Purchasing your own home, while often rewarding, comes with its own set of risks and uncertainties. It's crucial to ensure that your new property meets all your expectations and requirements, especially given the substantial investment involved.
Thankfully, properties in NSW offer a safeguard in the form of a cooling-off period (reserved for private treaty sales). This crucial time frame grants you the opportunity to thoroughly evaluate the property, conduct necessary checks, and solidify your decision.
In this guide, we will delve into the essentials of cooling-off periods, providing you with all the information you need to navigate this important phase of your real estate journey with confidence.
What is a Cooling-Off Period?
The legal definition of the cooling-off period as per the Conveyancing Act 1919 is the duration after the exchange of contracts when the purchaser is allowed to pull out of the contract for residential properties.
The cooling-off period allows the purchaser to determine whether to continue with the property purchase. During this time, you can conduct your due diligence, finalise your finances, and get your contract reviewed.
Duration and Critical Timing
The standard cooling-off duration consists of 5 business days beginning on the date of signing contracts and ending at 5 pm on the fifth business day. An extension of the cooling-off period can also be negotiated with the vendor.
The keywords here are ‘business days’. Weekends and public holidays are generally not included in the cooling-off period.
For example, let’s assume you exchange contracts on Thursday the 25th of January. Friday date 26 is a public holiday (Australia Day) and dates 27 and 28 are on a weekend. In this case, the 5th day of the cooling-off period falls on Friday the 2nd of February.
Take note of these critical timelines to be on the safe side.
When is there no cooling period?
A cooling-off period is only applicable in private treaty residential sales. Auction sales have no cooling-off periods. If you win a bid at an auction, you have to sign the contract and pay the deposit on the same day.
Other properties that don’t have cooling-off periods in NSW include properties that surpass 2.5 hectares in area, land that has more than two residential units, or developed and vacant land used for non-residential purposes.
You can also skip the cooling-off period and waive your cooling-off rights by submitting a section 66W certificate.
What happens after the cooling-off period?
Once the cooling-off period lapses, the contract becomes unconditional. In other words, you can no longer back out of the contract and must go through with the purchase
Unless you’ve negotiated with the vendor to have the remainder of the deposit be paid on the expiry of the cooling-off period. Then you should also have the deposit paid by the end of the cooling-off period, not after. This deposit is then held in a trust account until settlement for release. To learn more, read our article on real estate deposit rules.
After the cooling-off period, you will enter into the settlement period, which is a standard of 42 days.
The settlement period includes paying the property purchase price, signing and exchanging all legal documents, transferring the title into your name, and visiting the Lands Titles Office to complete the process.
Navigating the Cooling-Off Process in NSW
The cooling off period is designed to give the buyer a protective period to either complete any outstanding tasks or to back out of the sale. These tasks involve:
- Completing your due diligence
- Preparing and finalising your finances
- Getting your contract reviewed
1. Getting your Due Diligence completed
Typically it is ideal to have your due diligence completed before you exchange contracts. But in today’s market where the demand for property is so high, purchasers would opt to secure the property by exchanging contracts before doing due diligence.
During the cooling-off if you haven’t done your due diligence, you would be engaging in the following activities:
- Get building and pest reports
- Obtain building certificates from the local council
- Get relevant survey reports
- Obtain strata reports for strata apartments
- Analyse the neighborhood and property
Based on the information gained from the above, you can now decide whether to continue with the sale or terminate the contract.
2. Financial Preparations and Approvals
Similarly with due diligence, it is recommended that you have your finances finalised and approved by the bank before you exchange contracts. But that’s not always the case.
The cooling-off period will allow you more time to have the banks approve your loan unconditionally. However, in the instance that for some reason your finances are not approved, you can use the cooling-off period to withdraw from the contract.
3. Getting your contract reviewed
If you haven’t gotten your contract reviewed by your property lawyer, then the cooling-off period is a great time to get this completed. Your property solicitor will help you uncover any special conditions in the contract that you may not be aware of.
Your property lawyer will also make sure that everything that you’ve negotiated with the vendor or agent concerning the property is included in the contract as well.
Reasons why you would back out of the contract during the cooling off period
As we’ve seen, the cooling-off period allows you to conduct your due diligence and back out of the contract with minimal financial penalties. And there are several reasons why you may change your mind and choose to withdraw from the deal.
They include:
- Inability to get financing approved within the required timelines.
- Unsatisfactory building and pest inspection report. You might have uncovered serious structural issues or pest infestations that may be costly to correct.
- Your due diligence informs you that the decisions may not be the best for you. For example, there might be an upcoming development that will block the views you were hoping to enjoy.
- A better property you love is listed on the market for almost the same price.
How do you withdraw from a contract?
Withdrawing from a contract is quite straightforward. You simply need to inform your conveyancer or solicitor in writing that you intend to pull out from the deal.
They will then notify the vendor’s agent by writing a letter on your behalf and sending it via email, fax, mail, or deliver it physically.
Remember, this has to be done by 5 pm on the fifth business day as per the cooling-off period timelines.
What are the costs of withdrawing a contract during the cooling-off period?
The cost of withdrawing from a contract during the cooling off period is typically 0.25% of the purchase price in NSW.
The rest of the 10% deposit minus 0.25% will be refunded to you.
What happens if you withdraw from the sale after the cooling-off period in NSW?
There could be larger fees and penalties if you decide to withdraw from the sale after the cooling-off period. But this depends on the terms and details included in the contract. As such, the consequences vary from contract to contract.
Most of these penalties will often include fees to the vendor as compensation for withdrawal in the form of:
- The full 10% deposit on the property and/or
- The difference between your offer and preceding sale price of the property
The Implications of Waiving the Cooling-Off Period
In a private treaty sale, you can waive your rights in the cooling-off period using a 66W certificate issued to the vendor. This certificate complies with Section 66W of the Conveyancing Act 1919 and must be signed by your conveyancer or solicitor.
You should only opt for a Section 66W if you’ve done everything necessary to move forward with the purchase. Because you are waiving your cooling-off period, you are immediately legally bound to the sale upon the exchanging of contracts.
[.callout] ⚠️ Section 66w Caution: By using a Section 66W certificate in NSW, you're irrevocably committing to a property purchase and may face significant penalties, including forfeiting 10% of the purchase price, if you back out. [.callout]
Comparative Analysis of Cooling Off Periods per State
Cooling-off periods aren’t the same across Australia. Each state and territory has its own laws and regulations governing cooling-of periods.
Apart from the cooling-off period timelines, they also have different requirements when it comes to the payable holding deposit and withdrawal penalties.
Here’s a state comparison table showing what to expect when it comes to cooling-off periods in different states:
Key Takeaways
The cooling-off period exists to protect you from making any grave mistakes and tying yourself down to a property you don’t like. It’s there to help you determine whether it’s the right decision for you.
Depending on the terms of the contract, the cooling-off period might be the only time you can pull out of the deal. If the period lapses, the contract will become unconditional.
Need legal advice?
If you are currently in your cooling-off period, and you need further guidance on what you need to during this period feel free to give us a call on (02) 7806 0623 or book in a free consultation with us today.
We are your expert Property Law specialists committed to helping you with a smoother property transaction.
