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The Pitfalls of Satisfying Conditions – Purchase & Sale of Property in NZ

32254560_mContracts for the sale and purchase of property are often subject to conditions which allow the purchaser to cancel the contract should those conditions not be satisfied.  Conditions give purchasers an opportunity to cancel a contract if investigations reveal unsatisfactory facts about a property, or if the purchasers’ circumstances do not allow them to proceed with the purchase (for example, if they are unable to obtain finance).

 

What the Property Sale & Purchase Contract Says

Clause 9 of the ADLS Ninth Edition (2) 2012 includes some common conditions: finance (9.1), Land Information Memorandum (“LIM”) (9.2), and Builder’s Report (9.3).  It is equally common for contracts to have customised drafting of conditions in the “Further Terms of Sale” section, which allow for the conditions to operate slightly differently.  For example, clause 9.3 states that if a purchaser cancels an agreement due to an unsatisfactory builders report, that purchaser must hand the vendors the written report upon cancellation. On the other hand, many customised clauses inserted into the further terms of sale do not require that purchaser to provide the builder’s report to the vendor.  In practical terms, this is a subtle but important difference.

Naturally, the more conditions there are in an offer to purchase property, the less attractive that offer will be at a given price.  Vendors have a natural aversion to contracts with many conditions because each condition introduces more opportunity for the purchaser to cancel the contract and therefore more risk to the vendor that the sale will not proceed.

Not all conditions are equal. Some conditions are less desirable than others in the view of the vendor. For example, a vendor that knows that their property is in good physical condition may find a builders report condition more favourable than a prior sale condition, particularly because the vendor or has no control over whether a purchaser to the contract is going to be able to find someone to buy their own property or how desirable that purchaser’s property is to other buyers.

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Vendors naturally want to ensure that when a contract is cancelled, that cancellation is done so on appropriate grounds. For example, a vendor would find it frustrating if a contract was cancelled due to a finance condition not being satisfied, where the purchases made no attempt to secure finance in the first place.

Clause 8.7 (2) of the ADLS contract requires purchasers to “do all things that may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.” This clause requires purchasers that have had conditions inserted into a contract to make active steps towards having those conditions satisfied. Specifically, they must do all things that may reasonably be necessary to work towards having that condition satisfied.  In the case of a finance condition, this would mean that the purchasers would at least seek finance from banks and other lenders.

When Things Go Wrong with the Property Purchase

In the case of Kerr v Lee, the court had to decide how clause 8.7(2) should be enforced, and what that clause obligates purchasers to do. In this case the purchasers, the Lee’s, entered into a contract for sale and purchase to purchaser the Kerr’s property.  This contract was subject to a prior sale of the Lee’s property. Ultimately, the Lee’s never confirmed the price sale condition as having been satisfied. The issue was whether the Lee’s should have done more to secure a sale for their property under clause 8.7 (2).

The facts of this case can be summarised in this example:

  1. The Kerr’s entered into an agreement for the sale of their property to the Lee’s.
  2. This agreement was conditional on the Lees obtaining a contract for the sale of their own property for $950,000.00 by 7 July 2007.
  3. Despite attracting a few offers on the property via their real estate agent, the Lee’s could not obtain their target price of $950,000.00. The highest offer was $910,000.00, subject to a valuation.  This reduced to $840,000.00 once the valuation report indicated that to be the value of the Lee’s property.
  4. There were attempted negotiations between the Lee’s and the Kerr’s to revisit the purchase price for the Kerr’s property, which failed.
  5. The Lee’s undertook renovations to their property to increase its value, however they were still unable to increase the value to $950,000.00.
  6. The Lee’s then instructed their agent to list their property at $950,000.00 anyway. The agent said that it was not worth his time to do so, given the timeframe within which it had to be sold, and the property was never listed.
  7. The Lee’s gave notice to the Kerr’s that the prior sale condition was not satisfied and that the contract was cancelled.
  8. The Kerr’s then gave notice to the Lee’s that the Lee’s were obligated to settle as the Lee’s had not listed their property or taken other steps to sell it.

Eventually, the Kerr’s sued the Lee’s for the deposit, which was payable once all conditions were confirmed, on the basis that the vendors did not meet their obligations under the prior sale conditions and therefore had no basis on which to cancel the contract due to that condition not being satisfied.

The Court Decision

To decide whether the Lee’s had discharged their obligations under the agreement, the court paid close attention to the wording of clause 8.7(2):

The part of parties for whose benefit the condition has been inserted must do all things that may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.

The particular wording of this provision puts an obligation on the purchasers to do all things reasonably necessary to fulfil conditions by the due date. In defence of themselves, the Lee’s argued that they sought valuations, undertook renovations, and even approach the vendors to renegotiate on price. The court accepted that significant steps were indeed taken by the Lees to secure the sale of the property, but that was not enough to take some steps when the wording is to do “all things that may reasonably be necessary” to fulfil the condition by its due date.

The test applied by the court regarding whether clause 8.7(2) was followed by the purchasers was relatively straightforward.  At paragraph 37:

The plaintiffs can establish that the defendants are in breach of clause 8.7 (2) if they can prove that they did not take steps that were reasonably necessary, even if the defendants took other steps were also necessary.  Applying the test in Mana, the plaintiffs need to persuade the court that steps that were not taken were required to bring about stipulated result within the agreed period (that is, by 7 July 2007), and that it was reasonable for the defendants to have taken them, judged in the circumstances of the case.

The key point against the Lee’s in this respect was that they never listed the property on the open market, and that to do so was indeed “reasonably necessary” to sell the property. Because they did not take that step, they fell afoul of the clause 8.7 (2) and were not entitled to cancel the agreement due to the price condition not being satisfied. Ultimately, the court ruled that the Kerr’s were entitled to the $100,000 deposit plus interest.

This case serves as a warning to purchasers that when they insert conditions into an offer to purchase property, they are obligating themselves take all reasonable steps towards satisfying those conditions. Generally, what is “reasonable” depends on the particular circumstances of the case in the background situation. This also means that purchasers should not arbitrarily include conditions and offers unless they are willing and able to work towards confirming those conditions by their respective due dates.

If you are a vendor or purchaser to a conditional contract property, and wish to know what the obligations each party has, please contact us for advice. Having this advice early can ensure that you will not find yourself in same position as the Lees.