fbpx
Back to insights

The Offer to Purchase Agreement – A brief overview (Part 1)

The first step that initiates a sale of property between a buyer and seller is the signing of an Offer to Purchase (OTP).  Once a buyer has found a property he or she desires to buy, the buyer will make an offer to the purchase through the signing of an OTP.

The purpose of this article will be to provide a brief overview of an OTP, what the most important clauses it should contain, as well as what the potential pitfalls could be for a buyer or seller when signing an OTP.  We will be discussing this topic in three separate articles.

1. Parties

It goes without saying that the contract parties to the OTP form an integral part of the OTP.  For the buyer, it is important to ensure that the seller is the legal holder of the property and that the person signing on behalf of the seller (in the case of a company or trust), has the necessary authority to act on behalf of the seller.  The best way to ascertain ownership is to obtain a deed search of the property which will include all the owners’ details, previous purchase price, bonds registered against the property as well as the previous date of sale.  The estate agent assisting with the sale will normally have access to the deed search, alternatively, you can obtain a copy from your conveyancer (attorney that will attend to the transfer of the property).

For the buyer, it is important to understand in who’s name or entity the property should be purchased.  Normally the reason behind this decision relates to tax considerations and it is therefore important for a buyer to first discuss his or her financial portfolio and structure with his or her attorney or accountant, to ensure that the property is registered in the name of the best-suited entity or person.

2. Purchase Price

The purchase price will be the amount offered by the buyer to the purchaser, which is accepted by the purchaser.  Normally properties are marketed at a specific price, which price will include agent commission, if applicable.  As the buyer, you will need to ensure that you have budgeted for legal costs and transfer duty (or VAT, if applicable)  when the offer is made.  Also, if repairs to the property are needed, financial provision should be made for the same which can influence the offer amount.

It is important to understand that until the seller has counter-signed the OTP, the offer is not yet accepted.  The seller can either reject the offer or make a counteroffer, which if it is then countersigned by the buyer, will form a binding agreement between the parties, subject to any suspensive conditions of course.

3.  Suspensive Conditions

When we talk about pitfalls, this is one area where both parties to an OTP had to endure huge disappointment as a result of either of them withdrawing from the contract, based on the non-fulfillment of the suspensive condition.

“A suspensive condition is a condition which (as the name suggests) suspends rights and obligations until the uncertain future event occurs. Upon the occurrence of the event, the suspended part of the contract (or indeed the entire contract) is brought to life”.

Makes sense? At first glance, this definition seems straightforward to understand and easy to interpret. In practice, however, the suspensive condition can and has caused much upset and disgrace for parties bound by it. The purpose of this article is not to discuss all the different types of suspensive conditions and the legality thereof, but rather to shed light on the existence and importance of this condition.

The most used format of a suspensive condition is used in offer-to-purchase agreements where the immovable property is sold. Normally the buyer will make an offer on a property he or she intends to buy, subject to the approval of a bond by a financial institution for the offer, or a lesser amount in the case where a cash deposit can be delivered. Normally a period of 30 – 40 days is granted to the buyer to obtain such approval from his or her financial institution.

Once the offer to purchase has been signed, both parties will be excited and will feel that a legal agreement has been reached. The fact is, however, that until such condition is met and the buyer received his bond approval, no legal agreement comes into existence.

It has happened often that the seller will move out once the offer to purchase has been signed and proceed to make an offer on another property. Likewise, if the seller agrees to grant the buyer occupation before the transfer, it has happened that the buyer has made certain renovations to the property already, thinking that he or she already owns the property.

However, should the initial condition of the bond approval not be met, any party can at that stage withdraw from the agreement, which means that if the seller has not made his or her offer on the other property subject to the successful sale of the first property, he or she will be bound by the latter contract and will have to proceed with that sale. Likewise, the buyer will not be entitled to any compensation for renovations made to the seller’s property, unless it has been agreed upon between the parties in writing.

The suspensive condition will always be included in an offer to purchase for the benefit of one party, normally the purchaser, and even though the seller might feel that he has duly performed in terms of the agreement, the fact remains that if the condition is not timeously met, the agreement becomes null and void and will require a new offer to purchase should the parties wish to proceed with the sale.

It is always advisable to contact your conveyancer before you sign a contract subject to suspensive or any other special conditions. The example we referred to above seems to be straightforward, but this will not always be the case necessarily. Instead of signing the agreement and then seeking legal advice, rather first determine the exact meaning of the suspensive and or other special conditions through your attorney and ensure that you know what you are letting yourself into.

We hope that we have given you some food for thought for now. Keep a lookout for part 2 where we will continue to unpack the OTP.

By Zane Du Randt.

Zane is an admitted attorney, notary, and conveyancer at O’Reilly Law.