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About to pay for a property and everything isn't right?

03 August 2015

A 2010 Supreme Court decision brought some welcome clarity to the rights and obligations of both a vendor and a purchaser in these situations. In the 2010 case the purchaser refused to complete settlement in full of a $1.5m commercial property where the vendor had not obtained a building warrant of fitness as agreed. The cost of the work required to make things right was estimated to exceed $500,000. Before this decision, a common interpretation of a clause in the standard agreement for sale and purchase of real estate was that, unless the purchaser was legally entitled to cancel the agreement, the purchaser had to pay the full purchase price on the settlement date. The purchaser would then have to pursue the vendor after settlement for his or her loss. This would be a highly unsatisfactory state of affairs for a purchaser.

What are your options?

When it comes to the settlement date and the property is not the same as that described in the agreement, or the vendor has not done what was agreed, you cannot sit on your hands and refuse to settle until the vendor rectifies the problem or agrees to reduce the price. As a judge in one case said, when a purchaser comes to this fork in the road, there are only two options – cancellation (if the purchaser is entitled to cancel) or settlement.

As a purchaser you are only entitled to cancel the agreement if the consequences of the vendor’s breach are serious enough or the vendor is in breach of an essential term of the agreement. It is not always clear whether you have the right to cancel. If you cancel when not entitled to do so, the tables will be turned and you will be committing a very serious breach.

If you do not have the right to cancel, or you elect not to exercise your right to cancel, then you must settle. This does not mean that you must pay the whole of the purchase price. You may be entitled to claim compensation or set off your loss against the purchase price. You don’t always have the right to a set off - this is another area of uncertainty.

Claims for compensation

Following the 2010 case the standard form of agreement was amended to set out the procedure that must be followed for a purchaser to claim compensation or set off at settlement. The purchaser must give the vendor full details of the claim before the settlement date. The amount claimed must be a genuine pre-estimate of the purchaser’s loss. If the vendor agrees with the claim, it is deducted on settlement. If the vendor does not agree then an interim amount is paid to a stakeholder and held until the amount of compensation is determined.

Proceed with care

Although the 2010 Supreme Court case and the subsequent amendment to the standard form of agreement have brought some welcome clarity to this situation, both vendor and purchaser must proceed with care – there can be serious consequences for taking the wrong course of action.

 

Please email me at barbara.mcdermott@nwm.co.nz with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.


Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.