Exchange of Contracts: How It Works

What is a contract of sale?

A contract of sale is essential for every property transaction. This legally binding document outlines the key terms agreed upon by the buyer and seller, including the price and settlement date.

A conveyancing solicitor usually prepares the contract of sale, which is then checked by the seller’s solicitor. Contracts of sale may differ slightly across States and Territories but there are essential components regardless of location.

Examples of components typically included in a contract of sale:

names and residential addresses of the property’s buyer and seller
a full description of the physical dimensions of the property being sold, including the land
the agreed-upon settlement date
a list of chattels (items not physically attached such as curtains and dishwasher) included in the property
purchase price, also known as ‘consideration’ and the agreed-upon percentage to be paid as a deposit when contracts are exchanged
terms and conditions for any damage of the property before settlement or for factors such as financial approval of loans and tenancy if the property is being rented
penalties for delays in settlement
easement rights or the right to use the property and its land for a specific purpose
sunset clause, which places a time limit or expiry date on the contract of sale. If that date passes before the terms are satisfied either party can withdraw from the sale without incurring a financial penalty
cooling-off period, which is a clause that allows the buyer to pull out of the deal within a legal timeframe.

How does the exchange of contracts work?

The exchange of contracts is one of the most important legal steps when buying property, as it formalises the transaction between the buyer and the seller.

Here’s how the process works: Two copies of the contract of sale are made — one for the buyer and one for the seller. Once the buyer’s solicitor has finished preparing the contract for sale, they will exchange it with the seller’s solicitor. Both parties sign their respective copies and they are handed over to the other to be retained as official records of the transaction. The exchange of contracts must take place within two business days of signing.

Before exchanging contracts, you must be absolutely certain that you want to buy the property and can service the mortgage. This is also the time to complete any building and pest inspections. And, through your solicitor or settlement agent, ensure there is no outstanding debt on the property or anything wrong with the title deeds.

Once everything is in order, the exchange can go ahead, which legally completes the property sale process. At this point, the seller has accepted the amount offered for the property and the terms and conditions for for settlement day.

At the time of the exchange, the buyer is also required to pay a deposit. This amount is usually transferred to a trust account held by the real estate agent. They will release the funds — along with the full payment for the property — to the seller on settlement day. The exchange usually occurs about six weeks before settlement.

Can the buyer or seller pull out after contracts are exchanged?

Once signed contracts are exchanged, they become legally binding for both the buyer and seller. That means, in most cases, neither party can withdraw from the sale without facing serious consequences.

Private treaties:

For private treaty sales, the buyer typically has a cooling-off period, which allows them to withdraw from the sale by providing written notice. The rules and length of this period differ between States and Territories. In NSW, for example, the cooling-off period for private treaty sales is five business days, while in Victoria it’s three business days. Buyers can request an extension to the cooling-off period, but the seller isn’t obligated to agree.

During the cooling-off period, the buyer can pull out of the sale, but there may be a cash penalty. Before reaching the contract exchange phase, you should be confident that you want to go ahead with the purchase. Consult with your solicitor or mortgage broker if you anticipate any issues in the future with your ability to make your mortgage payments.

There is also no cooling-off period for sellers in private treaty sales. Once contracts are exchanged, the seller is expected to complete the transaction and cannot back out without breaching the contract.

Auctions:

In auction sales, the rules are even stricter. If you are the successful bidder at auction in Australia, you must sign the contract and pay the deposit on the spot — with no cooling-off period. If you try to back out after the exchange, you will, at the very least, need to forfeit your deposit.

Can you be gazumped?

The legally binding nature of the exchange also prevents gazumping, where the seller accepts a higher offer from another buyer after already agreeing to sell. Gazumping can only happen before the contract exchange. Once the exchange occurs, the seller must honour the agreed price.

Before the exchange of contracts, make sure you …

1. Have your deposit ready to transfer

You should well and truly have your finances in order at the exchange of contracts stage, but you can double-check with your lender that the funds are ready to transfer and that there aren’t any pressing issues with the mortgage as a whole.

2. Have all your paperwork organised

This also seems obvious, but you can speed up the entire process if you get everything from your end in order and have a proactive solicitor or settlement agent on your side. That way you can bring the exchange forward, as long as your lender and the seller have no objections. The closer you are to the exchange of contracts also means the closer you are to settlement and moving in.

3. Fully understand the contract details

The contract of sale shouldn’t be confusing but you should be acquainted with it, like the settlement statement, in case there’s anything troubling you in it. Given the size of your financial commitment, it’s well worth sitting down with your property professional and getting them to take you through the contract item by item. It’s always a good idea to ask an expert when something is unclear.