EXPLANATION OF THE KEY SALE AND PURCHASE AGREEMENT CLAUSES
The Sale And Purchase Agreement can be a daunting document for first home buyers. As a legal document it is important that you make sure that you are fully informed about your legal obligations. It is also the opportunity to ensure that you include all the conditions needed to be able to check out the property to satisfy yourself and the bank that it is a solid purchase.
So we asked Schnauer & Co. to break down the Sale And Purchase Agreement
In the seventeen years I have been working in property law, I can count on one hand the number of clients who have asked me to explain each individual clause in the Sale and Purchase Agreement, and what it means to them. Real Estate figures show that there are about 60,000 land transactions conducted in New Zealand each year, with virtually all of those transacted through the standard ADLSi/REINZ Agreement for Sale and Purchase form. That does not mean that other versions of agreements cannot be used, because the law only says that for a land transaction to be valid, it must be “evidenced” by writing. There have been cases where people have claimed an agreement exists simply through the exchange of email correspondence and letters, without a formal agreement being signed. Nevertheless, it is widely accepted that almost all transactions occur through the standard form agreement.
In most cases, vendors and purchasers sign these a Sale and Purchase Agreement without checking with their legal advisors what the terms actually mean. Further, it is also frequent for agents to include conditions or terms which either add to, subtract from, or are supplementary to, the standard terms and conditions. It is therefore timely to look at what these “standard” terms and conditions actually mean, without going into too much detail. It is also pertinent to note, that there is currently a committee going through a process of changing the current standard form agreement, with a new agreement likely to come into effect later in 2018.
The first distinction I always like to make is pointing out the difference between conditions and terms. If a party enters into an agreement to buy property, they are entitled to make it conditional on certain matters. The standard conditions are finance, building report and satisfactory LIM report. The law in this area is essentially that these conditions are conditions subsequent to the agreement being formed. That means that the parties are bound as soon as the agreement is signed, but whether either party proceeds depends on the conditions being fulfilled.
The second page of the standard form agreement has a heading of “General Terms of Sale”. Clauses 1 through 18 are those standard terms. These terms also deal with the way in which the conditions operate.
Key Clauses Of The Sale And Purchase Agreement
CLAUSE 1: DEFINITIONS OF WORDING
The first clause is essentially definitions and explains the basic wording used in the agreement.
CLAUSE 2: PAYMENT OF DEPOSIT
Clause two is a relatively important provision. It deals with the payment of the deposit. Most people are unaware that it is not a legal requirement for a deposit to be paid on a property purchase. However, no sensible vendor would usually enter into an agreement without some sort of commitment from a purchaser. The vendor is usually unable to cancel the agreement for non-payment of the deposit unless they have first given at least three working days’ notice of their intention to cancel.
CLAUSE 5: INSURANCE AND RISK
The next important provision is clause 5. This deals with risk and insurance. The property and chattels is at the risk of the vendor until possession is given and taken. The legal definition of possession is different than settlement. It can mean that if a purchaser takes possession before paying the money, then the property then becomes their risk. This can create problems because insurance companies will usually not insure a property that is not owned by the party.
CLAUSE 6: OBJECTION TO TITLE
Clause 6 is an interesting provision. It leads to a lot of confusion amongst real estate agents. That is because a lot of agents consider that the clause is a condition in the agreement, however, it is a term of the agreement and not a condition. The clause allows a purchaser to object to the vendor’s title to the property within ten working days of the date of the agreement. Once a vendor has received a title objection letter, they have five working days in which to respond. By and large, the provisions of this clause are technical and usually for lawyers to work through and to provide simple explanations to clients if title requisitions or objections are ever made.
CLAUSES 7 & 8: VENDOR WARRANTIES AND UNDERTAKINGS
Clauses 7 and 8 provide for vendor warranties and undertakings and then the procedure that is to be dealt with if such warranties and undertakings are breached. Generally, a purchaser does not have an automatic right to cancel an agreement if such undertakings or warranties are breached by the vendor, rather they are usually only entitled to a claim for compensation at settlement. Clause 8 deals with the mechanism for that.
CLAUSE 10: TIME PERIODS FOR DEALING WITH CONDITIONS
The next important provision, and one of the most important in the agreement, is clause 10 dealing with conditions. It sets out the timeframes under which a purchaser must satisfy the LIM condition and builder’s report condition. It also provides for the time periods under which all conditions must be met, and further, points out that the “party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment”. Broken down, this essentially means that if a condition is inserted into the agreement (such as finance or builder’s report) the purchaser has to try very hard to meet that condition and simply cannot have a change of heart and say that finance has not been approved and walk away from the agreement. If that is the case, the relevant provision of clause 10 could be breached and the purchaser’s deposit could be at risk.
CLAUSE 11: DEALING WITH DEFAULTS
The remaining clauses deal with defaults (clause 11) and then some general provisions dealing with the agents’ responsibilities, GST and others. For most residential transactions, GST does not apply because residential property transactions are exempt for GST purposes.
SCHEDULE 2: LIST OF STANDARD CHATTELS
The last point that should be noted is that Schedule 2 in the agreement contains a list of standard chattels. This should be completed in full so that all chattels that are included actually go with the property at settlement. There are numerous warnings on the last page of the agreement that explain to parties that they should seek professional advice before signing it and that should be observed too if possible.
Before signing a Sales And Purchase Agreement it is important to make sure you’re fully informed about your commitments once signing and ensure you have the right conditions and clauses in place to protect yourself.
For assistance in ensuring you are well placed to sign a Sales & Purchase Agreement please call or email:
Kim Hunt
Senior Legal Executive
Schnauer and Co Lawyers
Email: khunt@schnauer.com
DDI: 09 892 0351
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