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Purchaser Pays For Ending Agreement

16 June 2014

Purchaser ordered to pay $100,000 for ending agreement 

Most purchasers wish to sign a sale and purchase agreement subject to conditions. Commonly the agreement is conditional on the purchaser arranging finance, approving a builder’s or LIM report, or selling the purchaser’s property. How far does the purchaser have to go in order to satisfy these conditions? Can the purchaser end the agreement because the purchaser has changed his or her mind, and use the non-satisfaction of the conditions as an excuse? Can the purchaser be unreasonable and say the conditions have not been satisfied? Can the purchaser sit on his or her hands and do nothing towards satisfying the conditions after signing the agreement?

The starting point to answer these questions lies in clause 9.8(2) of the standard agreement for sale and purchase of real estate. That clause states that “The party or parties for whose benefit the condition has been included shall do all things which may be reasonably necessary to enable the condition to be fulfilled by the date for fulfilment.” Whether or not a purchaser had done all things reasonably necessary to sell a property was considered by the Court in a recent case.

 

Kerr & Kerr v Lee & Noh

The Kerrs agreed to sell their 5 hectare lifestyle property near Auckland for $1,800,000 to Lee and Noh in April 2007.  The agreement was conditional on the sale of Lee and Noh’s property for $950,000 by July 2007. A $100,000 deposit was payable when the agreement became unconditional. Lee and Noh followed agents’ advice and undertook renovations to make it more likely they would sell for $950,000. Lee and Noh found someone to buy the property for $910,000, but that agreement ended near the end of June 2007 because a valuation of the property was too low. Lee and Noh had not sold by July 2007 so they ended the agreement with Kerrs. The Kerrs tried to hold Lee and Noh to the agreement because they had not listed or taken other steps to sell, but Lee and Noh did not complete the purchase. The Kerrs then sued Lee and Noh for the $100,000 deposit.

The judge ordered Lee and Noh to pay the Kerrs the $100,000 deposit. The judge stated that a purchaser will be in breach of the agreement if the purchaser does not do something that is reasonably necessary, even if the purchaser has done other things that might be necessary. Where the agreement is conditional on the sale of a property, generally the purchaser must list the property and undertake appropriate advertising and marketing. Although the judge considered that Lee and Noh could delay listing and advertising their property until after their renovations had been completed, they should still have listed and advertised their property even though they had an interested purchaser and even though it was unlikely that they would be able to sell for $950,000.

 

Do all things reasonably necessary or risk liability

It is not uncommon for a purchaser to end an agreement for non-fulfilment of a condition, even though the purchaser is not legally entitled to do so. Unless it is obvious to the vendor that the purchaser has not taken appropriate steps, it is unusual for a vendor to hold the purchaser to the agreement. However, purchasers need to be aware that they run the risk of being liable to the vendor, not only for the deposit, but also other losses suffered by the vendor if they don’t do all things reasonably necessary to satisfy the condition. What action a court will regard as being reasonably necessary may be different depending on the situation so it is imperative you seek legal advice if you have any doubt.

 

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.   Find out more about us at www.nwm.co.nz