Sale agreements and suspensive conditions – when is an agreement actually deemed binding?
As an estate agent there is no better scenario than being able to bring an unconditional cash offer at full asking price to your seller. However, this isn’t always the case and more often than not an offer to purchase will be made subject to the suspensive condition that the purchaser obtain bond finance (also referred to as bond approval).
When an agreement is subject to a suspensive condition, the contract comes into effect only once the condition is met. It is self-evident that such a suspensive condition is for the exclusive benefit of the purchaser who does not want to be bound to the agreement if he cannot procure the required bond finance.
Therefore, where an agreement for the sale of immovable property contains a suspensive condition to the effect that the purchaser must obtain a mortgage bond, the following applies:
- the agreement is suspended until the bank (or other financial institution) approves a bond; and
- if the bank does not approve a bond by the due date and in the amount stipulated in the sale agreement, the agreement will lapse.
If the purchaser obtains a bond for a lesser amount than was stipulated in the sale agreement and wishes to accept that bond, the purchaser may unilaterally waive the bond condition, provided that there is no provision to the contrary in the agreement and that such waiver takes place before the end of the time period for the obtaining of the bond, and:
- the purchaser’s waiver must be clear and unequivocal and must be done in writing;
- the waiver may be contained in an addendum and signed by both seller and purchaser, should the seller be agreeable;
- the addendum must be signed before the end of the time period for the obtaining of the bond;
- any extensions to the bond suspensive condition period must be done so in writing and contained in an addendum signed by seller and purchaser; and
- the purchaser is able to make up the balance of the purchase price despite the lesser amount of the bond.
This begs the question: What actually constitutes bond approval?
Depending on the bank and their internal processes, the bond approval process commences once all the credit checks have been completed and all FICA requirements have been met. The bank will initially provide what’s called an Approval in Principle. This means that the bond amount has been approved but the approval is still subject to the bank finding value in the property and the loan amount requested.
Since the commencement of the National Credit Act, an applicant for financing must first be provided with a quotation setting out all the short and long term financial implications of the proposed loan, which the applicant (purchaser) may accept or reject. Thus when an offer to purchase contains a suspensive condition that the purchaser shall obtain bond approval, such a suspensive condition is only deemed to have been met once a full quotation has been received from the bank and has been accepted by the purchaser. Where the quotation is not financially viable for the individual, he or she has a statutory right not to accept the quotation. This statutory right cannot be undermined by a contractual provision in a deed of sale. The court in Basson v Remini and Another 1992(2) SA 322 (N) held that a suspensive condition is only fulfilled once the loan agreement has been accepted. Therefore, it is advisable that an offer to purchase should clarify that the suspensive condition is only fulfilled once the quotation has been accepted by the purchaser.
As yet there is no guiding case law on the question whether a purchaser is obliged to accept a quotation that is furnished on the bank’s usual terms and conditions. A decision to refuse the bond quotation will result in the lapsing of the sale agreement as the suspensive condition has not been fulfilled. A purchaser acting in good faith would be expected to accept the quotation, whilst an unreasonable refusal may point to bad faith. This alone, however, does not mean that an action exists in favour of the seller for an order that the suspensive condition must be deemed to be fulfilled. In any event, the seller may choose rather to walk away and continue marketing the property in order to find an alternative purchaser, and save time in this way.
Apart from the above, there are a few additional complications that can arise such as a bond being granted with an unfavourable interest rate or when it is not granted for the full amount stipulated in the agreement.
The bond approval process commences once all the relevant documents have been submitted to the bank. A property valuation will need to be conducted and all the credit and FICA requirements will need to be met in order for the bank to approve the loan.
Insufficient loan amount
In this scenario, the bank may approve a bond but for a lower amount than a purchaser needs in order to proceed with the sale. The purchaser may then be given a period within which to raise the remaining funds. However, if this is not achieved, the suspensive condition is considered not to have been met despite the bond approval and thus, the contract of sale is null and void.
Unfavourable interest rate
This scenario can cause issues for the purchaser as, in principle, the suspensive condition has been fulfilled with the bond required to purchase the property being granted.
Protection against this unfavourable situation can be included in the offer to purchase. For example, an added clause in the contract can stipulate that the sale is subject to the purchaser being granted bond financing at an interest rate not exceeding X%. If this is not the case, the buyer may reject the bank’s loan offer based on his rights in terms of the National Credit Act (within 5 days of the quotation being received) and cancel the offer to purchase.
It can be complicated to set an exact interest rate and therefore, in practice, a ballpark interest rate (above prime) will be included to offer guidance in these cases.
Careful consideration of terms of the contract of sale, and seeking the advice of professionals prior to signing can go a long way to ensuring a smooth and beneficial transfer for both buyer and seller. For advice on what conditions can and should be included in an offer to purchase to protect both the seller and the buyer, it is useful to consult with an experienced conveyancing attorney.