New Zealand Law Society - The New ADLS-REINZ Agreement

The New ADLS-REINZ Agreement

Part 3

By Thomas Gibbons

This article continues a series on the new ADLS-REINZ agreement for sale and purchase of real estate (10th edition) (LawTalk 937, March 2020, pages 47-48 and LawTalk 938, April 2020, pages 54-55). Property lawyers and legal executives are no doubt becoming more familiar with the new form of agreement.

Page 9 – Warranties

Clause 8.2(7) has an amended unit title warranty: that the vendor has no knowledge or notice of any fact which “might result in” the owner incurring liability under the Unit Titles Act 2010, or of any proceedings by or against the body corporate, or of any order or declaration being sought against the body corporate or the owner.

The “might result in” requires a degree of foresight on the part of a vendor (or, more likely, a lawyer or legal executive). An advisor likely has a positive duty to raise this warranty with a vendor client. But does an advisor have a positive duty to (say) ask for body corporate minutes, in order to be further satisfied as to the “might result in” test? Probably not, but it’s worth considering the extent of vendor due diligence which might become desirable in future.

Clause 8.3 clarifies that the right to postpone settlement for non-provision of insurance information or non-provision of a pre-settlement disclosure statement on time is in addition to the purchaser’s rights under sections 149 and 150 of the Unit Titles Act 2010, highlighting again the interplay of contractual arrangements with a statute. One reflection is that statutory provisions like those in the UTA could provide that different contractual provisions are okay, as long as they are no less favourable to a purchaser than the statutory protections. That is, why shouldn’t a contract be able to provide more consumer protection than a statute without falling foul of it?

Clause 8.4(1) provides that a party’s notified email is an address for service for the purposes of section 205(1)(d) of the UTA. (As a matter of interest, section 205(1)(d) also allows for fax service.)

Page 10 - Conditions

The finance condition contained at clause 9.1 has seen a massive overhaul. The assumption is now that the purchaser can choose its own bank or other lending institution, and that the terms of the finance must be satisfactory to the purchaser; but if the purchaser avoids the agreement for failing to satisfy the finance condition, the purchaser must “provide a satisfactory explanation of the grounds relied upon by the purchaser, together with supporting evidence, immediately upon request by the vendor”.

Several points can be made. First, the agreement is now clear that evidence must be provided for failure to satisfy finance. Second, this has sort of been the case for some time, though with a greater degree of grey area. (A purchaser has long been required to take reasonable steps to satisfy finance, and any other condition, under clause 9.10(5).) Third, it amplifies what all lawyers and legal executives know already – that a finance condition is not a general right of exit.

Fourth, and perhaps most importantly, the words “satisfactory explanation” invite further question. Satisfactory to whom? The vendor, or the purchaser? Or a third party? It may well be the case that the vendor would deem any explanation satisfactory, while for a purchaser, nothing would cut the mustard. We must therefore impute a reasonableness requirement into this clause; perhaps, on reflection, “reasonable” might be a better word than “satisfactory”.

Clause 9.4 has seen two amendments: one which allows 15 working days for a builder’s report (clause 9.4(1)), and one which provides that a builder’s report must be in writing (clause 9.4(2)).

Page 11 – Conditions (continued)

Clause 9.5 sees an entirely new clause: a condition for a toxicology report. Now, there is an argument that the days of methamphetamine and other contamination reports have passed, as the Gluckman report on methamphetamine contamination in residential properties significantly altered thinking around the appropriate standards.

The toxicology report gets marked on the front page. The purchaser is to order the report and make an assessment as to whether it is “satisfactory to the purchaser, on the basis of an objective assessment” (clause 9.5(1)). It is work noting that these words as to an “objective assessment” are missing from the finance condition. The default timeframe for the clause is 15 working days, and the purpose of the report is to detect whether the property has been contaminated by the preparation, manufacture, or use of drugs (including but not limited to methamphetamine). The report must be in writing, and prepared in good faith by a suitably qualified inspector using accepted methods (in particular, NZS 8510:2017 Testing and decontamination of methamphetamine-contaminated properties). Subject to the rights of any tenant, the vendor is to allow the inspector to attend the property at reasonable times and on reasonable notice to perform the inspection, though invasive testing must not take place without the vendor’s prior written consent. If the purchaser cancels the agreement for non-fulfilment of this condition, then the purchaser must provide a copy of the inspector’s report immediately on request by the vendor.

Interestingly, clauses 9.1(2) as to finance and 9.4(5) as to the builder’s report refer to a purchaser avoiding the agreement, while clause 9.5(6) (toxicology) refers to a purchaser cancelling the agreement. The meaning is presumably the same, though the word “cancel” seems both more modern and more precise.

Also interestingly, clauses 9.1(2), 9.4(5), and 9.5(6) seem to refer to the finance evidence or builder/toxicology report only being provided if the agreement is avoided/cancelled by the purchaser for non-fulfilment of that condition. This creates a couple of further issues. First, if a purchaser has a builder’s report showing substantive issues, then a purchaser could avoid the agreement under that without having to provide copies of (say) the finance evidence and the toxicology report. Second, if a purchaser simply does not notify the vendor as to the condition and the vendor then cancels, or even if the agreement remains in abeyance, then it seems the vendor has no entitlement to the report. So, for example, let’s say the finance condition is due on 10 May. If the purchaser does not satisfy the condition, then the vendor can make enquiries as to what the purchaser has done under clause 9.10(2), but not a lot further. Eventually, on say 25 May, the vendor gets sick of waiting and cancels. As the purchaser has not avoided/cancelled, the obligation to provide the evidence/report has not been triggered.

The Overseas Investment Act 2005 has increased in application, with recent reforms covering residential property to a greater extent than was previously the case. The OIA condition in clause 9.6 has been amended, to provide that OIA consent must be on terms and conditions that are “satisfactory to the purchaser, acting reasonably” (noting again that these are the words missing from clause 9.1). Clause 9.7, as to the Land Act 1948, has been amended to clarify that Land Act approval is a condition. A heading on the application of section 225 of the Resource Management Act 1991 has been added.

And if you thought the contractual provisions in the UTA were poorly drafted, then re-read section 225 of the RMA. That’s at a whole other level. Though it also reinforces a difficulty mentioned above: the challenge of drafting a contract that fits in with differing statutory provisions. We live in a world in which many contracts are regulated by statute, and the ADLS-REINZ is an archetypal example of this.

Thomas Gibbons is a Director of McCaw Lewis. He writes and presents extensively on property law.

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