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The downfalls of nomination clauses and how to avoid them

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A nomination clause in a contract for real property allows the original buyer to nominate a different entity as the buyer under the Contract prior to settlement occurring. Such clauses may be appealing where a buyer wants to lock in the purchase of a property but is unsure which entity it wishes to purchase the property through, or is in the process of establishing the ultimate purchasing entity.

But does the risk outweigh the benefit? Parties should be very careful when using nomination clauses in contracts as there can be significant financial consequences of doing so.


Don’t double your duty

An important implication of nomination clauses relates to transfer duty.

There is a risk when nomination clauses are exercised that the Office of State Revenue may assess the first contract as a dutiable transaction and conclude that transfer duty must be paid by the first buyer as well as the new nominee.

Under section 115 of the Duties Act, transfer duty will not be payable on a cancelled agreement – that is, an agreement that is ended because of:

  • a breach of the contract by a party;
  • the non-fulfilment of a condition of the Contract;
  • frustration; or
  • the consent of the parties.

If the contract contains a nomination clause and the original buyer nominates another party as buyer, the first agreement has technically been performed, not cancelled, and so the above exemption to transfer duty may not apply. Transfer duty may then be payable on the first contract with the initial buyer and the second contract with the nominee.

Both buyers and sellers should be wary of using these clauses, as the obligation to pay duty attaches to both parties in a transaction.

What are your other options?

An option agreement is a potential solution to a nomination clause. Such an agreement allows an entity (the grantee) to buy the right to purchase the property and enter into a contract at a later date, and can also include a right for the grantee to nominate another entity as the buyer under the contract when they exercise that right.

There are also circumstances where undisclosed trusts/entities can be utilised, with a different entity settling the purchase through agency or nomination. This requires certainty of the ultimate buying entity prior to any contract being entered into.

If you would like to know more about transfer duty, option agreements or anything real estate related, please contact our experienced Property Team on 07 3223 6100 or email redchip@redchip.com.au for an obligation-free discussion.

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