How does the conveyancing process work?
Conveyancing refers to the sale of real estate from a vendor (seller) to a purchaser (buyer).
Conveyancing can also refer to the process under which a mortgagor (usually a property purchaser) gives a mortgage to a mortgagee (usually a bank or other lender).
The General Process
In all States and Territories, conveyancing follows the same general process.
In some ways the process of applying for a construction loan is much the same as for a standard mortgage. Your lender will want to see proof of your income such as pay slips or a contract of employment as well as bank or investment statements showing evidence of savings. These all show the lender that you have the financial capacity and personal discipline to repay the loan.
The way contracts come into existence
There are subtle but important differences between the manner in which contracts come into existence in each State and Territory.
In most jurisdictions, the real estate agent usually conducts the exchange and the negotiations leading to the exchange. However, in NSW and the ACT solicitors/conveyancers are often significantly involved.
Accordingly, in NSW and the ACT there can be much more haggling about the deal after the real estate agent declares a property “sold” and before a binding legal agreement is created.
Steps in the conveyancing process
Step 1 - Contract of Sale
The contract for sale is a very important legal document. Many disputes arise between vendors and purchasers. Consequently, trained experts should prepare the document. Under various laws, the contract must contain specified documents, certificates and disclosures.
Step 2 - Make an offer
When a potential purchaser decides they are interested in a property, they may make an offer to purchase it. The vendor may accept this offer, or alternatively, the purchaser and vendor may enter into negotiations over the price and conditions of the sale.
Step 3 - Paying a deposit
Purchasers may decide to pay an initial deposit as a sign of good faith of their interest in the property. The amount of such deposit can vary and will generally be stipulated by the vendor or agent. This will not mean that a binding contract exists or that the property is removed from the market. The payment is simply to show the vendor that the purchaser is serious about their offer.
Note that ‘holding deposits’ will generally be non-refundable.
However, in Queensland, it is unusual for holding deposits to be used except for off the plan sales and it is illegal for such deposits to be non-refundable.
If the vendor later accepts an offer, the vendor and purchaser agree to exchange contracts. At that point, the purchaser pays an agreed deposit amount. The deposit is usually 10% of the purchase price and is held by the real estate agent or the solicitor/conveyancer.
The purchaser should not exchange a contract for sale until they have reviewed the contract with their solicitor/conveyancer.
Note: gazumping is a common practice that can take two forms:
- the intending purchaser believes the property has been secured by payment of an initial deposit but when they are ready to exchange contracts, discover that another purchaser has already exchanged contracts on the property; or
- the vendor’s solicitor/conveyancer accepts two or more initial deposits and then tells the intending purchasers that the price has increased. The intending purchasers are then left to outbid each other as if it were an auction.
Step 4 - Buying at auction
When a property is sold by auction, a purchaser is bound to purchase the property after having made the highest bid at the end of the auction.
It is important for the vendor to have a solicitor/conveyancer examine the sale contract before the auction to make sure that everything is in order. It is also important that a potential purchaser has finance arranged and that all necessary property inspections have been done.
Before auctioning a property, the vendor will nominate a ‘reserve’ price that is not usually disclosed to potential purchasers. The reserve price is the lowest price the vendor is willing to accept. If the highest bid is below this price, the property will be ‘passed in’. The vendor will then either try and negotiate a price with interested purchasers or put the property back on the market.
If bidding continues beyond the reserve price, the property is sold at the fall of the hammer. The successful purchaser must then sign the contract for sale and pay the deposit (usually 10%) immediately.
Step 5 – Risk
Responsibility for damage to the property remains with the vendor up until settlement or completion of the sale, but it is prudent for the purchaser to insure the property from exchange of contracts. From settlement, when the property title is transferred to the purchaser, the purchaser is responsible for damage.
Purchasers may choose to insure the property before settlement if they are unsure whether the vendor has a current insurance policy. If purchasing a unit under strata title, the purchaser should obtain a Certificate of Currency from the owners' corporation's insurer to make sure the property is adequately insured.
Note that many lenders require evidence of comprehensive building insurance being in place, with the lender noted on the policy as an interested party, as a condition of settlement of the loan for the property purchase.
Note that in Queensland and ACT, the risk passes to the purchaser when the contract is formed.
Step 6 - Exchange of contracts/paying a deposit
See Annexure 1 for the different ways contracts are exchanged.
Step 7 – Cooling-off period
After exchange, the purchaser of residential real estate may have a time to “cool off”. If a cooling off period applies, the purchaser can rescind the contract before the end of the cooling off period. Details of cooling off provisions are set out in Annexure 2.
Cooling off does not apply to sales at auction.
Step 8 – Transfer of property title
The purchaser’s solicitor/conveyancer must prepare a transfer document, have the purchaser sign it, and pay any stamp duty for the document’s registration. The purchaser’s solicitor/conveyancer must then send the transfer to the vendor’s solicitor/conveyancer for the vendor to sign. In Queensland, the vendor must sign the transfer form before it is stamped.
Note – stamp duty (also referred to as transfer duty) on transfer
The purchaser’s solicitor/conveyancer must arrange for the transfer document to be stamped prior to settlement so the purchaser can lodge it for registration immediately after settlement. This is often a requirement of the purchaser's financier, so that it can register the transfer and its mortgage promptly. This means that the purchaser must arrange to pay their solicitor/conveyancer the stamp duty amount prior to settlement, or arrange for stamp duty to be paid at settlement (e.g. from loan proceeds). It is not possible to defer the payment of stamp duty on the transfer.
Step 9 – Time for completion
The time for completion can be set by agreement between the parties.
The time span for completion of “off the plan” purchases can be quite lengthy. This is because the contract can be completed only after the development/building construction has completed and new titles are issued. The standard times for completion are set out in the table below, but these periods can be changed by agreement between the vendor and the purchaser.
What is “time of the essence”?
Time is said to be of the essence of a contract if the contract specifically says so. This means failure by either party to complete on a nominated date is a “breach of a fundamental term”. If there is a breach of a fundamental term, the other party can terminate the contract, forfeit and keep the deposit (in the case of a breach by the purchaser), and sue for damages.
Example: A real estate contract provides for completion “within 42 days of exchange, time of the essence”. If the purchaser does not complete on or before that date, the vendor can terminate the contract, forfeit the deposit, and sue for damages.
Only in Queensland is time normally of the essence, although time can be expressed to be of the essence in any State or Territory.
Contracts that are not time of the essence frequently contain a provision entitling the vendor to give the purchaser a notice (usually 14 days) making time of the essence for completion at the end of the 14 day period.
Example: A real estate contract provides for completion within 42 days of exchange, not time of the essence. If the purchaser does not complete on or before that date, the vendor can issue a notice to complete to the purchaser making time of the essence for the end of the notice period.
Standard time for completion
Step 10 – Requisitions
After exchange, the purchaser’s solicitor/conveyancer will usually send a list of formal questions about the property known as requisitions on title. Requisitions obtain from the vendor information that may not have been previously disclosed or discovered during inspection of the property (for example, disputes with neighbours relating to fences). The standard contracts used in Queensland prohibit the delivery of requisitions on title but instead contain some basic warranties about the vendor's title.
In Victoria, requisitions on title have been replaced by warranties in the contract, in particular General Condition 2 of the approved form of contract. The vendor’s solicitor/conveyancer will reply to these requisitions.
The purchaser’s solicitor/conveyancer will often make some additional searches and enquiries not made before exchange. These searches are to determine a variety of factors, including whether there are general defects in the title, the land is contaminated, or there has been construction on the property. If any of these result unsatisfactorily in a way not disclosed in the sale contract, the purchaser may be able to rescind the contract, sue for damages, or seek a reduction of the sale price.
Step 11 – Outgoing mortgagee
If the vendor has a mortgage over the property, the mortgagee must be contacted to provide a pay out figure and attend at settlement to hand over a discharge of mortgage and, often, the certificate of title/title deed.
Step 12 – Adjustments
At settlement, “adjustments” will be made. Example: the council rates have been paid for the whole year. The purchaser must pay an additional amount to the vendor for the proportion of the year the purchaser will own the property. Usual adjustments are council rates, water rates, strata body corporate contributions, land tax and rent if the property is tenanted.
Step 13 – Settlement
The sale is said to settle or complete on the day the purchaser pays the balance of purchase money, plus or minus adjustments, to the vendor.
On the date of settlement, it is important that a final search of the title is obtained to ensure that the property is clear from any interest or restrictions that may have been recorded between the date of exchange and settlement. Usually the solicitors/conveyancers/mortgagees meet and hand over the title documents in exchange for payment.
Step 14 – After Settlement
The purchaser or the purchaser’s mortgagee will register the transfer documents with the Land Titles Office. Usually there will be a:
- discharge of any existing mortgage/s;
- withdrawal of any existing caveat/s;
- transfer of title from the vendor to the purchaser;
- mortgage from the purchaser to the new mortgagee.
The Land Titles Offices advise the relevant authorities (such as the local council, water authority and Valuer General’s office) that the property has a new owner.
Note – if settlement does not occur If settlement does not occur on the scheduled date, depending on the contract terms, interest at a rate specified in the contract (often higher than mortgage rates) will accrue from the date specified for settlement to the ultimate settlement date, if the purchaser fails to settle on the due date. In addition to paying interest, the purchaser may be given a notice to complete, making time of the essence. Once the time of the essence date is reached, interest continues to accrue but the vendor can rescind the contract and retain the deposit previously paid.