Whats Happens If I Dont Settle

Posted on Tuesday, April 23 2013

Auckland lawyers explain: Whats Happens If I Don’t Settle on Property Purchase.

 

You’ve declared the agreement for sale and purchase unconditional – or signed an unconditional agreement. Later, you find that you either can’t, or don’t want to, settle. What are you risking?

Common reasons for a purchaser not settling are:
• Finance fell through, or anticipated funding wasn’t available after all;
• “Cold feet”: the purchaser has changed their mind;
• The purchaser discovers problems with the property or the title, or believes that the vendor has misrepresented the property or breached the contract, and no longer wishes to go ahead with the deal.

If a purchaser doesn’t settle due to lack of finance, or they get “cold feet”, then they are clearly in the wrong, and will be at the mercy of the vendor. This also applies to where the vendor has misrepresented something, or committed a breach, but the breach is not sufficiently serious to justify cancelling the agreement. While the vendor gives the purchaser a number of “warranties” under clause 6 of the standard REINZ – ADLS agreement, breach of these warranties gives the purchaser a right to claim damages – but does not give them the right to refuse to settle unless the vendor’s breach is a genuinely serious one.

Grounds for Cancellation

A purchaser only has a right to cancel an agreement (i.e. bring it to an end) without penalty after it has been declared unconditional (assuming that the vendor is otherwise willing, ready and able to settle), if section 7 of the Contractual Remedies Act applies (clause 5.4). This section will only apply if the vendor is seriously in the wrong. There are two alternatives:

1. The truth of the thing represented by the vendor, or the term which has been breached, must have been one which was essential to the purchaser – and the parties must have expressly or impliedly agreed that it was essential. If the purchaser stressed the importance of seclusion and privacy to the agent, and prior to settlement, the vendor removes all the trees on the property which provided the privacy, this could provide grounds for cancellation. Other matters are so obviously essential that it goes without saying, and there is an obvious right to cancel. For example, if the agreement said the property was at 15 Sunrise Ave, but the property actually being sold was the house next door at 13 Sunrise Ave – a totally different building.

2. The effect of the misrepresentation, or breach, is to substantially reduce the benefit, or incrase the burden, or make the benefit or burden substantially different from that represented or contracted for. For example, if the vendor built a house without getting a building consent (a breach of clause 6.2(5) of the standard agreement), and because of the way it has been built, it’s a “leaky building”, this type of breach would justify cancellation if the cost of repairs was significant. On the other hand, a smaller, less costly non-compliance (such as a deck built without a building consent) would only justify damages, not cancellation.

Consequences of Failing to Settle Without Grounds for Cancellation

If the purchaser can’t settle, or refuses to settle, but doesn’t have grounds to cancel the agreement, then the vendor can:

1. Insist that the agreement remain on foot, and claim penalty interest on the unpaid purchase price indefinitely, and / or

2. After the expiry of a settlement notice served on the purchaser under clause 10.1, making time of the essence, either:

2.1 Sue the puchaser for specific performance, requiring the purchaser to buy the property; or

2.2 Cancel the agreement, keep the deposit up to the value of 10 % of the purchase price, and sue the purchaser for damages, if their actual loss is greater than 10% of the purchase price.

Purchaser’s Potential Liability to the Vendor

An important thing for purchasers to realise is that they can potentially be liable to a vendor for more than the deposit they have paid, if the vendor’s loss is greater than this amount. The deposit they have paid is the minimum that a wrongful failure to settle could cost a purchaser.

A purchaser’s liability to a vendor for damages can be a lot more in a falling market, where the vendor may be unable to re-sell the property for a long time, and the property is then re-sold for substantially less than the purchase price shown on the agreement. In this suituation, the measure of damages would be the drop in value on the re-sale, together with penalty interest through to the date of cancellation or resale, mortage interest the vendor was required to pay, the vendor’s expenses and outgoings such as rates, and the vendor’s expenses on the resale. If the property is a residential property, and the vendor has committed to the purchase of another home in the expectation that they can use the sale proceeds from the sale of their property to purchase the home, then the purchaser will also be liable to the vendor for their losses in being unable to settle – which could be greater than 10% of the purchase price on that agreement. A purchaser can be liable to a vendor for other losses as well, provided that the type of loss could have been forseen at the time they signed the agreement. It is even possible for a purchaser’s liability for failing to settle to be as much as, or more than, the purchase price shown on the agreement.

The moral of the story is: do your homework before you sign. Get a lawyer to advise you on an agreement’s terms before you make an offer. Be wary of unconditional agreements. Get a LIM, get a building report, inspect the property yourself, and inspect it again before you settle. And don’t declare an agreement unconditional unless you are certain you are able, and willing, to go through with the purchase.

 

By: Margaret Matthew, Associate, Rennie Cox
Rennie Cox/Urban Legal
Barristers and Solicitors
AUCKLAND
www.urbanlegal.co.nz

 

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Expert's Bio

Anne Needham

I have over 30 years experience in providing excellent residential property legal services to clients. I have an established local (NZ based) practice and also an extensive off shore client base having acted for clients dealing with New Zealand property who are located all over the world - the internet and cellphones have made this so very easy! In addition Rennie Cox/Urban Legal has been providing legal services since 1923 and is now a progressive modern law firm providing a wide range of legal services to clients.

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