In the excitement of signing a contract for a new property, what happens if you later realise you need to make a change to the terms of the contract and it has already been signed? What will it cost you to make this change?
Why Amend a Contract?
Before a contract can be amended, you need to agree with the other parties’ reasons as to why the amendment is being made. Reasons being:
To fix an error, such as a spelling mistake;
To delete a term that the parties agree is no longer relevant;
To insert a detail which was omitted from the contract; or
Amend the purchase price of the property.
Considerations before Amending
It is essential that before any amendments are made to a contract that proper consideration is given to the suggested amendments, and the possible consequences of these changes in relation to the payment of transfer duty.
The Queensland Office of State Revenue (OSR) has released a series of rulings which determine the way in which transfer duty is assessed on varied agreements, and it is essential that you are aware of the potential consequences. Generally speaking, duty will be assessed on the amount stated in the contract, and a written agreement signed by the parties to the contract will be required if duty is to be assessed on a lower amount.
It is also important to consider that any incentives you insert into a contact, such as rental concessions or the inclusion of furniture for a separate fee, may be considered to be an additional part of the purchase price when assessing duty and duty may be assessed on a higher value.
Sometimes due to the nature of the amendment required it is not possible to amend the contract and it is necessary to end the existing contract and enter into a new one. This may be the case where an incorrect entity has been named on the contract, for example naming an individual as the purchaser rather than the trustee of a trust. In these circumstances it is necessary to enter into a deed of rescission, effectively cancelling the existing contract, and entering into a new contract.
Be aware that if the cancellation and entering into of the new agreement is deemed to be a resale agreement, duty will be payable on both contracts. A resale agreement occurs if the cancellation of the original contract results in you, or a related party, receives a financial benefit from the cancellation other than:
A release from the cancelled agreement; or
An interest in the property to the extent that the value of this interest does not represent a profit due to the resale agreement.
It is essential that you seek advice as to the proper process to ensure that you comply with the transfer duty requirements and do not become liable to pay more duty than what you have budgeted for.
Amending before signing
Whenever possible, it is best to review the contract and have any changes made to the contract before it is distributed for execution.
Sometimes this is not possible, such as when you are meet at the property to sign the contract and notice an error or change you wish to make to the printed contract. In these circumstances you can amend the contract by hand and initial the changes. These changes must then be initialed by the other parties to become binding. This is also a way which negotiations in price can be carried out when you make an offer by way of signed contract, with the parties hand amending a purchase price until a consensus is reached.
Amending after signing
Despite everyone’s best efforts, the reality is that sometimes errors remain unnoticed until the contract is fully signed, or event after the signing of the contract can necessitate changes. Depending on the nature of the amendment required, there are different methods which can be used to amend the contract.
In the case of minor amendments, such as a spelling error or missing words, the usual process is that the parties agree to amend the contract to correct these details. This is done by exchange of letters by the solicitors acting in the transaction, who then hand amend the contract.
One of the most common changes made to a contract is an adjustment to the purchase price in the event of an unsatisfactory building and pest inspection. Although you can request that a seller undertakes repairs to the property, another alternative is to request a variation to the purchase price so that you may undertake these works yourself.
For small variations to the purchase price, it is usual that by exchange of letter the parties agree to reduce the price by way of adjustment at settlement. In these situations, the contract is not physically amended, and the change is only reflected at settlement.
If there is a substantial variation to the contract, it is best to prepare a Deed of Variation detailing the change which is then signed by the parties. This deed is then read in conjunction with the contract, which when read together contain the agreement between the parties. If there is a substantial variation to the purchase price, it is best to prepare a Deed of Variation, as this will be required when calculating the transfer duty payable.
Although ideal to have a contract in perfect order before signing, this is not always possible. In the case that changes are required, there are several options open to you, but exactly how you amend the contract will depend on the substance of the amendments.
If you require further information regarding purchasing or selling property, please call us today on (07) 3839 7555.