Early access and early possession clauses present a great opportunity to facilitate transactions where the settlement date does not line up with the parties’ objectives. Commonly they are used to allow developers to commence repairs on an earthquake damaged property or to complete improvements before tenants move in. Purchasers might also request access when they need to have moved out of their current property before the settlement date.
There are a couple of risks to be aware of with early access arrangements.
Who bears the risk of the property?
The provisions of clause 5 of the ADLS agreement set out that the risk of the property stays with the vendor until the settlement has occurred. In the case of early access (when the purchaser intends to carry out building work on the property before settlement), we would normally expect the risk to pass over to the purchaser, at least in terms of the repairs being carried out. After all, the works being carried out by the purchaser may invalidate the terms of the vendor’s insurance.
Depending on the scale of the work the vendor might also require the purchaser to obtain contract works insurance. A vendor also needs to ensure that the purchaser obtains any required consents before carrying out any works.
Where the purpose of early access is simply to store items on the property (e.g. furniture in the garage) the items left on site would similarly be left at the risk of the purchaser, with perhaps an added warranty not to move any dangerous material onsite (e.g. flammable substances).
Deposits and the cost of remedying works.
Another factor to be aware of is the deposit payments. In a nightmare scenario where a purchaser commences works on the property before settlement but then defaults, the vendor will look to use the deposit to remediate any damage. Often with “as is where is” sales a nominal deposit of $10,000.00 or a sum that is less than 10% of the purchase price is entered.
Vendors need to consider whether this will be enough if the purchaser has partially completed work, or completed works in a poor manner so that the property is left worse off. In the case of a defaulting purchaser, the deposit may be the only expense that can be recovered if other creditors are also pursuing the purchaser’s assets. Ultimately the deposit should ideally be high enough to protect a vendor client.
What if the purchaser is moving in prior to settlement?
Sometimes a purchaser will take early possession of a property so they can begin living there before settlement. In this case, purchasers will usually be asked to complete their final inspection at that point to minimise the chance of a dispute further down the track.
Our team would be happy to advise on how to best tailor early access arrangements to protect either party within a transaction.