Stop, Collaborate and Listen

If you are buying or selling residential property in New Zealand, chances are you will use what is referred to as the standard form REINZ-ADLS Agreement for Sale and Purchase ("ASAP" ) (current edition is the Eighth Edition 2006 (2)).  Towards the back of the standard REINZ-ADLS form, above where the signatures of the vendor and purchaser are to go, it states:

WARNING

This is a binding contract.  Read the information set out on the back page before signing.

This warning is there for a reason.  So is the information of the back which amongst other advice, says:

Professional advice should be sought regarding the effect and consequences of any agreement entered into between the parties. 

If you ignore that advice, you may well end up meeting with me, or another litigation lawyer.  Litigators are not people you want to be meeting with if you're in the process of buying or selling a property.  Litigation means something has gone wrong.  Wrong is bad.

The best way to avoid this is to STOP before you sign any agreement for sale and purchase, COLLABORATE with your friendly property lawyer, and LISTEN to what they tell you.  And, yes, I picked those three words for a specific reason.  Not just because they're relevant, but because at least one person will recognise their origin and now won't be able to forget that bit of advice if they try.  Which means my work here is done.

Binding contract

A binding contract is one that is recognised at law, and can be sued on for non-performance.  That you should get professional advice before taking on legal obligations probably seems self evident, but this is perhaps where the REINZ-ADLS ASAP does its job too well.

The REINZ-ADLS ASAP is a standard form contract compiled between the Real Estate Institute of New Zealand and the Auckland District Law Society, which incorporates the General Terms of Sale including clauses that deal with definitions, notices, deposit, possession and settlement, vendor warranties and undertakings; essentially it covers all standard matters relevant to a property transaction.

Like every standard form contract however, the particulars are not tailored to your own specific circumstances.

The first mistake you might be making is thinking everything is covered, and this is simply a paint by numbers exercise where you fill in the gaps with your name, purchase price, and settlement date.  Transactions that simple are rare.

If you haven't included any conditions or further terms of sale then, save for an outbreak of war or similar catastrophe, (yes: this is a slight exaggeration, but not by much), the law requires you to honour that contract on the date specified.  It won't be a justification that the bank won't give you a mortgage, or that after signing you discover your house is on a cross lease which prohibits you having your pets live with you, is located in a flood zone, with a non-complying sleep out, and requires tens of thousands of dollars of work to the rotten floorboards before it is livable.

Conditions

You can and should add or delete the standard form conditions as suits, and include "Further Terms of Sale" where appropriate to your circumstances.  Your lawyer will help you with the drafting.  You should collaborate with your friendly property lawyer when doing so to ensure you have included all conditions necessary to you, and to be confident that those you have included have the effect you intend them to have.

You might think you don't need a lawyer to do this.  This can be true.  But if it's not, it can be a costly mistake; and a lot of mistakes are made.  It's what keeps lawyers employed.

When is a condition not a condition?

Often, you'll hear people refer to a contract for the sale of property being "conditional on x, y, or z."  Whilst this may be technically correct, there is a lot of confusion and misunderstanding around some common clauses that may be inserted into an agreement for sale and purchase, and their effect.  Importantly, a condition must not be viewed as a Get out of Jail Free Card that you can rely on if you simply change your mind.

Firstly, and in particular, let me disavow you of any misconception you may hold, or be told about a Solicitor Approval Clause.

Solicitor's approval clause

There is often a belief that a clause making the agreement "subject to the purchaser's solicitor (or lawyer) approving this contract" is a back door out of the contract if you get cold feet.  Your lawyer does not have carte blanche to approve or not approve the contract or otherwise.  Generally the scope for the lawyer to approve or disapprove will be limited to the form or content of the agreement and the law does not permit your lawyer to act on your say so.

This means that your lawyer can refuse to approve the agreement only in such instances as where the plan doesn't reflect the buildings on the grounds, or the title is subject to an onerous covenant you were unaware of.

It doesn't mean your lawyer can say you've made a bad decision to buy this property and they're not going to let you go ahead with it.  Nor does it permit your lawyer to insert new terms or conditions.  Outside genuine issues (which are limited in availability and occurrence) if you do manage to get out on such a clause, it's more likely to be by luck than design. 

The printed terms of sale and related conditions  

In the Agreement for Sale and Purchase there is a box on the front labelled "Conditions", and inside the agreement there are the "General Terms of Sale".  There is also provision for parties to add "Further Terms of Sale".

The General Terms of Sale include such matters as "Vendors' Warranties", such as a warranty that the vendor has not given any consent under the Resource Managment Act 1991 that might affect the property.

The "conditions" may generally be described as things that must happen before a certain specified date, failing which the party who has the benefit of the condition is entitled to cancel the contract.  For example, the contract may be subject in all respects to the purchaser raising finance on specified terms, or conditional upon the sales of the purchaser's existing property.

It is important for a purchaser or other party affected by a condition to understand how these "conditions" work.

The  party for whose benefit the condition has been included is required both at law and under the contract to do "all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfillment".

What is entailed by "do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfillment" was recently considered by the Court of Appeal in Mana v Fleming [2007] NZCA 324, where the Court held that this contractual term merely affirmed the old common law rule that a party must do all things that are reasonably required to achieve the contractual object.

In that case, the ASAP was subject to a special condition that the purchasers entered into an unconditional agreement for the sale of their property on terms and conditions acceptable to the purchasers.
 
They didn't.  The vendors issued proceedings alleging the would-be-purchasers were in breach of their obligation to do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfillment. 

Although Mana v Fleming is a fairly fact specific case, that dealt with the issue of silent marketing, the Court confirmed the test is an objective one.  It doesn't matter that you think you took all reasonable steps.  It matters what the man on the Clapham Omnibus thinks (or for more modern New Zealand purposes, the ordinary person on the Johnsonville commuter train).

Relevantly, the Court distinguished between the need to establish that the purchasers had failed to do all things which may be reasonably necessary to satisfy the condition, and the need to establish a causal connection that that failure was why they didn't enter into an unconditional contract.  The problem wasn't that they hadn't entered into an unconditional contract on their own house - it was that they hadn't done enough to put themselves in a position where they might have.

Take for example a common finance clause; it might not matter that you wouldn't have got a mortgage from a lender if you'd tried: the fact that you didn't even try to get one could suffice.  Conversely, what if a lender will give you finance - but it is not your preferred provider.  Do the terms of the contract you've agreed to protect you from having to take that finance?

Purchase conditional upon sale

Similarly, you need to be cautious with "subject to sale" clauses.  If you are not genuinely trying to sell your property, and thought perhaps you'd just take a quick "look and see" approach you need to be aware that you are still subject to a duty to act honestly and in good faith.  This means a duty to use reasonable efforts to sell your property.

Builder's condition

It is fairly common now for a condition making the contract conditional on approval of a builder's report.  Although not the subject of proceedings, the Court of Appeal in Mana v Fleming confirmed that while the precise effect would depend on the particular wording of the special clause, the insertion of the words on terms and conditions acceptable to the Purchasers may not give ultimate discretion.  Your refusal needs to be fair and reasonable according to an objective standard.

The reference to "particular wording" is telling.  When drafting, conditions can often be made "vendor friendly" or "purchaser friendly".  Do you know the difference?  The difference could be between a right to cancel an agreement, and a right only to request the defects be remedied.

Others matters

Buying a house is generally one of the biggest single outlays of finance you'll make, and there will often be emotive elements.  You want to get it right, and make it as stress free as possible.  If your decision to purchase is influenced by any particular factor, or is dependant on the occurrence on any event, you want the agreement to reflect that and protect your position.

I'll say it again; your lawyer can only work within the framework you give them.  If you discuss all of these matters before signing anything, they can be addressed.

In addition, your lawyer is well placed to assist you in understanding the LIM reports (and knowing what to look for), explaining the relevance of zoning requirements or changes, and why it might be prudent to provide your builder with a copy of the file when doing an inspection.  They will take into account, or remind you to take into account, matters that may seem peripheral to you - like making sure the dates fit and you're not going to be in between houses on settlement day, or ensuring the contract provides for repairs when the previous owners remove that mirror from the ceiling in the bedroom before they vacate.

This is not about one-upmanship or getting one over the other party to a contract.  It is in both parties' interests that the agreement properly reflects what each expect out of the transaction.  After all, the underlying premise of contract law is that the parties have been free to bargain and have agreed on terms satisfactory to them both.

Use it - don't lose it

When it comes to engaging lawyers, fees are often a concern - what is this going to cost me?  But when it comes to buying and selling property you'll need to engage a solicitor or conveyencing professional to complete the transaction in any event.

This is often for a fixed fee, and subject to more complex cases, often you're not going to pay more for seeking advice prior to signing an agreement for sale and purchase.

If you're paying for your conveyencer's skill and advice, you may as well get the full benefit of it.  It could cost a lot more if you don't.

© Langley Twigg

Email stacy.fraser@lanleytwigg.co.nz

Website langleytwigg.co.nz

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