Buyer's Backstop – the compensation clause in an ADLS Agreement

Selling an earthquake damaged house with EQC and/or Insurance claims

Written by Harry McCormick - Solicitor (Property)

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.

Changing District Plans

Written by Andrew Schulte – Partner (Resource Management)

In this article we want to bring you up to date with some looming district plan changes.

If you are an agent operating in the Waimakariri or Selwyn districts of Canterbury this may be of particular interest to you. Currently, both the Selwyn and Waimakariri District Councils are in the midst of considering the reviews of their District Plans. 

Indications are that Selwyn’s proposed District Plan will be “notified” in early to mid-2020 while Waimakariri may not be far behind.

Notification is the public release of the proposed (new) District Plan for public comments, which are made through submissions.  Once notified there’s a 20 working day window to make a submission, so awareness of when the plans were released is important.

The impact of plan reviews, and the possibilities for changes to zoning and permitted levels of development, could present opportunities for your clients, whether they are buyers, sellers or developers.  Changes could create opportunities to provide for new development areas, or the intensification of development in existing zones.

For example, as part of the review process the density requirements for various zones may be altered or, if not, a submission seeking such a change could be made.  Similarly for the identification of permitted land uses in, say, a rural zone.  Such changes may be more likely in transitional areas on rural-urban boundaries or between zones with different allowances. 

Submissions can seek a broad range of outcomes, which are then considered in the hearing process that follows.

There is a second opportunity to submit comments on the submissions of others, through “further submissions”, but if you or your clients want the plan to change in a particular way, a primary submission is the more likely route.

If you or your clients are interested in finding out what opportunities might exist for new or enhanced development opportunities, and want to get involved in the plan review submission process, our Resource Managment team would be happy to assist.

Mike Parker

+64 3 339 5645

Partner - Property

Phone: +64 3 339 5645

Mobile: +64 21 226 2630


Andrew Schulte

Partner - Resource Management 

Phone: +64 3 339 5640


Harry McCormick

Solicitor - Property

Phone: +64 3 335 3475


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