Seller’s obligations and buyer’s expectations – The Supreme Court has its say!
Date: 02 June 2010 | Category: Property & Real EstateSource: New Zealand Herald (Property Section) 5 June 2010
Most contracts in New Zealand for the buying and selling of property contain warranties or promises. For example a seller will promise that the building has a Code Compliance Certificate issued by the territorial authority. Buyers sign up agreements to buy property on the expectation that the promises are correct or will be honoured by the seller before the settlement date. If the promises are not honoured by that date it can cause a major upset on the settlement date and lead to significant disputes between the seller and the buyer. The nature of these disputes often brings in the real estate agent, the buyer's and seller's lawyers which can cause a delay in settlement and cost to both parties.
In the standard ADLS/REINZ agreement which is widely used throughout New Zealand for the buying and selling of all kinds of properties, clause 6 contains a set of seller's warranties or promises. In addition, there are often seller's promises inserted into the contract at the time of negotiating the contract. For example, a buyer can find out that there are certain work not completed properly with the property or the LIM could disclose defects with the property which the buyers and sellers agree will be rectified by the settlement date -e.g. - a defective swimming pool fence.
Clause 6.5 of the standard agreement for sale and purchase was inserted into the agreement some years ago to deal with this sort of situation. The interpretation of this clause has for sometime favoured sellers over buyers. The interpretation is such that if there is a seller's breach of promise on settlement date, the buyer must settle with payment of the purchase price in full and then after settlement if the seller still does not fix the problem the buyer has to fix it themselves. Then the buyer would be forced to seek reimbursement from the seller and if the seller refuses to reimburse the buyer the buyer would have to sue the seller. Sometimes the problem can be a significant and very costly item which the buyer simply does not have the money to rectify. On other occasions it might be a less significant matter which it is often hardly worth suing for. In both situations the buyer is at a significant disadvantage to the seller.
The Supreme Court gave a ruling in April this year which is significant and will make major changes in the way this problem is handled. In a decision called Property Venture v Regalwood the Supreme Court clarified the interpretation of this clause 6.5. The Court decided that this clause meant that if there is a breach of promise a buyer must settle BUT ... in certain circumstances they may not have to pay the full purchase price. The buyer may be able to claim a set-off or reduction of the purchase price to compensate for the breach of the seller's promise. If the buyer can quantify the cost of rectifying the seller's breach of promise they may claim compensation for the amount. Therefore, where a seller has promised that on settlement they will have a Code Compliance Certificate issued for their property and where they have failed to do so a buyer maybe able to have the cost of obtaining the Code Compliance Certificate quantified and may well be able to claim a set-off of the purchase price for that amount from the seller.
Now the buyer has a greater scope to argue with the seller if there is a breach by the seller of their promise on the settlement date or it is going to be apparent that the seller will not have fixed the problem by the settlement date. On the other hand sellers will have to be much more vigilant about defects in their property where they are in breach of the contractual promises. Sellers cannot "bluff it out" any longer. A seller may have to accept a set-off or reduction in the purchase price. This can cause the seller significant problems if they are using all of the purchase price to buy another property. All this will cause sellers to identify defects with their property before they sell the property and ensure that they are not a breach of promise or if they are they would be wise to have them rectified or fixed up before they sell the property. Buyers have much more rights now than they used to have in relation to compensation or reduction in the price. Buyers may insist that part of the price is held back until the seller's breach of promise is rectified.
This decision is barely a month old and we will still have to see how the decision works out in practice. However it has redressed the balance between sellers and buyers in this tricky area of seller's promises. Buyers have more rights and sellers will need to be more vigilant about defects in their properties than in the past.
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