Cooling off periods explained
By Gary Newton and Alex Ottaway
A cooling off period is an amount of time after a contract is entered into during which the contract may be rescinded (treated as if never entered into).
This article concerns cooling off periods in contracts for sale of residential property in NSW. Agents need to be aware of the provisions which govern the cooling off regime. This article will not deal with the application of cooling off periods relating to options for sales of residential property.
Ordinarily, purchasers under a contract for the sale of residential property in NSW are protected by cooling off periods, unless an exception applies.
Meaning of ‘residential property’
‘Residential property’ is defined in the Conveyancing Act 1919 as including any of the following:
Where the land is used wholly for non-residential purposes, it will not fall within the definition and therefore no cooling off period will apply. For example, commercial strata lots or vacant land used as a market garden would not be considered to be ‘residential property’.
- land with not more than two places of residence (i.e. a house, two houses, a duplex but not a triplex or apartment block)
- vacant land where a single place of residence is permitted to be built
- strata lot or lots which constitute one place of residence only.
Off-the-plan sales of 1 or 3 above may attract the cooling off period.
Where a 66W certificate is given
There will be no cooling off period where the purchaser (or their solicitor or agent) gives the vendor (or their solicitor or agent) a 66W certificate before or upon exchange.
In order to be a compliant a 66W certificate must:
For residential sales contracts, the certificates are commonly called ‘section 66W certificates’, named after the section of the Conveyancing Act 1919 (NSW) which prescribes the content for the certificates.
- be in writing
- be signed by a solicitor, barrister or licensed conveyancer (but not one who is acting for the vendor)
- indicate that the purpose of the certificate is to waive the cooling off period
- state that the solicitor, barrister or licensed conveyancer explained to the purchaser the effect of the contract and that in giving the certificate to the vendor, the cooling off period would be waived.
A section 66W certificate can be given by facsimile.
Where the property is sold at public auction
A cooling off period does not apply to residential properties sold at public auction.
It may be that the property goes to auction but is passed in (i.e. not sold). In these cases, if a contract for sale of the property is entered into on the same day as the auction a cooling off period will also not apply.
Where the land is more than 2.5 hectares in area
If the land is more than 2.5 hectares in area, it is deemed not to be ‘residential property’ and therefore, there is no cooling off period.
A purchaser must exercise their cooling off rights (i.e. if they wish to rescind the contract) during the cooling off period by serving a written notice informing the vendor of the rescission.
The written notice must be signed by the purchaser or their solicitor. Where there is more than one purchaser, each purchaser (or the solicitor for each purchaser) must sign the notice.
The notice must be served on the vendor or their agent or solicitor. Where there is more than one vendor, service need only be on one of them (or on the agent/solicitor for one).
When the purchaser exercises their cooling off rights, the sale contract is rescinded. This means that, for legal purposes, it is as if the contract never existed.
The purchaser upon exercising their cooling off rights forfeits 0.25 per cent of the purchase price of the property. This amount can be taken from the deposit paid to the vendor.
If no deposit has been taken, or if the 0.25 per cent exceeds the amount of the deposit, the balance is a debt and the vendor may sue to recover it. If the 0.25 per cent is less than the deposit, the balance of the deposit must be paid back to the purchaser.
With sale contracts, vendors’ agents are permitted to take more than 0.25 per cent of the purchase price as a deposit. In all cases, and unless specifically instructed to do otherwise, agents should do so to protect the vendor. It is longstanding conveyancing practice for a 10 per cent deposit to be taken on exchange. The amount of the deposit is set out on the front page of the contact, unless it has been altered by a special condition.
If the purchaser fails to pay the full amount of that deposit on exchange, the purchaser is immediately in a position of default under the contract and the vendor is entitled to terminate the contract, sue to recover any amount of the deposit which is unpaid and can also sue the purchaser for any loss (including legal costs) the vendor might suffer if the property is sold to another purchaser for a lesser amount. The Vendor can exercise this right at any time after exchange and until the agreed deposit is paid in full.
In other words, if a purchaser has not paid the agreed deposit, they only have a binding contract (and cooling off rights), for so long as the vendor chooses not to terminate.
A great example of when a vendor may elect to terminate because the agreed deposit has not been received, is when a higher offer is received from another purchaser after exchange.
Agents should not make any representations to a purchaser about the whether the vendor will, or will not terminate the contract.
When a purchaser cools off (rescinds), the vendor does not get to keep the full deposit – only 0.25 per cent of the purchase price. The balance of any deposit must be repaid to the purchaser.
It is important to note that cooling off is different from termination. If a vendor terminates a contract due to the default of a purchaser (i.e. where, without valid reason, the purchaser is unwilling or unable to proceed to settlement or they withdraw from the purchase), the vendor keeps the full deposit, which compensates the vendor for their loss of bargain, the need to find a new purchaser and their costs and expenses incurred due to the sale falling through. A vendor sometimes also has the right to sue the purchaser for other damages.
A cooling off period starts at the time the sale contract is made – that is, on exchange. It finishes at 5.00pm (Sydney time ) on the fifth business day after the day on which the contract was made.
For example, if a sale contract was entered into at 10.00am on Wednesday, 9 June 2010, the cooling off period starts at this time. It ends at 5.00pm on Thursday, 17 June 2010. Weekend days and public holidays (in this case, the Queen's Birthday on 14 June 2010) are not counted as business days.
The rule that a cooling off period runs until 5.00pm on the fifth business day after the contract or agreement is entered into is a default rule. The parties may agree to extend or reduce the period.
Agents should not amend the contract to alter the length of a cooling off period. The Property, Stock and Business Agents Act 2002 does not permit an agent to make such changes to a contract. A change to reduce or lengthen a cooling off period should only be made by the vendor, or by their solicitor or licensed conveyancer.
Extending the period
The duration of a cooling off period can be extended by an appropriate special condition being inserted into the contract or agreement. If the contract or agreement has already been entered into (i.e. if the cooling off period has already begun) the vendor may agree to extend the period at any time before its expiration, provided this is done in writing. Agents should bear in mind that if there is a tenant in the property, and the property is being sold with vacant possession, an increase in the cooling off period (such as to a 10 or 15-day cooling off period) may require an extension in the usual 42-day settlement period to allow a periodic tenancy to be properly terminated.
Reducing the period
The best way to reduce the cooling off period is to insert a special condition into the contract. The parties may also agree to a reduction orally or in writing. In both cases, a 66W certificate will also be required.
Cooling off notices are required to be attached to contracts for the sale of residential property. If a complying notice is not attached, the purchaser has a right to rescind at any time up until completion, whether or not the cooling off period has already expired and they will not forfeit 0.25 per cent if they cool off.
The standard form contract for the sale of land sold by the Law Society of NSW and REINSW has a compliant cooling off notice contained within it.
Gary Newton is a Partner at Colin Biggers & Paisley. For more information, contact firstname.lastname@example.org