The basic idea of buying and selling property in Queensland (and around Australia) is that the seller must provide the buyer with honest information where required, but otherwise the purchase is at the buyer’s risk.
You’ve probably heard the phrase “buyer beware” (or caveat emptor for the Latin lovers out there) which sums up this principle nicely.
Of course, this has led to a finely balanced set of rules about what a seller must disclose to a buyer as part of the property purchase process.
One of those disclosures is known as “encumbrances” – and it’s not always as simple as you might think. So, let’s dig into the ins and outs of encumbrances when buying or selling property in Queensland.
What is an Encumbrance?
Put simply, an encumbrance is an interest in land held (or “owned”) by someone other than the landowner themselves.
So, let’s say you own a block of land.
Quite likely you have a mortgage as well. That mortgage is a form of “encumbrance” on the land – in that it is an interest you bank has over the land, even though it is not technically the owner.
Other common encumbrances are caveats, easements and leases.
What does a typical Contract Say about Encumbrances?
As a general rule, encumbrances affect an owner’s ability to deal with their land in some way.
For example, to sell land you generally have to pay your loan out – otherwise your bank won’t release its mortgage and a new owner is obviously not going to take on your mortgage for you.
As another example, a common form of “easement” is an access easement – meaning you have to keep the area available for another person (the beneficiary of the easement) to use it for access to their property.
Because encumbrances can make a significant difference to property use and value, the typical contract requires sellers to disclose any that will remain in situ after settlement, in the schedule shown on the Queensland Law Society / REIQ Contract (the Contract) below:
In essence, this section of the contract is designed to tell the buyer, in advance, what encumbrances are going to remain after settlement.
These are unhelpfully described as “Title Encumbrances".
Now you might think intuitively that “Title Encumbrances” are the ones that you can see on a normal Title Search (the paperwork that shows who owns a given property and other pertinent information).
But this is not so.
Instead, “Title Encumbrances” are the ones that remain after settlement of your purchase or sale.
This is why the contract then goes on to say (in clause 7.2) that the property is sold “free of all Encumbrances other than the Title Encumbrances and Tenancies”. Encumbrances (as opposed to Title Encumbrances) are defined to include unregistered encumbrances, statutory encumbrances and Security Interests.
Can’t Searches Show Encumbrances?
There are a raft of things that might be properly considered as Title Encumbrances that should be disclosed in the contract.
They might include easements, covenants, liens, caveats, leases, statutory encumbrances and claims by third parties.
The problem is that some of those things might show up in normal searches, but others won’t necessarily.
And because not every buyer does all the available searches (they cost money, after all), the buyer won’t necessarily become aware of the encumbrance if it is not disclosed to them in the Contract.
What kind of Disclosure is Sufficient?
Regrettably it is become common for some people preparing contracts to simply write
“The existence of any encumbrances or right relating to water supply, sewerage, drainage, electricity or other utilities or services which in any way affects the land whether such encumbrance is registered or unregistered or resulting from any other statute”
or similar in the disclosure section of the contract, believing that to be sufficient.
There is certainly an argument to be made that generic language of that kind isn’t suitable or acceptable as being proper disclosure of encumbrances over the property. In fact, the warning to seller in the section specifically points out that overly generic references to encumbrances is not sufficient.
Realistically as a seller, if you want to avoid the risk of breaching your warranty obligations in the contract then you should get your lawyers involved in preparing the contract which should include the necessary disclosures. They can then check the necessary available information for possible unregistered encumbrances on the property (also ask you hundreds of questions!) and make sure you comply with your disclosure obligations.
More likely than not that will include a specific and detailed disclosure of any encumbrance that will remain on title after settlement.
What if the Buyer Finds an Undisclosed Encumbrance in Their Searches?
So, let’s say you’re a buyer. The seller has not disclosed any Title Encumbrances, but your property lawyers find that there is an unregistered easement in favour of your local water authority. The easement prevents you from building over a section of your land and requires you to provide access to the authority when requested.
What can you do?
The first thing, of course, is to decide if you care or not. If the land in question is a tiny section in the corner of your property and the easement does not impact you in any way, then you might not consider that to be a problem.
But if the easement effects where you were planning on putting a pool (or other things), then that’s a bigger issue.
If nothing was disclosed to you, then technically the seller has breached the contract.
That, however, does not necessarily give you a right to get out of the contract. If that’s what you want to do, then you should get legal advice specifically on your termination rights before going ahead.
Alternatively, you might be able to seek some kind of compensation or damages from the seller – either before or after settlement of the contract.
That said, it can be a complicated situation so it’s important to get specific advice on your contract and circumstances before making a final decision about how you want to respond.
What Should Parties Do about Encumbrances When Preparing a Contract?
So, let’s sum up in a nutshell.
As an agent, the safest course is to stay away from the disclosures or special conditions sections. Don’t complete the encumbrances section on behalf of the seller and ask them to ensure they get advice on that point from their lawyers.
As a seller, get your property lawyers involved to prepare and complete the contract and the disclosures with this information.
As a buyer, make sure your property lawyers are doing the necessary searches and drawing your attention to anything resembling encumbrances. But if you find some, make sure you get advice about your rights before taking any action.
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