Schnauer & Co have previously addressed this in article “Breaking down the sale and purchase agreement” back in 2018. However, there have been many changes to the agreement since then. We are currently up to the eleventh edition 2022 (3) of the ADLS/REINZ Agreement for Sale and Purchase. It is best for you to use this form when making an offer by negotiation or, if the sale is by way of an auction, ADLS/REINZ have produced a separate agreement for auctions (the Sixth Edition 2022 (2)). If you are attending an auction then we recommend that you refer to our article “Purchasing A Property At Auction”.
A sale and purchase agreement is a legally binding agreement between you and the vendor (seller). It sets out all the details, terms and conditions of this offer/agreement, such as:
- the price
- any chattels to be included or excluded
- GST status (inclusive of GST or plus GST)
- interest rate for late settlement
- settlement date, and
- any seller or purchaser conditions (e.g. conditional on the vendor’s purchase going unconditional, etc).
It is crucial that you understand the difference between conditions and terms (“clauses”).
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 (front page).
The second page of the standard form of agreement has a heading of “General Terms of Sale”. Clauses 1 through 20 (or 22 for the auction agreement) are those standard terms. These terms also deal with the way in which the conditions operate.
Regardless of whether you purchase by price by negotiation or via auction, you need to know the following:
- It is in your best interests to use the appropriate agreement and all parties need to sign and date the agreement once all terms have been agreed to;
- It is best to use the latest version of the ADLSi/REINZ Agreement for Sale and Purchase but an agreement to sell can still be binding if it is “evidenced” in writing and this particular form of agreement isn’t used;
- You should always get legal advice before you sign the agreement and throughout the buying process;
- You can negotiate any of the conditions in a sale and purchase agreement;
- A sale and purchase agreement becomes unconditional when all the conditions have been met;
- Before you sign a sale and purchase agreement, the agent must give you a copy of the Real Estate Authority of New Zealand Residential Property Sale and Purchase Agreement Guide; and
- If it is a private sale and you are unsure how the negotiation process works then speak to your Legal Advisor.
Making your first offer can be daunting 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 the property to satisfy yourself and the bank that it is a good investment. This is why it is important to have a Legal Advisor that is patient, prompt at responding to your queries, and is able to explain matters in layman terms. You don’t want to choose a firm just based on costs, as this will be one of your biggest investments in life.
Now, usually your Legal Advisor wouldn’t explain each individual clause in the Sale and Purchase Agreement, and what it means for a client - they will point out issues that are relevant to you based on your circumstances. For example, clients buying off the plans (when construction has not started). If you are buying off the plans, then you may want to look at our article “The main risks of buying off the plans”.
In most cases, vendors and purchasers sign an offer without checking with their Legal Advisors what the terms actually mean. We often notice that agents like to include conditions or terms which either add to or subtract from the standard terms and conditions. There may also be instances where agents will provide conditions that aren’t favourable to purchasers - we have addressed Solicitor approval conditions previously in “Legal Toolkit: Expert Tips for First Home Buyers Part 1”.
We have also addressed the risks of not using the correct conditions in our article “Cancelling a contract”. We will therefore address what the “standard” terms and conditions actually mean, without going into too much detail.
Changes to the front page
- The standard conditions at clause 9.0 now require you to record an exact date for the conditions to be satisfied. It is best to record an exact date rather than working days and ensure you consider any upcoming public holidays. We recommend that you consult your mortgage broker about how much time is required to have your finance application approved (usually 10-15 working days).
- There is now the option for a toxicology report to be included as a condition and clause 9.5 applies to the operation of that condition. “Legal Toolkit: Expert Tips for First Home Buyers Part 2” addresses how cancellation under standard conditions isn’t always easy and this is why it may be a good idea to have a well-worded condition provided to you which can be inserted into the further terms page.
Key clauses of the sale and purchase agreement relevant to first home buyers
1. Clause 1: Definitions of Wording:
This clause is essentially definitions and explains the basic wording used in the agreement. For example item (4) clarifies what a working day is and includes clarification about the excluded days during the Christmas period when law firms close.
2. Clause 2: Payment of Deposit:
Clause two 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 to the purchaser of their intention to cancel the agreement. It also states how long a stakeholder must hold a deposit and the factors to consider depending on the type of the property.
3. Clause 3: Possession and Settlement
This clause addresses:
3.1 the right for vacant possession if the property is not sold subject to a tenancy;
3.2 the right to a pre-settlement inspection (this should occur a few working days prior to settlement);
3.3 a further right to re-enter the property to check compliance by a vendor, if valid issues were raised during the pre-settlement inspection that the vendor agreed to remedy;
3.4 how expenses will be apportioned in the settlement statement and the obligations of the Legal Advisors acting for both parties;
3.5 the process if there are settlement delays where penalty interest can be charged from 4pm based on the settlement figure (unpaid portion of the purchase price).
4. Clause 5: Risk and Insurance:
The next important clause deals with risk and insurance. The property and chattels are 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. This is more risk for the vendors than the purchaser but you should always seek legal advice about taking possession prior to settlement as there are some other factors to consider. This clause also details what would happen if substantial damage occurred before possession was given and what your options would be.
5. Clause 6: Title, boundaries and requisitions:
This clause allows the Legal Advisor acting for the purchaser to check the title within 10 working days (unless an amendment is made in the agreement)and provides them with a right to object to certain defects. For a valid claim, the interest registered on the title has to be defective and not simply “unfair or adverse”.
In auction agreements, you are deemed to have accepted the title and should have already undertaken due diligence. This is why we suggest that the title is reviewed in advance of making a conditional offer or your offer should include a special title condition in the further terms.
6. Clauses 7 & 8: Vendor warranties and undertakings:
Vendor warranties and undertakings are promises made by the vendor relating to the property. Generally, if any vendor undertakings or warranties are breached by the vendor, the purchaser is still obliged to settle the transaction.
7. Clause 9 Conditions and mortgage terms:
This clause relates to the conditions on the front page of the agreement and sets out what happens when a purchaser wants to cancel the agreement. If you can’t lawfully cancel a contract and you walk away, you risk losing any deposit that has been paid or being sued by the vendor. Conditions used from the front page of the agreement must be satisfied by 5pm on the due date.
8. Clause 11: Dealing with defaults:
This clause deals with defaults and some general provisions dealing with the agents’ responsibilities, GST, sales information, Pandemic provisions etc. For most residential transactions, GST does not apply because residential property transactions are exempt for GST purposes.
Further Terms of Sale
This is where you would insert any “special conditions”. Any conditions inserted into this page, supersede any terms of the agreement.
Schedule 1 – GST Information:
You leave this section blank if no parties are GST registered and you do not intend to use the property for a taxable supply. If you have any questions in relation to GST, you should speak to your accountant. Please keep in mind that you cannot withdraw KiwiSaver funds, if you intend to nominate a GST registered party as purchaser.
Schedule 2 - List of standard chattels: –
Schedule 2 contains a list of standard chattels that will be sold with the house. This should be completed in full so that all chattels that are included in the sale actually go with the property at settlement.
Schedule 3 – Tenancy:
Schedule 3 addresses any tenancy currently in place (if sold subject to tenancy). The front page will also state if the property is sold subject to a tenancy.
Signing the Agreement
The last party to sign the agreement (once any changes in the offer have been accepted by both parties) needs to also date the front page of the agreement. During the negotiation process, if conditions or terms are added or amended by agreement between all the parties, the acceptance should be shown by all parties initialing beside the addition/amendment. An agent or your legal adviser can guide you in this process.
Contact Kim Hunt now to take advantage of Schnauer and Co’s First Home Buyers Offer ...
Kim Hunt
Senior Legal Executive
Schnauer and Co Lawyers
Email: khunt@schnauer.com
Tel: 09 486 0177
DDI: 09 892 0351
