Back To Basics – What To Look Out For In Your Back-Up Agreement
What is a Back-up Agreement?
When a property is being sold and there is a fully signed Agreement for Sale and Purchase already in place that remains conditional, a back-up Agreement can be entered into with a different purchaser. The back-up Agreement will be conditional upon the first Agreement not being declared unconditional in all respects by the deadline contained in that first Agreement for the satisfaction of the last condition.
As a vendor, what should I look out for?
When selling your property, receiving a second offer and entering into a back-up Agreement for Sale and Purchase seems ideal, and the majority of people do so without first having us review the back-up Agreement. However, most back-up clauses obligate the vendor of the property to take all reasonable steps to ensure cancellation or termination of the prior Agreement and specifically state that the vendor cannot grant an extension to any condition in the prior Agreement. This may be undesirable to some vendors, especially in situations where the purchase price contained in the prior Agreement is higher than that in the back-up Agreement. In such situations, the vendor is no longer able to assist to ensure the first Agreement is declared unconditional. For example, they cannot grant the purchasers an extra time to get finance approval and satisfy the finance condition, even though the first Agreement may be the preferred Agreement.
The vendor becomes obligated by the back-up clause to cancel the first Agreement for failure by the purchaser to satisfy the relevant condition by the deadline. The back-up Agreement is then declared to be on foot and will often contain additional conditions that need to be satisfied by the purchasers. If the purchasers are then unable to satisfy such conditions (Finance, LIM, Building Inspection report) they are entitled to cancel the back-up Agreement. The vendor, after previously having two Agreements for Sale and Purchase in place, is left having to start all over again.
Our preference is to require the second agreement to be “unconditional in all respects” before it becomes the back-up agreement so as to ensure that with one agreement or the other the vendor will have successfully sold their property.
As a purchaser, what does a back-up Agreement mean for me?
If you are the purchaser under the first Agreement that is entered into, and the vendor of the property enters into a back-up Agreement, you will not necessarily be informed about this. However, it will likely mean that the vendor will be unable to grant an extension on any of your conditions. If you are unable to satisfy a condition by the relevant deadline contained in your Agreement, the vendor will be obligated to terminate their Agreement with you so that the back-up Agreement can come into effect.
If you are the purchaser under a back-up Agreement, your Agreement will not be on foot until the first Agreement is cancelled. If the first Agreement is declared unconditional, your back-up Agreement will simply be at an end. If your back-up Agreement states that the vendor will only take steps to cancel the first Agreement once all other conditions under the back-up Agreement are satisfied, it means that as a back-up purchaser, you may spend money obtaining a LIM Report and Builders Report only to find your Agreement is suddenly at an end as the first Agreement is now unconditional. It would be more favourable to you if the back-up clause specified that the remaining conditions contained in your Agreement must only be satisfied by you once the back-up Agreement is declared to be on foot.
As can be seen, what may be best for a vendor may not be so good for a purchaser or vice versa. You need to get advice from us first.