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Sellers: beware the fine print

10 Oct 2017

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By Mike Toepfer, Director, Aspiring Law

You’ve probably heard the expression “buyer beware” when it comes to trading property, but what’s not so well understood is that a seller can still carry significant liability.

If you’re selling a property, it’s really important to understand that under the standard sale and purchase agreement published by the Auckland District Law Society/New Zealand Real Estate Institute – the most widely-used document in New Zealand – the seller does give some “warranties” to a buyer.

What’s a warranty? Simply put, it’s a promise by the property’s seller to the buyer that certain facts are true or will happen. If they are not true, then the buyer can make a claim against the seller for any loss they suffer.

So, if you’re selling a property, it’s vital you read, and fully understand, the warranties – which are found in the standard agreement’s small print – and ensure you’re actually able to give them. If the warranties are not correct, you’ll need to delete some or all of them, or change the wording.

Many assume it’s really only a prospective buyer who needs legal advice in the early stages of the sales and due diligence process, and that a seller’s need for a lawyer falls about the time the dotted line has to be signed. Warranties are just one example of why vendors need early legal advice.

What are you signing up for?

The main warranties include that:

  • The seller has not received any notice from the local council or the government or any other statutory body, or from the tenant of the property, or under the Resource Management Act 1991, or from any other person, which directly or indirectly affects the property, and which the buyer has not been told about.
  • That the seller has not given any consent or waiver which may directly or indirectly affect the property. For example, the seller may have signed a consent for a neighbour to build on the neighbouring property where that building infringes the rules in the District Plan in some way.
  • Any chattels, plant, equipment, systems or devices which are included in the sale and which provide services or amenities to the property (for example, security, heating, air conditioning systems) will be in reasonable working order on settlement, and otherwise in the same state of repair as they were on the date the agreement was signed (fair wear and tear excepted). If you are selling a property, you should make sure any chattels listed in the sale agreement are in good working order. If they’re not, you either shouldn’t include them in the agreement, or, alternatively, change the warranty to make it clear that they’re not in good working order. If you are buying, you should check before you sign the agreement that the chattels are in good condition and record what state of repair they’re in, as you might not remember when it comes to settlement.
  • All electrical or other installations on the property will be free of any charge (for example, not subject to a finance charge or financing agreement).
  • If the seller has done any works on the property, or arranged for anyone else to carry out works, then all necessary permits and consents have been obtained, and, to the seller’s knowledge, the works were completed in compliance with those permits and consents, and a code compliance certificate was issued for that building work, if required (a code compliance certificate is a certificate from council confirming that any work authorised by a building consent has been satisfactorily completed in accordance with the terms of the building consent). Please note: just because a code compliance certificate has issued, it doesn’t mean that a seller doesn’t have any other liability under this warranty. The seller is promising that any building work completed in accordance with a building permit or a building consent shall be compliant with the building code, even if a council incorrectly issues a code compliance certificate.If there is a problem with the building work, the seller can still be liable for the faulty work. Note, too, the time period during which a person can be sued for a breach of warranty is 10 years from the date the warranty is given, not 10 years from the date the work was completed.The warranty covering work done to the property will not extend to that done on a property by a previous owner. So, a buyer should carry out their own investigations rather than relying on the warranties contained in the agreement. Extra care should be taken if a property is a cross lease or unit title, as there may be additional requirements for any work carried out on these types of properties.
  • If the property being sold is a unit in a unit title development (for example, an apartment), the seller warrants that they are not aware of any claims made against the body corporate, and no special resolutions have been passed affecting the common property.
  • If a cross lease property or unit is being sold, there are no structures or alterations to buildings on the property which have not been authorised by the appropriate bodies or people.

Do your dues

If you’re not sure whether any of the warranties which are contained in the agreement can safely be given, then you need to take appropriate steps to find out. For example, you could check council records to make sure that all necessary code compliance certificates have been issued for building work which you have carried out.

If you’re buying a property, be sure to carefully inspect the property before settlement to make sure that all chattels included in the sale are of an acceptable standard and any issues are dealt with at that time.

The fine print of any agreement needs to be carefully considered and understood by all parties to the transaction. The implications or consequences of giving warranties that aren’t correct can be significant. If there are warranties that you cannot truthfully give, amendments to the warranties will be needed before signing the agreement.

Due diligence by sellers really is just as vital as that for buyers. When you decide to put your property on the market, one of the first calls should be to your lawyer. The liability carried by sellers often isn’t well-known and can be complex. A property lawyer will offer guidance on what you need to be aware of, at what stage, and what needs to be put in place to protect your interests.

You don’t know what you don’t know – until you find out. And, you don’t want that to be the hard way. Remember, too, vendor liabilities can last a decade – that’s a long time to be unnecessarily at risk.