In this article, we set out how a purchaser can claim a right to compensation under the standard ADLS Agreement for sale and purchase should an issue arise before settlement.
Once an agreement is unconditional it is reasonably difficult for a purchaser to withdraw or cancel the contract. This means the purchaser is at risk between an agreement becoming unconditional and the settlement date, as these two dates can often be weeks or months apart. Subsequently, a property’s condition can change drastically throughout this time. A vendor may have also agreed to carry out work to the property, but has failed to do so.
The potential for a property’s condition to deteriorate highlights the importance of a thorough pre-settlement inspection. These inspections are vital as they represent the purchaser’s last opportunity to ensure that the property is as it was agreed when the agreement went unconditional. However, if any issues emerge after the inspection it can leave a purchaser in a difficult situation – they’re bound to settle but the property’s condition is not what was agreed, therefore, relief is needed.
Under the ADLS Agreement a purchaser can claim compensation or require an “equitable set-off” to amend the loss or damage. This means the purchaser is able to require an amount be set aside from the price paid on settlement pending resolution of the dispute. It doesn’t let a purchaser cancel the contract (except as provided in the Contract and Commercial Law Act 2017) but it allows an amount to be set-aside to remedy the defect. Clause 8 outlines the steps required.
It requires the purchaser serve notice to the vendor on or before the last working day before settlement and the notice must;
- state the particular error, omission, or misdescription of the property or title (in a claim for compensation);
- state the particular matters in respect of which compensation is claimed (in a claim for equitable set-off);
- comprise a genuine pre-estimate of the loss suffered; and
- be reasonably particularised and quantified as at the day of notice.
Case Study: A situation might arise where an inspection was carried out prior to signing the agreement. Nothing out of the ordinary was uncovered and the contract was signed. Once the terms had been satisfied, it became unconditional and the purchaser was legally obliged to settle. However, two months had passed since signing and during the pre-settlement inspection the purchaser noticed the manhole in the roof was locked. The vendor claimed some valuable heirlooms were stored in it however the purchaser suspected the vendor was growing cannabis and was correct. The purchaser wasn’t able to cancel the contract but can claim an equitable set-off for the cost of any decontamination, provided they comply with the terms above.
The onus is on the purchaser to raise the issue before settlement and any claims must be genuine and reasonable. A purchaser is unlikely to be successful in a claim for a slightly overgrown garden. If the amount of compensation is agreed, it shall be deducted on settlement.
If the amount is disputed an interim amount is deducted and paid by the purchaser to a stakeholder until the amount of compensation is determined. If the parties cannot agree, an experienced lawyer is jointly appointed, with costs shared between the parties. The dispute can also be taken up with the president of the New Zealand Law Society.
Clause 8 is the mechanism to apply for compensation or an equitable set off, and timing is imperative in bringing a claim. At Cavell Leitch we make sure our purchaser clients arrange a pre-settlement inspection at least two days before settlement to ensure we have time to raise any concerns.
If you have any questions about the operation of the compensation clause, or would like assistance navigating a property purchase, our team of experienced property lawyers are ready to assist.