New court ruling intensifies debate over binding bond approvals

Source: Pexels

The judge ruled in favour of the seller, because both parties had signed a contract that became binding as soon as the buyer’s credit provider issued its “approval in principle”.

"Some people misinterpreted the ruling, or disagree with it - saying it wasn’t fair,” says Renier Kriek, managing director of Sentinel Homes. Yet the judgement followed centuries of contract law precedent by focusing only on the following question: At what stage did the purchase agreement become binding, before or after the property finance had been accepted by the buyer?

“Obtaining finance is a process, unlike a turning on a light switch, it’s not instant and even positive results arrive piecemeal,” says Kriek. “When you sign an offer to purchase a property and require a home loan, there’s usually a condition that your loan must be approved before a certain date. This is called “suspensive condition” – meaning that only once this condition is fulfilled, the contract will become final and binding.

“Buyers and sellers need to understand the suspensive condition in their contract, especially as they generally have competing interests in terms of the stage at which the deal should become final,” he says. “It’s therefore important to phrase your contract without ambiguity, so it’s not open to misinterpretation.”

Real-life consequences

Contract law may sound academic but it has serious, real-life consequences. Since nobody wants to lose their deposit, Kriek urges buyers to fully grasp the financing process: When a home loan provider assesses your application to buy a house, and is satisfied it can lend you the money, it will first issue an approval in principle (AIP).

Then it conducts a valuation, before eventually issuing a prescribed document called pre-agreement statement and quotation. According to the NCA, the buyer has five days to accept the pre-agreement statement and quotation, which then becomes a final offer of finance.

“From the seller’s perspective, it would be best if the agreement of sale would likely contain a clause stating that the contract becomes binding as soon as the home loan provider issues the AIP,” says Kriek.

“From the buyer’s perspective, however, this clause poses a risk: it means you’re bound to the sales agreement, the sale is final, and your deposit could be on the line, even before you have agreed to the interest rate and other finance conditions suggested by the home loan provider.”

Ideally, he advises buyers to ensure the sale is only binding once, namely that:

a) the bank has issued the pre-agreement statement and quotation, and

b) you have accepted it. “This means you can only lose your deposit or be forced to buy the property once you have agreed to the terms of the credit proposed to you.”

Check the nitty-gritty

Also watch out for home-loan approvals that require the submission of approved building plans. As a rule, your offer to purchase should require the seller to do so. But if this clause is missing, the seller won’t be obliged to provide the building plans, even if your home-loan provider requires these.

This makes you as the buyer responsible for obtaining the plans. It’s not only time-consuming but if plans can’t be approved, due to unauthorised building works, your deposit may once again be at risk.

This also applies to any other conditions your home loan provider may have. You have to ensure that these conditions are also in the sale agreement, so that the two documents tie into each other.

For these reasons, Kriek urges buyers to get legal advice before signing their offer to purchase. Don’t rely only on the property practitioner or others linked to the seller. No-one should take a hig cost and high liability decision like buying a home without expert legal and other professional advice, such as from a registered property practitioner and bond originator.

Ultimately, understanding the nitty-gritty of your contract should help you avoid financial losses and enjoy a smoother property transfer.