Be Careful How The Bond Clause In Your Property Sales Agreement Is Worded!
Here is yet another reminder from our courts on how important it is – if you want to avoid the trials of litigation - for you to have your property sale agreement drawn up professionally. One thing it must do, as the case in question clearly shows, is record the terms of your agreement precisely and without any room for argument – to prevent the following old Roman proverb to become too relevant - “In war and litigation, both sides suffer”.
This High Court case revolved around a “bond clause” in a sale agreement. A bond clause is a standard protection for any buyer who needs finance in order to pay the purchase price. It’s a “suspensive” clause that means the sale agreement only becomes enforceable if and when it is fulfilled.
The bond clause and the better offer
- The bond clause in an agreement of sale required the buyers, within 30 days, to obtain from a bank a loan offer, quotation and pre-agreement. It did not specify that these had to be lodged with the seller.
- The buyers duly obtained a loan offer (not accompanied by a quotation or a pre-agreement) and told the seller about it. Thereafter they accepted the bank’s loan offer but also asked the seller for more time so they could try and find another loan offer at a better interest rate.
- The seller refused, having decided that the bond clause had not been fulfilled in time and that therefore the sale agreement was now void. She then put the property back on the market and accepted a better offer for it.
- The buyers were having none of that and asked the High Court to interdict transfer to the “new” buyer and to instead order transfer to them.
- The seller argued that there was no valid sale to the original buyers because they hadn’t fulfilled the bond clause by giving her the bank’s loan documentation within the 30 day period. She was therefore, she argued, entitled to regard the original sale as invalid, and to re-sell the property at a better price.
One clause, two interpretations
It boiled down to this – the seller and the buyers had each interpreted the obligations imposed by the bond clause differently. The buyers thought they had fulfilled the suspensive condition, the seller thought they hadn’t.
A hard lesson for the seller
The Court disagreed, holding that on the particular wording of this particular clause, it was enough for the buyers to obtain a loan offer from a bank. They could receive the offer and accept it without having to give the bank’s loan documentation to the seller. They could waive the protection given to them by the clause’s other requirements. In other words, they were entitled to regard the bank’s loan offer to them as fulfilment of the condition, and the sale agreement is valid and enforceable. Accordingly the seller must transfer the property to the original buyer at the lower price and will now have to suffer the consequences of breaching her contract with the “new” buyer.
As a seller, if you want certainty on whether or not your buyer really has obtained bond finance within the set time limit, make sure that your bond clause clearly and unequivocally requires the buyer to lodge with you proof that the bank has granted the loan.
More broadly, whether you are a buyer or a seller, the last thing you need is to have to go through the expense, stress and waste of time that litigation will inevitably subject you to.