We have had some fantastic questions from some of you, and suggestions on what topics we might cover in our next newsletter.  This has meant that our series on the standard terms in the ADLS Agreement for Sale and Purchase has been on hold for a couple of months.  We will resume this series in our September edition.

Disclosure of confidential information - when is it appropriate?

Written by Adrienne Parrat - Legal Executive (Property)

In most cases it may be very obvious when you can or cannot disclose personal information about a client to a prospective purchaser, but where the line is grey or you think disclosure of this information might result in a sale it is important to consider the question "have I been authorised to disclose this?"

The Real Estate Agents Disciplinary Tribunal’s recent decision on disclosure of confidential information provides some clear guidance on when this is appropriate. In this case the agent advised a purchaser that the vendor was in financial trouble. The Tribunal commented that this information was not using the agent’s knowledge and skill to obtain the best possible outcome for the vendor and in fact could have hindered the vendor obtaining the best price for their home. Confidential information cannot be disclosed without authorisation is the underlying rule we can take from this decision.

Considering this example we can see both sides of the argument and as the market slows the need to sell can be stressful. It is important that before using any marketing technique or commenting on the vendor’s circumstances, you consider what you have been authorised to disclose. Does the vendor want any prospective purchaser to know they are going through a separation and therefore need a property to sell?  Is it important to advise that the vendor has bought and needs to sell or that there is no plan B for the vendor? While these may be useful techniques when drumming up interest is it really acting in the vendor's best interests? While there are arguments on both sides of this question and in fact some may even authorise you to provide this information it may pay to get this authorisation in writing to avoid any potential issues in the future.

One foot in, one foot out: cash-out clauses and backup offers

Written by Rebecca Clark - Law Clerk (Property)

When a property is in hot demand and a vendor just wants the best offer they can find, cash-out clauses and backup offers are often included. These clauses can achieve greater outcomes for your clients, but can also put an agreement at risk, and jeopardise an entire sale if used incorrectly.

Cash-out clauses

A cash-out or escape clause allows a vendor to consider a subsequent offer they view as more favourable, after already signing an agreement to sell to a separate purchaser. Depending on the drafting of the clause, typically where the vendor receives an offer on no less favourable terms than that put forward by the purchaser, the vendor can give written notice to the purchaser that they must confirm the remaining conditions in the agreement within a certain timeframe. If the purchaser is unable to confirm the agreement within this timeframe the vendor is entitled to cancel.

There are risks with this process. If the second purchaser’s offer is conditional as well then the vendor runs the risk of cancelling on a legitimate buyer with no guarantee the second purchaser will confirm. 

For the purchaser, a cash-out clause creates a level of uncertainty. A purchaser might expend considerable time and resources satisfying that a property is suitable, only to lose out because the vendor uses a cash-out clause to accept a different offer. Some conditions are less controllable for the purchaser and harder to complete urgently, such as a condition for an unconditional sale of their property or obtaining a building consent from the local Council.

In one recent case our purchaser client had satisfied all conditions except for obtaining an unconditional sale of their property, which wasn’t due for another two weeks. The vendors served notice on the purchasers to confirm the agreement before their property went to auction. Unsurprisingly the purchasers were unable to confirm the agreement, causing them to incur unnecessary legal fees and other costs.

Sometimes a vendor insists on keeping the cash-out clause in the agreement, and confirming the conditions quickly (if necessary) is simply not possible. In this case we usually advise our purchaser clients to delay the confirmation dates for the costly but controllable conditions such as the LIM and building report condition. Ideally these conditions would confirm at the same date as less controllable options such as those described above. This means there is a reduced risk that the cash-out clause activates at a time where our client has already invested significantly in their due diligence investigation.

Backup offers

Backup offers differ from cash-out clauses in that a vendor may accept an additional offer on a property that already has a standard conditional agreement in place. However the additional offer will be conditional on the current agreement not confirming by a stipulated date.

Unlike a cash-out clause the first purchaser still has the agreed upon timeframe to fulfil the conditions of theagreement. If the first purchaser has not confirmed the remaining conditions by the due date then the first agreement would normally be at an end and the backup offer comes into effect. It is usually a requirement of any backup offer that no further extensions can be granted for the first agreement.

Like cash-out clauses, including a backup offer in an agreement is mostly advantageous for the vendor. They have the ability to secure the sale of their property at a price they are happy with, and the comfort of knowing that if the first purchaser doesn’t fulfil the conditions, they have a backup agreement in place.

While both of these clauses carry clear benefits for the vendor, they may detract from the marketability of a property by making the agreement less appealing to a prospective purchaser. The suitability of these clauses should be considered on a case-by-case basis and in light of the individual circumstances of the client. It is highly recommended that both parties seek legal advice before entering into an agreement where either mechanism is used. For help dealing with cash-out or back up clauses, have a chat to our residential property team today.

Try before you buy - pre-settlement inspections

Written by Louise Maginness - Registered Legal Executive (Property)

After an agreement becomes unconditional the agreement allows a purchaser to conduct a once only pre-settlement inspection of the property.

When should the inspection be done?

We recommend to our clients that they conduct the inspection at least two days prior to settlement.  Some purchasers wish to do their inspection on the same day as settlement.  However, under the current ADLS agreement terms, the inspection cannot be carried out on the day of settlement and the vendor is within their rights to refuse.

Ideally the inspection should be completed after the vendor (or tenant) has vacated the property.  However this may not be possible as often the vendor (or tenant) doesn’t move out until the settlement date.  Please note that when a property is tenanted, it is essential that a pre-settlement inspection is requested early as the Residential Tenancies Act requires that a tenant is given at least 48 hours’ prior notice before an inspection.

What is the purpose of the inspection?

The purpose of the inspection is to allow the purchaser to check that the property, chattels and fixtures are in the same condition as when the agreement was signed.

The vendor is required to leave all the chattels listed in the agreement in the property on settlement.  The current ADLS Agreement for Sale and Purchase provides that the chattels must be in reasonable working order on settlement - fair wear and tear excepted.

If the purchaser is unable to undertake the inspection themselves (e.g. they are out of town) then they can authorise another person to undertake the inspection on their behalf.

What to check

The purchaser should take their time to make sure they check everything thoroughly.

The purchaser should check that no further damage has occurred since the agreement was signed e.g. a broken window.  They should turn on the chattels to see if they are functioning correctly e.g. heaters, lights, dishwashers, ovens, spa baths etc.  Check the heat pump’s cooling and heating functions.

There have been occasions where a vendor has removed chattels (such as the window coverings or dishwasher) and replaced them with cheaper/older models. If a chattel needed replacing before settlement, then the replacement should be like for like and the same model or type as agreed.

We recently had a client who wished to light the wood burner at the pre-settlement inspection.  Our advice was that if the wood burner is coming with the house and they want to check that it is working, then yes, light it! We did suggest that the purchaser bring their own kindling, cones and paper etc.

Once an inspection has been completed the purchaser should contact their lawyer to advise whether they are happy that the property is in the same condition as when they signed the agreement.  If there has been damage or if any chattels or fixtures have been removed then they will need to notify their lawyer immediately.  The purchaser’s lawyer would then notify the vendor’s lawyer that there are things that need to be rectified before the purchaser will settle. 

How clean should the property be?

Many clients believe that the property should be absolutely spotless and ready for them to move in on settlement.  The standard agreement does not apply for the vendor to clean the property before settlement.  If a client wants the property cleaned before settlement then a further term needs to be inserted into the agreement stating that the carpets and/or house should be commercially cleaned by the vendor prior to settlement.

What if there is damage?

The client must tell their lawyer immediately.  It is much easier to deal with any issues prior to the day of settlement.  While the client will not be able to cancel the agreement, they may be able to claim for compensation, as long as this claim is served on or before the last working day prior to the settlement date.  In most cases a practical solution can be found – usually involving either the negotiation of a price reduction or the withholding of some settlement funds until repairs are complete.

Can the purchaser complete a second inspection?

A second inspection is only allowed if it has been agreed that the vendor will carry out work before settlement and that the purchaser needs to check that it has been completed.

Mortgagee sale, rating sale or “as is where as” properties

If a client is purchasing at a mortgagee or rating sale, or for an “as is where is” property, then usually the agreement will be amended so that the vendor isn’t warranting as to the state of the property or that any chattels will be included.  This should be explained to the client prior to execution of the agreement.

If a pre-settlement inspection is carried out at an appropriate time and in an appropriate manner prior to settlement, then any issues raised will normally have a practical solution which allows the settlement to go ahead. If you or your clients have any questions about either the pre-settlement or compensation claim processes then please do not hesitate to contact a member of our expert property team.

Janine Ballinger

Partner - Property

Phone: +64 3 339 5642

Email: janine.ballinger@cavell.co.nz

Rebecca Clark

Law Clerk - Property

Phone: +64 3 409 2705

Email: rebecca.clark@cavell.co.nz

Louise Maginness

Registered Legal Executive - Property

Phone: +64 3 339 5643

Email: louise.maginness@cavell.co.nz

Adrienne Parratt

Executive - Property

Phone: +64 3 339 5615

Email: adrienne.parratt@cavell.co.nz

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