Cilna Steyn of SSLR Incorporated, a legal firm of specialist property lawyers, provides clarity on the Subject to Sale contract, which in the current market, may just be the most effective way to buy a new property, especially if downscaling.
WATCH : Important clauses to know in an offer to purchase document.
Q: Please explain the concept of Subject to Sale and why it exists.
A: The concept of the sale of immovable property, subject to the sale of another property, is relatively simple. A so-called "Subject to Sale" is a suspensive condition; this means that should a specific condition not be met in the agreed period of time, the contract will not exist at all. This means that neither party would be responsible for damages to the other party, and neither party can be held liable for any damages suffered and cannot be held to the terms of the agreement by the other party. This suspensive condition will always carry a timeframe in which this condition must be fulfilled. This period of time is not prescribed by law but is agreed to between the parties. If this condition is not met, the contract will then lapse as if it never existed.
Q: As people feel financial pressures building from rising costs across the board, do you think that Subject to Sale will become more popular in 2023 than in previous years?
A: Historically, we have seen many offers to purchase with these conditions; it is a very standard term in an Offer to Purchase. However, with the current interest rate, which is still on the rise, it is important to note that many homeowners can simply not afford the bonds of multiple properties. This places a lot of purchasers under pressure to sell one property prior to qualifying for a bond on a second property. From the data I have been seeing lately, it is clear that a lot of homeowners are busy downscaling after purchasing properties during the 2020–2021 extremely low interest rate phase, which they simply cannot afford at this stage. Because of the extremely high costs of those properties, it would be necessary to sell those off, failing which, they will not qualify for a bond even if the secondary property is at a much lower cost.
Q: How precarious is it putting an OTP on another property when the existing property is not yet sold but is on the market?
A: If a contract is drafted correctly with the suspensive conditions set out clearly, and with reasonable timeframes, the risks involved in these types of transactions should really not overshadow the benefit of these transactions. Offers to purchase, requiring a seller’s existing property to be sold before the other contract becomes of full effect, does carry the risk of the seller of the existing property (being the purchaser in the secondary transaction) ending up in a similar situation. Should the purchaser of the first property also have to sell their property first or qualify for a bond, with the interest rate in its current position and with banks being extremely cautious around affordability, the risks are simply that this domino effect of multiple properties being reliant on the fulfilment of suspensive conditions, could cause a ripple effect where all parties involved are left stranded bound to Offers to Purchase with suspensive conditions, yet to be fulfilled.
Contractually, all the parties should be able to walk away from a transaction like this without any financial harm. The risk here relates more to opportunity cost and the speed at which a transaction could be concluded, especially if there is a looming risk of being unable to service a bond on a property. My best advice in a situation like this is to place this property on the market and get a sense of the market appetite before venturing out to make offers on secondary properties.
Q: In a buyer's market, is it risky for sellers to accept a Subject to Sale or rather wait for a traditional offer?
A: There is a relatively low risk for a seller in a situation like this. However, to have the time period for a suspensive condition to be fulfilled as a very long period could mean that the seller could lose a potential buyer in a position to proceed immediately with the transaction. My advice is not to wait for a more traditional offer but to rather have measures in place, for instance, the option for the seller to accept cash offers or offers without suspensive conditions. This would limit the seller’s risk of losing a potential sale where the property might be sold quicker.
Q: There is a train of thought that sellers should not even consider this type of offer. Do you agree?
A: I definitely disagree. In a situation where the seller has not received any viable offers, considering a different, less traditional type of offer should never be discouraged without explaining the potential options to a seller. As explained earlier, the seller might still be in a position to cancel an offer with a suspensive condition should that seller receive a “better” offer. There are many ways to protect both parties to a contract. Sticking to very traditional thinking should definitely not be the future of our property industry.
Q: What timeframe is considered reasonable for putting an expiry date on the contract?
A: Typically, it would be between one and three months, dependent on a specific area. My advice would always be to engage a property practitioner that is very well-versed in the particular neighbourhood. A property practitioner is able to provide an idea of the prospects of receiving an offer on the property that has to be sold, and this then guides the parties in electing a timeframe. There should never be a one-size-fits-all answer.
Q: What happens if the seller receives a cash offer (and possibly higher) after accepting a Subject to Sale that has not expired?
A: Provided the parties agree in writing that in an event where the seller receives a higher offer or an offer with more favourable terms, it is crucial to appreciate that a cash offer might not be a better offer. Until money is in the bank, a cash offer may be a more risky option than a “Subject to Sale” condition; it is easy to quote a number and use the term “cash offer” on an Offer to Purchase, but the prerequisite for this should be an immediate delivery of a guarantee or at least - at the time of conclusion of the Offer to Purchase - proof of funds.
In a situation where the parties agree that the seller may approach the purchaser with an Offer to Purchase and allow that person the opportunity to match the terms of the secondary offer, the seller would be entitled to cancel the initial Offer to Purchase containing the suspensive condition. It would not be just or reasonable to simply allow the seller to cancel a transaction without allowing the purchaser being given the opportunity to progress the purchase on similar terms as the more favourable offer.
Q: Is there any way for either buyer or seller to wriggle out of the Subject to Sale offer?
A: No, this is the case in most contracts. It is crucial to appreciate that once a contract comes into being – unless there are specific terms stating the conditions under which the contract may be cancelled or in terms of which a contract will be suspended - a contract is a binding document that will remain in place until the parties have fulfilled their obligations or until such a time as the terms of the contract determines that the contract will come to an end.
Parties to any contract, especially an agreement of sale for immovable property, must be very sure that they would be able to fulfil their obligations in terms of the contract prior to entering into a contract. It often happens that parties conclude contracts with the idea that if they find something better or no longer like the terms, they can simply send an email and get out of it. This is simply not how a Law of Contract works.
Q: Anything else is most welcome.
A: Contracts of any kind should never be seen as a standard document that can be slightly amended to fit the purpose of the particular parties. It is crucial to appreciate that a contract forms the basis of a relationship between the parties and is as unique as every human relationship is. The same applies with regard to contractual terms.
I’m personally advocating the use of standardised contracts in both the sales and rental property market. It is, however, crucial to appreciate that even though one may use a standardised contract, the special conditions and the finer details of the agreement between the parties should be undertaken by someone with expertise in the particular field.
If done correctly, a sale subject to the sale of a purchaser's property could be of massive benefit to both seller and purchaser. Conversely, if done incorrectly, it could cause much frustration and heartache!
Writer : Kerry Dimmer
