Gazumping, Disclosure & Cooling Off

What is Gazumping?

Gazumping (a term coined in England in the 1920’s), occurs when an agent or seller verbally accepts an offer to buy a property at an agreed price but the property is subsequently sold to someone else. In NSW before 1988, weeks could elapse between the time a price was negotiated and the seller delivered a sale contract to the buyer. It became a profoundly depressing and frustrating experience for a buyer who spent time, effort and money waiting for an exchange of contracts to see a latecomer pick up the spoils.

Buy in the morning, it’ll be more expensive in the afternoon

In April 1987, a position paper of the Real Estate Institute of New South Wales noted that New South Wales was the only State in Australia which had a conveyancing system where the highly questionable practice of gazumping still occurred. The 1986 - 1988 real estate boom saw the NSW Government first introduce the anti-gazumping legislation we now know as vendor disclosure and cooling off. It was aimed at enabling the parties to exchange contracts quickly.

The dizzying upward spiral in property prices in 2021 and fierce competition has led to comparisons with previous boom markets. This in turn has led some to call for further legislative intervention to prevent a return to form of gazumping where well-heeled buyers are prepared to exchange contracts for residential property, often sight unseen, without having undertaken any due diligence. That leaves the more cautious buyer out in the cold.

Change in the Law

NSW was the last jurisdiction in Australia to introduce laws aimed at protecting buyers from being gazumped and improving the efficiency of transactions. Current legislation now addresses a number of issues.

Sale contract - Sellers and their agents must not advertise a property for sale until they have a prescribed form of contract for sale ready and available for inspection by buyers. So in theory, a buyer can make an offer and sign a contract on the same day.
Disclosure - The form of contract must contain certain documents such as a planning certificate and drainage diagram, which are intended to allow buyers to forego cursory due diligence.
Cooling Off - A buyer has a 5 business day cooling off period (or 10 business days in the case of off the plan properties) during which they can change their mind, back out of the contract and recover all but 0.25% of the purchase price.
Waiver - A seller can require a buyer to waive their cooling off rights by providing what is known as a Section 66W Certificate, so that a contract becomes unconditional from exchange. The certificate must be given by a solicitor, barrister or licensed conveyancer who certifies the buyer understands that their 5 or 10 business day cooling off period does not apply.
Implied Warranties - After exchange of contracts, a buyer still has the right to rescind and recover their full deposit if certain statutory warranties are breached, for example the property is intended to be acquired by the Government to construct a road and this was not known to the buyer before exchange.

Does the Cooling Off Regime Work?

Probably not. Especially in a buoyant market, sellers routinely require buyers to waive cooling off rights. Some buyers are prepared to waive their rights but cannot find a solicitor or licensed conveyancer to provide a S.66W certificate. Cooling off rights only apply to residential properties and don’t apply to properties sold at auction or on the same day as the auction.

Is There a Better way?

Imposing mandatory cooling off rights would disadvantage sellers who want certainty when contracts are exchanged. So, as most buyers are forced to waive their cooling off rights, many observers advocate a stricter disclosure and warranty regime to protect those who are forced to take the risk of not conducting detailed due diligence.

For example, most contracts require a buyer to accept a property as is, subject to all faults and defects whether obvious or not. A buyer who wants to obtain a building report might miss out to those who are prepared to take the risk of not doing so.

Perhaps the solution lies in scrapping cooling off and requiring sellers to obtain and annex more information about the property such as a current survey, pest report, certificate of compliance from the local Council and strata report in the case of home units. In addition, making some contracts, (say those with a sale price below $750,000) conditional on a buyer obtaining finance within 14 days, may assist those in a lower income bracket.

More Change?

The recent introduction of electronic conveyancing throughout Australia has made the sale and purchase of land quicker and more certain than ever before. But with property prices surging, the dream of home ownership for many is evaporating and gazumping has resurfaced in a more subtle form. Current laws may not go far enough to help level the playing field. The vendor disclosure regime is rapidly evolving and becoming more sophisticated. Balancing the interests of all is a tricky undertaking but greater legislative protection for buyers is more likely than not over the next few years.