Vendor Warranties - sale and purchase of Real Estate or a Business

10 July 2022

When selling land or business, generally a vendor will give various warranties to a purchaser. These warranties are intended to provide a purchaser with promises that the vendor has made in respect of facts relating to a business or property, and these promises may have enticed a purchaser to enter into an agreement. There is an expectation that a purchaser can rely on these warranties and that the purchaser will get what they’ve paid for.

In New Zealand, the most common form of agreement used is the Auckland District Law Society (ADLS) Agreement for Sale and Purchase of Real Estate or Agreement for Sale and Purchase of Business. Both agreements include standard warranties, for example:

  • Real Estate: where a vendor has done any works to the property, those works have been completed in compliance with the required consent and a Code Compliance Certificate was issued for the works completed.
  • Business: where there are assets included in the sale, those assets (plant and equipment, machinery, and fixtures) of the business will be in good working order and condition and no money or security will be owing over these assets on settlement.

From a purchaser’s perspective and under both forms of agreement, there is the option for the purchaser to undertake due diligence in respect of the purchase via a due diligence clause which allows a purchaser to undertake a thorough investigation on the business or property being purchased.

There is a common misconception or argument that when a purchaser completes due diligence, they cannot rely on the vendor warranties given because the purchaser has had an opportunity to investigate those warranties and satisfy themselves as to their validity.

When a purchaser undertakes due diligence, this argument is not usually sufficient to release a vendor from a specific warranty clause. However, there may be an argument if the vendor can show that the purchaser had actual knowledge of the issues that are the subject of the warranty, prior to making the agreement unconditional.

An instance of this argument can be seen in the case of Singh v Rutherford where the Singhs (as purchaser) brought a claim for breach of warranty against Mr & Mrs Rutherford (as vendor). Mr and Mrs Singh entered into the standard form of ADLS agreement for sale and purchase of real estate to purchase a lemon and kiwifruit orchard. The vendor gave various warranties, including an express warranty as to the "approximate" canopy area of older kiwifruit, younger kiwifruit and lemon trees. The Singhs undertook due diligence and made the agreement unconditional on the basis of their investigations. Following settlement, the Singhs production from the orchard was significantly less than they expected. The Singh’s investigated as to why and found the canopy area of the orchard was significantly less than warranted by the vendor.

In the District Court, the Judge ordered that even though there was a breach of warranty by the vendor, no damages to the purchaser would be awarded. This was on the basis that the purchaser had the opportunity to complete due diligence and satisfy themselves that the canopy area was as warranted.

However, on appeal by the Singhs in the High Court, the Judge ruled that regardless of the purchaser completing due diligence, this did not supersede the specific warranty clause and there was no specific obligation on the purchaser to check the canopy size. As such, the Judge found the purchaser should have been able to rely on the warranty and awarded damages in favour of the Singhs.

As a Vendor, you need to ensure that you understand the warranties you are giving and that you are able to give such warranties before you sign an agreement for sale and purchase. There is a risk from not understanding the warranties, which could result in substantial costs later on. It is critical to seek legal advice to avoid or mitigate a potential claim.

Corporate & Commercial Team