Purchasing property is a significant commitment. Once an agreement for sale and purchase has been signed by both purchaser and vendor, it is legally binding. Cancellation is usually only available when the agreement contains a condition that has not been satisfied or where there is a serious contractual issue like a title defect or vendor default.
It is common for most agreements to be conditional when first signed. These conditions allow purchasers during the conditional period to investigate and be aware of matters relating to the property before becoming unconditionally bound to complete settlement. Common conditions include:
- Finance,
- Building report,
- LIM,
- Insurance, and
- Title.
If a condition is not satisfied by the due date, generally 10 to 15 working days from the date of the agreement, and the condition is for the purchaser’s benefit, the purchase may be entitled to cancel. However, conditions must be used properly. A purchaser must comply with the wording of the condition and take reasonable steps to satisfy the condition and give notice as required under the agreement.
Finance Condition:
A finance condition allows a purchaser to confirm whether they can obtain funds for their purchase. This may be bank lending or KiwiSaver (particularly if second chance withdrawal). It is also important to note that bank pre-approval is not the same as final approval for a specific property. A bank can sometimes decline finance because of the property, valuation, insurance or changes to a purchaser’s circumstances.
To rely on cancelling the agreement under the finance condition, a purchaser will usually need to show they have taken all reasonable steps to obtain finance. For example, that they have:
- Applied to a bank or lender within reasonable time,
- Provided all information requested by the bank or lender,
- Obtained a valuation if required,
- Responded timely to bank questions or concerns.
A purchaser can not treat a finance condition as an easy way out of the agreement. However, if adequate finance cannot be obtained despite reasonable attempts, the purchaser may generally cancel the agreement under the finance condition.
Building Report Condition
A building report condition allows a purchaser to obtain a property building inspection report from a suitably qualified builder. It allows purchasers to understand what they are buying or hidden defects.
Under the agreement, this generally requires:
- A written report,
- Prepared in good faith,
- By a suitably qualified builder,
- Assessed objectively,
- And if cancellation is requested, a copy of the report provided to the vendor.
The objective assessment element is important here as a purchaser cannot cancel under the building report condition because they feel worried or have carried out their own informal research. The cancellation must be based on the contents of a qualifying building report.
Building report issues that may be a cause for cancellation are:
- Structural defects,
- Weathertightness issues,
- Significant roof, foundation or drainage problems,
- Moisture ingress, or
- Safety concerns.
If the purchaser does not want to cancel the agreement, they can instead negotiate via their solicitor for vendor repairs or price reduction. Caution should be taken when requesting a price reduction as you take on the repairs yourself, and should it cost more than agreed, there is no course of action available.
If an agreement contains a Right to Remedy clause in the further terms of sale, this means the purchaser must first raise the issues in the building report by giving notice to the vendor. The vendor then has 3 working days to notify the purchaser on whether they are prepared to remedy the issues. If they are not, the purchaser may then cancel the agreement.
Lim Report Condition:
A Land Information Memorandum (LIM) is a council report containing information held by them about the property. It usually includes information relating to:
- Building consents and code compliance certificates,
- Resource consents,
- Rates,
- Water, sewer, stormwater connections,
- Hazards,
- Requisitions or notices, and
- Flooding information.
This condition allows a purchaser to obtain and allow us to review the LIM before deciding whether to proceed. While a little more stringent than other conditions, a purchaser may be able to cancel the agreement under the LIM condition for issues like:
- Unconsented building work,
- Zoning restrictions affecting intended use,
- Drainage or stormwater issues,
- Proposed public work, and
- Flood risks or hazard information.
A Lim condition is important, for example, where unconsented works may affect insurance, future resale, or compliance. A purchaser may be able to cancel if the LIM records that works do not have necessary consents or shows susceptibility to flooding or hazards.
Insurance Condition
An insurance condition allows the purchaser to confirm that insurance is available for the property on acceptable terms. This often ties in with finance as lenders usually require evidence that a property can be insured before agreeing to lend.
Insurance can be difficult to obtain or expensive where the property:
- Is subject to flood, coastal erosion, landslips,
- Has unconsented building work,
- Has weathertightness issues, or
- Has unresolved EQC claim issues.
If insurance cannot be obtained on satisfactory terms to the purchaser, they may be able to cancel under the insurance condition. However, as this also aligns with finance, if a bank requires insurance and insurance is unavailable, finance usually also fails.
Title & Requisitions:
Solicitors review the title to the property during the due diligence period. This is important, not only for your use of the property, but also for mitigating issues that may arise when you go to sell the property and the purchaser undertakes their investigations.
Issues that may arise are:
- Cross-lease defects,
- Defective legal access,
- Restrictive covenants,
- Unit title issues.
A requisition is a formal objection to the tile and must be made within the time required by the agreement. If a valid requisition is given to the vendor by notice, and the vendor cannot or will not remedy the defect, the purchaser may be able to cancel the agreement.
While these are not an exhaustive list of valid cancellation under the agreement, they are the most common. However, a purchaser can only back out of an agreement under these limited circumstances. Finance, building report, LIM, insurance, and title conditions can all be valid reasons for cancellation,but they all have requirements to be fulfilled. Importantly, purchasers must act reasonably, quickly, obtain evidence, and give notice within the required timeframe. Solicitors also help navigate and inform purchasers during the conditional period.
