Must a seller disclose encumbrances?
As the seller, you must be in a position at settlement to hand over a title free from undisclosed encumbrances to the buyer. Clause 7.2 of the Terms of Contract in a REIQ Contract for Houses and Residential Land provides that “The Property is sold free of all Encumbrances other than the Title Encumbrances and Tenancies”. Clause 1.1(2)(o) defines “encumbrances” as including unregistered and statutory encumbrances and Security Interests. This means that you should list, in the reference schedule of the contract under “Matters Affecting Property”, all encumbrances which will remain after settlement, including any encumbrances not currently registered on the title. Accordingly, you do not have to disclose a mortgage that will be discharged upon settlement. This list must be detailed and specific, it is not sufficient for a seller to reference a search that will be completed prior to settlement or the title search.
The importance of disclosing encumbrances cannot be overstated. In the case of Aughton v Wilkie  NSWSC 1462, Aughton paid $280,000 to Wilkie to enter into a development deal over some land at South Tweed Heads owned by Wilkie. Aughton was later awarded damages in the sum of $280,000 when it was discovered that the land was burdened by a large mortgage, which Wilkie had failed to disclose.