Make sure you’re aware of the implications of a ‘cash-out clause’ in your property sale and purchase agreement.
What is a cash out clause?
A cash out clause – sometimes known as an escape clause – is a vendor’s clause. It gives the vendor a right to say to the purchaser that they have received a better offer. It might not necessarily be a better price, and could simply be a faster settlement, especially in cases where the purchaser is waiting for their own property to sell.
Once the cash out clause is operated, the purchaser is given a few days to declare their offer unconditional or else have the agreement cancelled. The vendor can then proceed with the back-up agreement.
Why are we seeing more of cash out clauses now?
Cash out clauses are fairly standard in property sale and purchase agreements, but over the last few years in Whangarei they haven’t seen much action. In a slow property market, vendors have typically felt lucky to get a sale and have held onto it, so ‘cashing out’ of the agreement in favour of a better offer hasn’t been a concern.
However, in a heated market where there are multiple offers or back-up offers, there is increased pressure on a purchaser to satisfy their conditions quickly. Now it seems that Auckland is moving up towards Whangarei. The last few months have seen a real rise in the number of sales in Whangarei and with it a sense of urgency coming into the market. Properties are selling quickly and once they are sold they are attracting back-up offers. This is bringing into play the cash out clause.
Complications of cash-out clauses
Vendors – make sure you don’t sell your property twice
While cash out clauses are common and the issues well known, there are a number of complications which can arise. Most significantly the vendor needs to make sure that they don’t end up selling their property twice. While that makes for an entertaining story it can be complicated and expensive to sort out. Thankfully it is not a common event.
Purchasers – be careful you don’t take unnecessary risks
More regularly however, the effect of a cash out clause can be to force a purchaser to declare a condition satisfied before they are ready. They might not have received the LIM or completed a building inspection. Or they might be waiting to sell their property. Once the cash out clause is operated, in the rush to get a property they want they may waive their rights. The pressure is on the purchaser here and they have to decide what to do. Either they let the property go or they waive their rights and take a risk.
Taking risks is part of life, but when under stress it is important that purchasers don’t take bad risks. Getting good independent advice is important. On many occasions risks can be effectively mitigated. Bridging finance might be arranged, or a building inspection might be rescheduled. However, on other occasions there is nothing for it but lose a dream or take a risk. But remember, despite the words in the ads, very few properties are really “unique”. And the plus side of an active market is that, although properties move quickly there are more coming onto the market. Exercise discretion and make decisions based on judgement and information, not on the basis of emotion.