period if you choose to – we’ll explain how later. Waiving the cooling-off period can improve your offer on the house more attractive to the seller. If your dream home is in a trendy area, you might offer an unconditional contract to get a competitive edge against other prospective buyers.
Steps of the cooling-off process
Firstly, the real estate agent must give the buyer and seller a copy of an unsigned sale contract at least one business day before signing the agreement. Then the seller’s agent must also provide a copy of the consumer guide regarding residential property agreements at least one day before signing the contract.
During the cooling-off period, your conveyancer should conduct a building inspection, among other enquiries. If you discover any problems, you can terminate the contract of sale. You will send a written notice, but you won’t need to explain why you cancelled your contract.
Make sure you send the letter within the cooling-off period; otherwise, it will not hold after that.
What about the deposit?
The buyer has to pay the deposit to the seller soon after both parties sign the contract. The seller’s agent acts as the deposit holder. They put it in a secure account. No one can access the money until either the end of the settlement period or if the buyer terminates the property sale during the cooling-off period.
The agent releases the deposit money to the seller on the settlement day. If the buyer cancels the contract of sale, then the agent returns the money to the buyer.
How long is the cooling-off period?
The cooling-off period starts once the seller and buyer have signed and exchanged the contract. It lasts five business days in NSW. However, other states differ, some lasting only two business days. The cooling-off period ends at 17:00 on the final business day of the period.
If you sign and exchange contracts late Friday afternoon, the cooling-off period will begin next Monday. Remember, bank holidays and weekends don’t count within the period.
Can cooling-off periods be extended?
If both the buyer and seller wish to extend the cooling-off period beyond ten days, they can do so in writing. The seller doesn’t have to agree to the request.
Asking for an extension might harm your chances of the seller accepting your offer. As we mentioned, the vendor might prefer sellers who offer unconditional contracts because they are less likely to withdraw from the sale.
When will a cooling-off period apply?
Cooling-off periods are the mandatory default in NSW. Generally only available for buyers, you don’t need to request it from your solicitor. However, you will need to make it known if you want to change the cooling-off period at all, for example, extend or waive it.
If you purchase the property through an auction, you won’t automatically get a cooling-off period. Even if you ask for one, you are unlikely to get it.
When does the cooling-off period not apply?
In NSW, the following circumstances are exempt from the cooling-off period:
- Purchasing property at auction
- Property purchases where the buyer and seller exchange contracts on the same day as the property is auctioned
- An exclusively non-residential property
- The property is larger than 2.5 hectare
If I buy at auction, do I still get a cooling-off period?
The cooling-off period does not apply if you buy at auction or exchange contracts in a private treaty on the same day the property was auctioned. This means that you need to complete building and pest inspections ahead of the auction. Additionally, you need to secure your finances.
Why might I decide to use the cooling-off period?
The cooling-off period helps buyers withdraw from a property sale contract that isn’t right for them. There are many reasons why you might decide to withdraw from the agreement. These include
- Issues arising with the property and pest inspections – although this is often a separate conditional clause in the contract.
- The buyer’s inability to get approved finance from a lender or home loan application denied – again, this is usually a separate clause. If you’re struggling to secure finance, speak to the best mortgage broker in Sydney.
- Planned infrastructure or housing development in the area makes the property less desirable.
- An unexpected change in the buyer’s personal life or financial position.
- A change of heart – perhaps the buyer finds another property that suits their needs, or they no longer like this one.
Remember that the buyer does not need to offer reasoning for withdrawing from the agreement.
The seller may also back out of the sale before the contract is unconditional. For example, their circumstances might have changed, or they might receive a better offer. However, as the cooling-off period is not for their benefit, they face legal consequences.
Additionally, the seller’s agent might sue the seller to recover their lost commission. The buyer might use it to recover money paid for legal fees, building and pest inspections, and other costs. If you find yourself in this situation, it might be helpful to seek professional advice.
Who receives the penalty payment?
You won’t get the full deposit back when you terminate your sale contract during the cooling-off period. In NSW, the vendor receives 0.25% of the property’s purchase price. The buyer gets the rest of the deposit back. In some circumstances, the penalty is worth it. However, it could be costly, with property prices nearing $2 million in some parts of Sydney.
What costs will I get back?
Although the cooling-off period exists to protect buyers, if you withdraw, you’ll likely be in a worse financial situation than if you had never agreed. You should still carefully consider property sales before making an offer. Don’t rely on the cooling-off period to get out freely. You could still lose thousands of dollars.
What are my legal obligations?
If you wish to exit the property agreement, you must notify your vendor in writing before the deadline on the fifth business day.
What happens after the cooling-off period?
Once the cooling-off period ends, the buyer will struggle to terminate the sale contract without losing lots of money. Each contract should outline the penalties if either party backs out of the deal outside the cooling-off period. If the buyer wishes to pull out after the end of the period, they have to give written notice to the seller as soon as possible.
Generally speaking, a buyer will pull out of the contract if the seller breaches its terms or fails to disclose crucial information about the property.
If the buyer does not wish to get out of the property agreement, the solicitors will exchange the contracts, and the buyer will become the legal owner of the property.
Waiving the cooling-off period
Waiving the cooling-off period and other conditional clauses are known as an unconditional contract of sale. In such a competitive housing market or if you’re highly interested in a particular property, waiving the cooling-off period might get you a competitive edge over other potential buyers.
To waive the cooling-off period, you must contact your lawyer or conveyancer. They will sign off your decision on the waiver. Once you and the seller sign and exchange the contracts, the property is yours from the end of the settlement period. The buyer has then forfeited their right to terminate the agreement, even if your lender doesn’t approve your home loan.
While offering an unconditional contract guarantees the seller security with the sale, the buyer takes on significant risk. You should only provide an unconditional agreement if you have sorted your finances and completed all inspections and property valuations.
If you do back out of the deal after waiving the cooling-off period, the seller is legally entitled to keep your deposit and may sue you for damages.
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Does the vendor get a cooling-off period too?
No, the cooling-off period is for the buyer’s benefit. If the vendor chooses to pull out of the agreement, they may face legal action from their real estate agent and the buyer. The seller must offer the buyer a cooling-off period of five business days to change their decision without legal consequences.
Can a vendor change their mind after accepting an offer?
If the seller changes their mind after accepting an offer from a buyer, they might face legal consequences from the buyer and real estate agent.
Do all contracts have a cooling-off period in NSW?
It’s mandatory in New South Wales to offer a cooling-off period of five days to the buyer. However, if the buyer chooses, they can waive their cooling-off period. If they withdraw after waiving, they might face legal action and lose their deposits.
Are cooling-off periods mandatory?
Every state differs. In NSW, five-day cooling-off periods are mandatory. However, in Western Australia and Tasmania, they are not the default. You would have to negotiate a cooling-off period with your vendor.
If I exit in a cooling-off period, will I get my money back?
If you pull out of a sale agreement during the cooling-off period, you lose 0.25% of the purchase price and get the rest of your deposit back. However, if you pull out outside of the period, you may lose the entire deposit and face legal action.
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