More on Back-up Offers and Cash-outs

More on Back-up Offers and Cash-outs

In these times of heightened competition for Dunedin property, it is worth knowing how back-up offers and cash-out clauses work, including some of the finer details.

Back-up offers and offers invoking a cash-out clause both come after a contract is already on a property. The first contract is then referred to as the “prior agreement”. Any subsequent offer must acknowledge the prior agreement by the insertion of a clause under the “Further Terms” section.  The two types of post-contract offer differ in that a back-up offer must wait till the current contract-holder decides whether to confirm or not. If the prior agreement fails to confirm, either at the due time or earlier and a back-up offer is in place, the back-up offer then becomes the active agreement on the property. If the prior agreement confirms, the back-up is at an end. Some buyers believe that a back-up offer must be higher than the prior agreement, but that is not necessarily so. Depending on the clause used, a subsequent offer to a prior agreement may only need to be, in the vendor’s opinion, “no less favourable”, or at least that is commonly used legal wording. If the back-up is unconditional, the back-up offer buys the property as soon as the prior agreement is cancelled.

There is no obligation for the prior agreement buyer to be notified there is a back-up offer in place. Indeed, in some circumstances, particularly when the back-up offer price is more than the first agreement, it is in the vendor’s best interests not to disclose that a back-up offer is in place.

If the time for a contract to be confirmed is lengthy, say more than 10 working days, a sales consultant will often recommend the inclusion of a cash-out or escape clause, though this relies on the buyer’s acceptance. If a subsequent offer is accepted within the conditional period, the cash-out clause comes into play, that is, it is invoked and the buyer with the prior agreement is given a specified number of days, often three working days, in which to confirm their agreement, whether or not all of their conditions have been satisfied. The notice invoking the cash-out clause is served by the vendor’s lawyer.

The inclusion of an escape clause is not automatic. It is a very good safety measure to ensure vendors are not tied to one contract for a long time unnecessarily. But in some circumstances, when, for example, a buyer is intending to embark on a costly due diligence process, it might be unreasonable, if not impossible, to expect the buyer to accept the inclusion of an escape clause. Bottom line for vendors: discuss with your sales consultant and take legal advice if needed before making a decision.

 

What Falling Rates Might Mean

The further drop in interest rates following the Reserve Bank’s reduction of the official cash rate (OCR) recently is likely to mean, all other things being equal, a continued spur to Dunedin residential sale prices. When interest rates are low, borrowers can afford to borrow more. Historically, low rates keep house prices buoyant. Interest rates are now at their lowest for around 60 years. Together with the shortage of first-home-buyer properties and the continuing flow of Kiwisaver-armed buyers, low interest rates and more relaxed lending by banks are likely to result in Dunedin house prices rising further till at least the end of the year. We are three and a half years into a price rise cycle. Having come off a 7-8-year price lull we might expect the rising market to continue here, possibly for another couple of years.

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