Common practice in property sales agreements is the inclusion of “subject to” clauses. But what do these clauses actually mean for purchasers and sellers?
When selling a home on the condition that the sale is subject to the sale of the purchaser’s property, it merely means that the purchaser needs to sell his property in order to raise funds to pay the seller. Should the purchaser not sell his property, it means that the seller has, in essence, not sold his property.
Things go wrong as they sometime will, which is why Linda Erasmus, CEO of Fine & Country South Africa, notes that the “subject to the sale of another property” clause in any agreement should include a condition to protect the seller.
Schalk van der Merwe, attorney and principal of Lew Geffen Sotheby’s International Realty Pretoria notes: “There are two types of ‘subject to’ clauses that sellers need to be aware of. Firstly, the suspensive clause, which means that everything is signed, but the sale and transfer is suspended until factors such as bond approval come through or the buyer sells their existing home in order to transfer their bond.
“The suspensive clause needs to be detailed in the offer to purchase, otherwise it holds no weight. The seller need to consider whether it is worth their while waiting for the buyer’s bond financing to come through, for example, or whether it would benefit them more to keep the home on the market. The seller can also write into the contract that should any other offers come in during this suspensive period, they can accept these,” says van der Merwe.
Suspensive “subject to” clauses would generally read as follows: “This offer is subject to the sale of the purchaser’s property, stand 143 Craighall Park, within 60 days.” This means that the seller is bound to the one purchaser for 60 days, and that he cannot sell their property to another buyer within the stipulated 60 day period. This is beneficial to the buyer; however it is not necessarily beneficial to the seller, who would like to sell their property as soon as possible. There are a few golden rules that can be followed with regards to these kinds of suspensive clauses that will benefit and safeguard the seller as well.
Firstly, the suspensive clause should be limited to a realistic period of time, and the purchaser ought to put his property on the market for a reasonable market value in order to sell within the given period. The clause should also stipulate that the seller is permitted to keep his property on the market within the stipulated period, and should the seller receive a better offer, he should have the option to accept the offer with the better terms and conditions, and terminate the original offer. This will benefit the seller, as it allows him to maintain control over which offers to accept.
Van der Merwe explains further: “The second kind of clause is the resolutive clause. Here the sale is signed and sealed. However, should circumstances change, detailed in the contract, the sale falls through.
“These clauses may involve factors over which the seller has little control – for example, a farmer may buy a farm and write into the contract that if there is no rain in the month following the signing of the purchase agreement, the sale falls through. It is completely up to the seller to access the merit of the clause as this will allow the buyer to walk away from the agreement without penalty.
“We would advise all buyers and sellers to speak to a lawyer before signing an offer to purchase to ensure that all bases are covered and neither party is left out of pocket or is inconvenienced at the end of the day,” he says.
A disadvantage for the purchaser is that another buyer who has sufficient funds available immediately may come along and buy the property. But if procedure is followed properly and if all parties abide by the clauses of selling a home “subject to the sale of another” it should be easy.
Another point of importance for sellers is to note that it is common practice – especially in cities where people move from one suburb to another to be closer to schools, and so forth – that most buyers are not in a position to purchase other than with a “subject to” condition.
A final word of warning from Erasmus: “Throughout many years in real estate, we have noticed that a ‘subject to’ offer normally comes in higher than a cash offer. The reason for this seems to be that the purchaser always thinks that he can get more for his own property than what it is worth – only to find out later that the unrealistic price cannot be achieved.”
Written by Isabella Verna and republished with the permission of Home Front, October 2006