The standard form Agreement for Sale and Purchase of Real Estate jointly produced by REINZ and the Auckland District Law Society ('the ADLS form’) is probably the most widely used legal document in New Zealand. The Real Estate Institute of New Zealand (‘REINZ’) has now produced and is marketing its own standard form sale and purchase agreement of real estate (‘the REINZ form’). The REINZ form is markedly different both in form and substance from the ADLS form. With REINZ reporting around 100,000 house sales every year, the contents of this new form could well impact on many prospective buyers and sellers who need to be aware of any potential pitfalls of the new form.
Key changes
Changes to form of agreement
The REINZ form is drafted in ‘Plain English’ and, ‘was designed to do away with ambiguity and complexity’ says the REINZ CEO, Christine Le Cren. The intention is to make the form more easily understood by the public. While the language and layout may indeed be easier for the layperson to read, the implications and effect of those words will not necessarily be fully understood. In addition, the form introduces new terminology not defined by case law which will almost certainly lead to uncertainty in interpretation – possibly creating more ambiguity and complexity.
The ADLS form has been around for many years and has been tried and tested by the courts so that the clauses and terms have been well defined and interpreted. This is not so for the REINZ form which does not have the assistance of case law to help bring certainty to the terms of the agreement. For example, the word ‘warranty’ has been replaced with the word ‘promise’. While the term promise is better understood by the average New Zealander, the question remains whether it will translate in court to having the same power and enforceability as a warranty? How questions such as this will play out in the courts remains to be seen. It is for reasons such as this that some legal commentators have criticised the REINZ form as flawed in certain respects, some going as far to say it is unsafe to use.
The REINZ form for negotiated sales is comprised of two sections, Section A and Section B. Section A contains the details of the individual transaction while Section B contains the standard terms of sale. It is intended that the standard terms of sale are just that and should remain constant. The promoters of the REINZ form suggest that if any amendments to those standard terms are required, these can be achieved through Section A which allows for the deletion or amendment of the standard terms contained in Section B. Section B containing the ‘fine print’ terms need not be actually attached to the agreement that is signed. Buyers and sellers must sign Part 3 of Section A declaring that they have received a copy of Section B. However, to ensure an agreement is enforceable by everyone affected, care will need to be taken to ensure everyone has been given a copy of Section B, as there may be room for argument that a party cannot be bound by any standard terms they have not in fact received.
Anna Fitzgibbon, ADLS's president, has warned that the form ‘markedly favours purchasers. It attempts to introduce new principles into settled areas of vendor and purchaser law – perhaps unsuccessfully’. While there may be other provisions which favour of the buyer, the REINZ form also attempts to make it more difficult for both the seller and the buyer to cancel the agreement. It is already being suggested that in fact the agreement, to the contrary, gives clever solicitors acting for purchasers in particular more scope to cancel a contract.
What to look out for
Approval treated as given
The conditions clauses in the REINZ form differ from those in the ADLS form and it is important for the buyer and seller to be aware of all conditional dates. Where a buyer or seller is required to approve a condition in the agreement such as LIM, title, or building report conditions ('the approver’) and the date for confirmation has passed without confirmation, the other party can issue a ‘warning notice’ requiring the approver to issue a ‘refusal notice’ in respect of that condition. If the approver fails to give the refusal notice within three working days of receipt of the warning then they will be treated as having approved the condition, and lose the right to raise issues.
Conditions
Title
Under the ADLS form, if the title to a property is defective the buyer can give notice to the seller requiring the seller to remedy and if the seller doesn’t comply either party can cancel the agreement. This is known as the right to requisition the title. This right has been replaced in the REINZ form by a clause which provides for the buyer's lawyer to withhold consent to the title for anything that ‘could’ be registered on the title that ‘might’ affect the buyer's use of the property. This new condition is causing concern amongst practitioners for its wide discretion in favour of the buyer. The buyer must, however, give notice to the seller detailing the reasons for not giving approval to the title (‘the refusal notice’). If the objections can be rectified the seller has five working days to do so. Upon rectification, the buyer’s approval is treated as being given.
LIM/Building report
Under the REINZ form the conditions relating to a building report and LIM also require the buyer to issue a ‘refusal notice’ giving the reasons for not confirming the condition. The seller then has the opportunity to remedy those 'defects'. This process is similar to the standard LIM condition in the ADLS form. However, in using the ADLS form it is common to insert a specific LIM/Title/Building Report condition which does not require the buyer to give the seller the opportunity to remedy. Buyers need to be careful when signing a REINZ form that the standard provisions are modified if necessary to meet the buyer’s requirements.
The REINZ form requires builders’ reports to be from a ‘qualified builder’ so you cannot get a mate around to ‘kick the tyres’ and request a price reduction. The report must be from a ‘suitably qualified person’. This term is not specifically defined in the Agreement and parties may have to look to the courts to determine who is ‘suitably qualified’.
Onerous seller obligations
Sellers need to look carefully at the obligations under clause 19 ‘Promises’ of the REINZ form and will likely wish to vary some of the more onerous obligations imposed under this clause. For example, under clause 19.4 the seller promises to remove documents registered against the title to the property on settlement. Some of these documents may be intended to remain registered on the title. It may therefore be beyond the seller's control to have them removed and the Seller could be in breach of the contract through no fault of their own.
Dispute resolution
Under the REINZ agreement all disputes arising out of the agreement must be referred to mediation as a first resort but the agreement fails to provide for any further processes should the mediation not resolve the dispute. The problem with this is that when a dispute arises, parties may feel that mediation will not resolve the issues and are often opposed to entering into mediation with the other party, particularly in more fractious situations. It might be prudent to vary the REINZ form in all cases to clarify the mediation obligations and lead on to other dispute resolution processes.
Be careful
The issues discussed in this article are possibly equivalent to the tip of an iceberg in relation to matters that might arise from the use of the new REINZ form. Before signing, a prudent buyer or seller should ensure that everything in the agreement being created is what the person signing expects and wants. Your solicitor’s advice is available to provide that assurance.
© Anderson Lloyd
Email: alexandra.isherwood@andersonlloyd.co.nz
Website: www.andersonlloyd.co.nz