You have found the perfect property and want to make an offer to purchase it. What should your next step be?
- You engage a solicitor and seek legal advice before you make any decisions and prior to signing the ADLS Agreement prepared by the Real Estate Agent.
- Your solicitor will:
- ask you to sign a professional services engagement letter;
- carry out initial searches on the property and will provide you with initial advice on the purchase;
- approve the ADLS Agreement as prepared by the Real Estate Agent, or may make amendments to the ADLS Agreement including preparing additional clauses for your protection as a purchaser;
- provide you with advice and instruction on when to execute the ADLS Agreement; and
- after the ADLS Agreement is signed, carry out the tasks to settle the purchase of your property.
Unfortunately, it is our experience that most individuals sign the ADLS Agreement prepared by the Real Estate Agent and then find a solicitor, or know/have a solicitor but still sign the ADLS Agreement prepared by the Real Estate Agent before engaging a solicitor and seeking legal advice.
What is the legal effect of signing the ADLS Agreement?
As soon as the ADLS Agreement is signed, you have entered into a binding contract which is one that is recognised at law and the parties to the contract can sue for non-performance. The effect of this is if something goes wrong you will end up engaging a solicitor (some solicitors are general practitioners who can provide you with a holistic legal service) to act for you in what has turned into a litigious matter.
In addition, we commonly experience clients who engage a solicitor with the expectation that solicitors can work miracles should you decide not to proceed with the purchase. This expectation may be formed because:
- the ADLS Agreement is a standard form contract which incorporates general terms of sale which essentially cover all the important legal issues in relation to a sale and purchase of property; and/or
- the ADLS Agreement you signed is conditional upon:
- purchaser obtaining finance (clause 9.1. of the general terms of the ADLS Agreement);
- purchaser’s approval of the Land Information Memorandum (“LIM”) from the local authority (clause 9.2 of the general terms of the ADLS Agreement);
- purchaser’s approval of a building report (clause 9.3 of the general terms of the ADLS Agreement);
- purchaser’s solicitors approval of the agreement (a condition commonly inserted (not by solicitors) into the further terms of sale of the ADLS Agreement);
- the standard objection and requisition clause applies in relation to the Title to the property (clause 5.0 of the general terms of the ADLS Agreement);
- the standard vendor warranties apply (clause 6.0 of the general terms of the ADLS Agreement).
The general terms of the ADLS Agreement do provide some protection to the purchaser, however, the key fact to note (and remember) is that the general terms of the ADLS Agreement are just that, general, and like any standard form legal document, are not tailored to your specific circumstances. Accordingly, if you later discover that the house is not suitable for your intended use and/or the property does not benefit you, for reasons such as:
- the soundness, suitability and value of the property;
- restrictions or requirements imposed by the local authority’s District and Regional Plans (in Auckland eventually the Auckland Unitary Plan);
- location of any buildings in relation to the boundaries of the land and any survey matters;
- development potential and engineering aspects;
- any buildings on the property being non-complying;
- you thought you were purchasing a fee simple but it is actually a cross lease that does not allow pets;
- the building has been altered since the cross lease plan was prepared;
- you thought you were purchasing a fee simple but it is actually a unit title with unaffordable body corporate levies;
- your personal situation changes;
you are bound to purchase the property regardless (provided the LIM, building report, title to the property and the general warranties are in order for acceptance or complied with).
Tackling common misbeliefs
The standard finance, LIM and building report conditions are not an automatic out for a purchaser. More particularly:
- Finance - depending on the way in which the finance particulars on the front of the ADLS Agreement are completed, you are legally obliged to attempt to secure finance from a lender. If you secure finance, the finance condition is technically satisfied. This applies even if you are not happy with the lender or the terms of the lending. The vendor is within his/her rights to call your bluff and bring a legal claim against you for breach of contract.
- LIM - the LIM condition states that the purchaser’s approval must not be unreasonably or arbitrarily withheld. The purchaser is required to give notice to the vendor, if the purchaser does not approve the LIM, stating the particular matters in respect of which approval is withheld and, if those matters are capable of remedy, what the purchaser reasonably requires to be done to remedy those matters. This triggers the process to be complied with by the vendor and the purchaser under clause 9.2 of the general terms of the ADLS Agreement.
- Building condition - the purchaser is required to obtain a report on the condition of the buildings and any other improvements on the property that is satisfactory to the purchaser, on the basis of an objective assessment. The report must be prepared in good faith by a suitably-qualified building inspector in accordance with accepted principles and methods. If the purchaser avoids this agreement for non-fulfilment of the condition the purchaser must provide the vendor immediately upon request with a copy of the building inspector’s report.
- Solicitor approval - the solicitor approval conditions that we regularly see drafted and inserted (not by solicitors) into the further terms of sale of the ADLS Agreement are narrow and relate only to the terms and conditions of the agreement, nothing else. The effect is that the condition does not provide any additional protection to purchasers, unless there was something seriously wrong with the general terms and conditions of the ADLS Agreement which is highly unlikely.
The case law in New Zealand records that this narrow type of solicitor/lawyer approval condition does not provide solicitors with unfettered discretion in relation to approving or disapproving the agreement. We are unable to consider your commercial wishes and anything outside of the terms and conditions of the agreement, and we are required to act in good faith.
The importance of engaging a solicitor before you do anything
The recent case Messenger v Stanaway Real Estate Ltd  NZHC 1795 in the High Court demonstrates the importance of engaging a solicitor prior to entering into an ADLS Agreement.
The vendors engaged a real estate agency in Auckland to market their property. The property was sold for $6 million but this sale fell through because of a poorly drafted ADLS Agreement. The ADLS Agreement failed to clearly state the settlement date and resulted in a 2 year period during which the vendors did not receive any money from the purchaser of the property. The sale fell through. The vendors entered into another ADLS Agreement for the sale of their property but for $4.4 million. The vendors brought proceedings against the real estate agency and in the High Court the vendors accused the real estate agency of negligence.
The High Court ruled in favour of the vendor and found the real estate agency liable for all the foreseeable consequences of its negligence. The High Court stated that a competent real estate agent would have clarified the settlement date and known that $4.4 million was a serious disadvantage.
The High Court further outlined the importance of seeking legal advice in order to safeguard a vendor or purchasers position.
Take away message
It is important to get it right, and this means engaging a solicitor before you make any decisions, and before you sign any ADLS Agreement, or any other legal document. It is particularly prudent because you want the ADLS Agreement, and any other legal document, to reflect your intentions and protect you, otherwise you run the risk of things going terribly wrong and finding yourself in a litigious matter.
Your solicitor cannot work miracles and is only able to offer you legal advice and assistance within the realm of the law.
Commonly, clients purchase property and make investments to generate income with little or no consideration of asset protection.
Asset protection, also known as estate planning, is the description given by lawyers to the provision of advice in relation to the most appropriate ownership structure for assets and investments, including the protection of such assets and investments for future generations.
Lawyers will consider whether it is appropriate to establish a discretionary family trust or an incorporated company and to transfer the ownership of various client assets and investments to them. For complex asset structures your lawyer will often work closely with a chartered account which provides an added benefit to clients. Upon the ownership structure being put in place, a will is normally prepared for the client which appropriately deals with the remainder of the assets (real and personal property), such as jewellery, a classic car, art and life insurance.
Take away message
Again, it is important to get it right, and even more important to provide for future generations. Do you want to make sure that your children, grandchildren and future generations are provided for? You have worked hard, and continue to work hard to secure assets and investments which provide a return, or will eventually provide a return. The next investment that you should consider, and which will provide you with value, is to engage a solicitor to review your asset protection and assist in managing the ownership structures that you have put in place.
From our experience, it seems that many individuals are opposed to incurring solicitors costs for advice on some of the most expensive and important decisions in life.
There is some comfort in having a professional available to talk to when you are engaging in complex legal and commercial processes (and yes, buying a house and protecting your assets are often complex legal processes), and to make sure you get it right from the outset.
If you would like further information on any issue raised in this update please contact:
Krystle Gardner, Associate
DDI: 09 965 2662
Alessandra Loi, Solicitor
DDI: 09 965 2661
Further advice should be taken before relying on the contents of this summary. Clendons North Shore accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material in this summary.