Varying a contract prior to settlement
Situations commonly arise where after a contract is entered into, the parties agree to reduce the purchase price following a pest and building inspection being carried out, or, the Buyer gets advice to purchase the property in a different name or entity to what is recorded on the contract.
If the parties are agreeable to the change, the change must be recorded in writing so that it is binding on the parties. It is also important to ensure there are no adverse transfer duty consequences for the Buyer.
It is standard practice for solicitors to exchange letters or correspondence confirming their client’s instructions to agree to the change. However, it is important to note that the effect of this exchange of letters, in the case of a reduced purchase price, only serves to ensure the Seller receives the lower amount and the Buyer pays that amount (making the reduced purchase price binding on the parties).
The Office of State Revenue (OSR) has advised that an exchange of letters confirming the parties agree to reduce the purchase price, will not prevent the OSR from charging transfer duty on the higher amount still shown in the contract.
Accordingly, if the parties agree to reduce the purchase price, the parties should consider whether a formal Deed of Variation is required. If the difference in the purchase price is nominal, the impact on the transfer duty may be insignificant and a Buyer may choose not to worry about a Deed of Variation and pay the higher rate of transfer duty. If, however the purchase price is reduced from say $1,000,000 to $970,000 the difference in transfer duty payable is $1,350.00, making a Deed of Variation an attractive option to ensure the Buyer pays the reduced rate of transfer duty.
Similarly, the OSR will not recognise practices to vary essential elements of agreements, such as parties to the contract, by an exchange of letters. If the Buyer entity or name needs to change, this should be recorded in a formal Deed of Rescission terminating the earlier contract on the condition that a fresh contract is entered into with the new Buyer, or a Deed of Novation.
In all instances, it is critical that clients inform their lender or broker of any changes to the contract including the Buyer name or entity, and purchase price.