Post-earthquake property settlement considerations
The severe force 7.8 earthquake at the top of the South Island on 14 November 2016 and the continuing aftershocks have not only changed the physical landscape but also that of conveyancing and settlements. The Chair of the New Zealand Law Society Property Law Section, Duncan Terris, looks at some of the factors that lawyers must now consider when advising their clients and determining the most appropriate course of action. While it is impossible to address every scenario, the matters raised below should allow an application of general principles to most situations.
Many of you will be aware that insurers have placed embargoes on any new insurance policies being accepted within certain areas. Some have excluded all areas stretching from Canterbury all the way north to the Bay of Plenty. That will of course be problematic for imminent settlements where insurance is yet to be arranged.
The experience in Christchurch was for a purchaser to apply to the vendor’s insurer for a continuation of insurance (in the purchaser’s name). Arguably in that case there is no "new" risk, merely a continuation of the existing risk.
That option also avoids the potential debate where a new insurer may claim that the damage was prior to them accepting the risk. Often any new insurer will require specialist reports on the building (and possibly a geotechnical report on the land stability) prior to accepting the risk.
The delays in obtaining insurance cover may well result in a delay of settlement as no mortgagee will advance without cover being in place.
In Christchurch it has become standard practice to have the vendor execute a Deed of Assignment in favour of the purchaser for any interest, be it current or residual, of any EQC or insurance claim.
It is accordingly important to ensure that claims are lodged by the owner at the time of the quake with EQC and their insurer for any potential damage. There may be structural issues that are not readily apparent from mere visual, non-invasive inspection. A failure to lodge a claim from the outset could result in a time bar for any future claim. Furthermore, once the vendor has settled there will be little incentive for their co-operation.
Some banks are understandably "nervous" about advancing funds on properties that may have sustained damage. For example, ANZ has specified various zones around the country and linked additional requirements as a pre-requisite for drawdown of funds. Contact ANZ directly for information concerning their requirements.
These requirements will necessitate some form of inspection and may cause delays in settlement. Justification for cancellation of an agreement for damage is addressed in clause 5.2 of the ADLSi Agreement for Sale and Purchase form Ninth Edition 2012 (5). The options are quite limited.
The client needs to be advised of the risk of penalty interest for late settlement, but on balance they need to ensure other aspects have been addressed as outlined in this memo prior to settlement. It is also important to remain aware of the obligations to the mortgagee as a client and ensure compliance with the letter of instruction and Solicitor’s Certificate.
Acting for a Purchaser - Agreement conditional
Where an Agreement is still conditional upon finance, there is an opportunity for adding the requirements of the mortgagee, such as additional engineering or building inspections.
The other additional clause to include is the requirement for the vendor to warrant that EQC and insurance claims have been lodged (if applicable) and that the vendor will upon settlement provide a Deed of Assignment of such claims. (The Deed of Assignment is to be prepared by the purchaser based on the claim number information provided by the vendor.)
Where an Agreement is being negotiated, it may be desirable to insert a condition that the Agreement is subject to the Purchaser being able to arrange adequate insurance cover on the property.
Acting for a Purchaser - Agreement unconditional
This scenario is more problematic, especially where the mortgagee may now be imposing additional requirements to those in the original approval letter. They are of course contractually entitled to do so in terms of their approval letters and loan agreements where there is any ‘material change in circumstances’.
A pragmatic approach is recommended. If the vendor does not co-operate with the purchaser in complying with the mortgagee’s requirements, there will inevitably be an inability to settle which disadvantages both parties. Co-operation is the only practical solution here.
Acting for a Vendor - Agreement conditional
The flip-side of the recommendations to the purchaser above applies here. From a purely contractual perspective, if the agreement is conditional upon finance approval and the mortgagee requires a building report, engineer’s report or geotechnical survey then they are all part of that approval. It may well mean that an extension of time for satisfaction of that condition is required and possibly deferring the settlement date, but that is better than no settlement.
Acting for a Vendor - Agreement unconditional
Quite simply, if the purchaser’s mortgagee withdraws its finance approval or imposes additional inspection requirements, then, the vendor is largely in the same position as if the agreement remained conditional. There is little to be gained by not co-operating and simply insisting on settlement and then issuing a default notice and claim for penalty interest. Again a degree of pragmatism must prevail.
Last updated on the 24th November 2016