Settlement Day is Looming and all is not Well
Common sense and fairness would tell you that you shouldn’t have to pay the full price for a property if it doesn’t meet the description set out in the agreement you signed – for example, where the property is described as being sold with vacant possession but there is a tenant in occupation on the settlement date, or where the vendor has stated that the cow shed complies with the dairy company’s requirements but at the settlement date it does not comply. Nor should you have to pay the full purchase price where the vendor hasn’t done what was agreed – for example where the vendor has not applied the agreed amount of fertiliser or left the agreed amount of supplements.
A 2010 Supreme Court decision brought some welcome clarity to the rights and obligations of both a vendor and a purchaser where the vendor was in breach of the agreement at settlement. In that 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 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. This would create a highly unsatisfactory position for a purchaser particularly where the costs of the breach were substantial. In effect, the purchaser would become an unsecured creditor to the vendor for the cost of the vendor’s beach.
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, the purchaser cannot sit on his or her hands and refuse to settle until the vendor rectifies the problem or agrees to reduce the price. As a judge in one case noted, when the vendor comes to this fork in the road, there are only two options – cancellation (if the purchaser is entitled to cancel) or settlement.
The purchaser is 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. Unfortunately, it is not always clear whether the purchaser does have the right to cancel. If the purchaser cancels an agreement when not entitled to do so, the tables will be turned and the purchaser will be committing a very serious breach for which he or she will become liable to the vendor as a result.
If the purchaser does not have the right to cancel, or elects not to exercise the right to cancel the agreement, then the purchaser must settle. This does not mean that the purchaser must pay the whole of the purchase price. The purchaser may be entitled to claim compensation for the misdescription of the property or may be able to set off his or her loss against the purchase price. The purchaser does not always have the right to a set off when the vendor is in breach. This is another area of uncertainty for the purchaser.
Claims for Compensation
The standard agreement sets out the procedure that must be followed for the purchaser to claim compensation or set off. The purchaser must give the vendor full details of the claim before settlement. The amount claimed must be a genuine pre-estimate of the purchaser’s loss. If the vendor agrees with the purchaser’s claim, it is deducted on settlement. If the vendor does not agree with the purchaser’s claim then an interim amount is to be paid to a stakeholder and held until the amount of compensation is determined.
Proceed with Care
Although the 2010 Supreme Court case has brought some welcome clarity to this situation, both vendor and purchaser must proceed with care – there can be serious consequences for an incorrect interpretation of the law applicable to the particular situation or a mistake in the prescribed process.
Please email me at [email protected] 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