By Thomas Gibbons
This article continues a series on the new ADLS-REINZ agreement for sale and purchase of real estate (10th edition), beginning with the significant changes around claims for compensation.
Pages 11 and 12
Claims for Compensation
The provisions as to claims for compensation have seen a massive overhaul. While claims for compensation have generally been seen to relate to claims for breach of warranty, clause 10.1 extends the reach of a compensation claim to a breach by the vendor of any term of the agreement. A breach of a term does not defer the obligation to settle, but that obligation is subject to the remainder of clause 10.
Circumstances of Claim
Clause 10.2 lists the circumstances in which a claim may be made. These are now extensive:
- Where the purchaser makes a claim for a breach of any term of the agreement.
- Where the purchaser makes a claim for misrepresentation.
- Where the purchaser claims a breach of sections 9 or 14 of the Fair Trading Act.
- Where the purchaser makes a claim for an equitable set-off.
- Where the parties dispute an amount payable under clauses 3.12 or 3.13 (default for late settlement by the purchaser or vendor respectively).
- Where the parties dispute an amount payable under clause 5.2 (relating to damage or destruction prior to possession).
Clause 10.3 then sets out a process. Notice must be served by the day before settlement, though clause 10.4 modifies this strict requirement, by providing that where a notice is not given “by the settlement date” (and given clause 10.3, these words should be “before the settlement date”) because of the conduct or omission of the other party, notice must be served by the working day immediately preceding the expiry of a settlement notice.
Returning to clause 10.3, the notice must state the particular matter being claimed under clause 10.2, state a genuine pre-estimate of the claimant’s loss, and be particularised and quantified to the extent reasonably possible as at the notice date. The clause is not clear as to what extent of particularisation is necessary, and nor is it clear as to what the consequences are if a notice fails to meet this threshold. Does that invalidate the notice? Probably not, but a scrupulous vendor could arguably refuse to do much with a notice that was fantastical rather than realistic.
In any event, if the compensation is agreed – which is, I might add, not that common – there is an adjustment to the price to be paid on settlement. Clause 10.5 therefore covers the most straightforward consequence of a claim.
A Disputed Claim?
Clause 10.6 covers a different scenario: where the vendor disputes the purchaser’s right to make a claim. The vendor must give notice of that within three working days after service of the purchaser’s notice, and the purchaser’s right to make a claim is to be determined by an experienced property lawyer or litigator appointed by the parties (or failing agreement, by the president of the New Zealand Law Society). Costs are to be met by the party against whom the determination is made. So there can be an outright challenge to the purchaser’s right to make a claim.
If a claim is made by the purchaser and the vendor does not give notice under clause 10.6 within three working days, then under clause 10.7 the purchaser’s right to make a claim is taken to have been accepted.
Once it is accepted or determined that the purchaser has the right to make a claim under clause 10.2(1), or there is a claim under clause 10.2(2), but the amount of compensation is disputed, then a further complex process kicks in under clause 10.8:
- An interim amount is payable to stakeholder on settlement, until the claim is determined.
- If the stakeholder is not agreed, the president of the New Zealand Law Society will nominate a stakeholder.
- The interim amount must be reasonable in the circumstances, with restrictions on the amount possible under clause 3.13.
- If the interim amount is not agreed, an experienced property lawyer or litigator (or an experienced registered valuer or quantity surveyor if the amount is claimed under clause 5.2) determines the interim amount if it is not agreed. (With, again, provision for the president of New Zealand Law Society to nominate this person if the parties cannot agree.) The costs are to be shared equally by the parties.
- The amount of any claim is not limited by the interim amount, and the interim amount is to be lodged on interest-bearing deposit in the joint names of the parties. Interest on the interim amount (less withholding tax and bank/legal administration fees) is to follow the interim amount’s destination.
- Once the amount of the claim is determined, no interest is payable on the claimed compensation, except for the net interest earned by the stakeholder. However, if the successful claim is more than the interim amount, then full interest will be payable on that excess. (Unfortunately, this arguably creates an incentive for some parties to have a high interim amount, as this may lessen the amount of interest ultimately payable. Still, this provision reflects a practical pathway.)
It is important to remember that the experienced property lawyer or litigator (or in some cases, valuer or quantity surveyor) does not determine the dispute – only the interim amount, with the potential for an additional role as stakeholder. The parties must still determine their actual dispute, and as clause 10.8(5) indicates, the claim is not limited by the interim amount.
Clause 10.9 requires close reading. Where a determination has to be made under either clause 10.6(2) (as to the purchaser’s right to make a claim), or under clause 10.8(4) (as to the interim amount), and the settlement date will have passed before this determinate is made, then the settlement date is deferred to two working days after notification to both parties of the determination. (Or two working days after the second determination, if both have to be made.)
Despite this long-stepped process, these procedures in clauses 10.1 to 10.9 do not prevent either party from bringing a claim for specific performance. Nor does a determination under clause 10.6 that a purchaser has no right to make a claim prevent a purchaser from pursuing that claim following settlement: see clause 10.11. This emphasises that the process in clause 10 is an interim process only, one designed to assist in achieving settlement efficiently while preserving the parties’ positions. In addition, a person making a determination under clause 10.6 or 10.8 is not liable to either party for any costs or losses.
Clause 11 has seen a cross-reference addition, as a party serving a settlement notice must be ready, willing, and able to settle under clauses 3 and 10 (unless the other party’s default or omission impedes this).
Pages 11 and 12
Clause 11.7 records that a party can sue for specific performance without serving a settlement notice.
Thomas Gibbons email@example.com is a Director of Waikato firm McCaw Lewis. He writes and presents extensively on property law.