The cancellation of the sale of a $1.2 million Dunedin home has been in the press recently. In short, the original buyer pulls out of a contract. The vendor then subsequently sells the property for a $150,000 loss.
The disgruntled vendor then heads to Court to sue the original buyer for the loss. The Courts have eventually awarded the original Purchaser to pay the Vendor the $150,000.
Now, if you’re after the light version of the story, then checkout the media article here.
If you’re after more detail around the case then keep reading.
In this case, the vendor had signed a conditional Agreement for Sale and Purchase, conditional on the purchaser obtaining finance, and a written builder’s report.
The buyer then cancelled the contract on the basis that the property had retro-fitted insulation in its wall cavities — which wasn’t identified as an issue in the builder’s report (he never obtained a builder’s report!). The purchaser, in his own mind, decided the retro-fitted insulation was a problem — not a builder in their builder’s report.
The High Court
Initially, the Court held that there was no loss to the vendor because, even if the buyer got a builder’s report, he wouldn’t have got finance.
So, because there was no real probability of them obtaining finance, there was no real loss to the vendor. As a result, the High Court awarded a token $100 in damages to be paid.
The Court of Appeal
Obviously the Vendor was somewhat disgruntled as a result so took the case to the Court of Appeal.
There it was found that any finance condition depends on each lender’s policies at any point in time. In this case, the buyer never tried to get finance. As a result, and because finance is so specific to each bank, we can’t simply assume that he wouldn’t have got finance.
At this point, the Court found it is on the buyer to prove that they did all things reasonably necessary to fulfil the condition.
So, what does this mean in practice?
Firstly, under the standard ADLS agreement, a party “must do all things reasonably necessary” to fulfil any conditions that were inserted for their benefit.
What “reasonably necessary” means will depend on the particular case. For a finance condition, the purchaser may have an obligation to approach more than one lender, seek a solicitor’s advice about alternative sources of finance, and approach the vendors for finance.
The purchaser must also prove that that they have done all things reasonably necessary to fulfil the finance condition. If they can’t prove this, then they may have issues cancelling the agreement under the finance clause.
Similar issues arise with a builder’s report condition. The default clause requires the report to be in written form, to be prepared on an objective basis, to follow accepted methods and principals, and be done by a suitably qualified inspector. Any report also needs to be provided to the vendor (under the default ADSL clause).
In short, buyer’s can’t simply walk away from a property they’ve changed their mind on under the guise of a building or finance condition. If they’ve bought a property, they need to follow through unless they have reasonable grounds to cancel the contract.
As always, we’re here to help. If you ever have a question on any condition, situation, purchaser or vendor just contact us — we’re happy to give you an initial steer on a no cost and no obligation basis.