The Supreme Court is clear: where the vendor is in breach of a warranty not significant enough to allow cancellation of the contract, property purchasers can discount from the purchase price a fair estimate of the purchaser’s loss. The purchaser is not entitled to defer settlement, nor obliged to settle in full. This Brief Counsel examines the case and its implications.
In 2004, Regalwood Holdings Ltd agreed to sell a commercial property in Christchurch for $1.5 million to Property Ventures lnternational Ltd, using the standard Law Society/Real Estate Institute Agreement for Sale and Purchase (Standard Agreement). Under the Agreement, Regalwood warranted that the building would have a warrant of fitness on settlement - but Council refused to issue the warrant of fitness.Property Ventures sought to discount from the settlement price the estimated costs of obtaining the building warrant of fitness.
But Regalwood insisted on full payment and, when Property Ventures refused to pay, cancelled the contract, forfeited the deposit, and sued Property Ventures for the purchase price.
The High Court found for Regalwood, and the Court of Appeal dismissed Property Ventures’ appeal, holding that the contract was validly cancelled. Both Courts took the view that Property Ventures could not decline to settle and that its only remedy was to settle in full and then seek damages from Regalwood.
The Supreme Court
At issue was the interpretation of clause 6.5 in the Standard Agreement, which reads:
Breach of any warranty or undertaking contained in this clause does not defer the obligation to settle. Settlement shall be without prejudice to any rights or remedies available to the parties at law or in equity, including but not limited to the right to cancel this agreement under the Contractual Remedies Act 1979.
The Court of Appeal had interpreted the first sentence in the clause as meaning that the purchaser, if proceeding with the sale, was obliged to settle in full.
The Supreme Court overturned this (and also in the process reversed a leading Court of Appeal judgment from 1994, Lingens v Martin, which predated clause 6.5 and held that a purchaser was not obliged to settle if the vendor was in breach of warranty and was demanding the full price).
The Supreme Court found the word “defer” to be key and ruled that the purchaser must either cancel the contract or settle. The majority said that “the existence of a breach of warranty is not a licence for a purchaser simply to sit on its hands refusing to proceed to settlement until the breach is remedied”.
But the obligation to settle did not mean settle in full and the Court could not insert words that were not there. The reference in the second sentence to “rights and remedies” preserved a common law right called “equitable set-off”, which allowed a purchaser to set off against the purchase price any claim for compensation that the purchaser had against the vendor. The claim must be “raised in substance” by the purchaser and the deduction must be “a genuine pre-estimate of the loss caused by the breach of warranty”.
The Court therefore held that Property Ventures was acting consistently with the contract in offering to settle at a reduced price, and that Regalwood could not therefore allege the purchaser was in breach and terminate the contract.
Justice Tipping said:
The purchaser is exercising a right consistent with settlement if he deducts from the purchase price a genuine pre-estimate of the amount by which the value of the property has been depreciated by reason of the vendor’s breach of warranty, and tenders settlement on that basis. A vendor who is in breach of warranty cannot insist that the non-cancelling purchaser settle by paying the full purchase price. The vendor will be in further breach by declining to accept a tender based on a deduction by the purchaser of a genuine pre-estimate of the loss caused by the breach of warranty.
And continued that:
The purchaser should tender an amount representing the full purchase price less a genuine pre-estimate of the loss the purchaser will suffer on account of the vendor’s breach of warranty. By that means the purchaser demonstrates unequivocally that he is ready, willing and able to perform the contract on a basis which makes appropriate allowance for the vendor’s breach. When the exact loss occasioned by that breach is established, a final accounting between the parties can take place. If the vendor declines to accept a valid tender by the purchaser on this basis, the purchaser may cancel, subject to taking whatever procedural steps may be necessary to establish that right. Alternatively, the purchaser may sue for specific performance of the contract, with the issue of loss for breach of warranty being addressed as an ancillary part of that proceeding.
Although she reached the same result, the Chief Justice approached the matter on the basis that the vendor was in material default and was therefore not “ready, willing and able” to settle. Accordingly, Property Ventures was not obliged to settle and Regalwood’s termination of the contract was invalid.
The parties will now return to the High Court for a determination of Property Venture’s compensation claim against Regalwood.
The ruling gives helpful guidance to purchasers using the Standard Agreement in circumstances where the vendor is in breach of a contractual obligation. The purchaser’s options are to cancel the contract or continue with the contract. The purchaser cannot simply delay the settlement until the breach is resolved.If continuing with the contract, the purchaser should:
assert clause 6.5 of the Standard Agreement (which provides that a breach of warranty does not defer the obligation to settle, but preserves the parties’ other remedies)
expressly claim compensation for the loss caused by the breach of warranty
make “a genuine pre-estimate” of that loss
offer to settle at the purchase price less that estimated loss, and
following settlement, participate in any litigation or dispute resolution process with the vendor over the breach of warranty claim, where the actual loss will be determined.
If the purchaser follows this sequence of actions, the vendor cannot attempt to cancel the contract on the grounds of non-performance as Regalwood tried to do. Purchasers who do not comply with this process leave themselves open to an allegation of repudiation entitling the vendor to call for settlement in full and, if this is not forthcoming, to claim purchaser default.
The Supreme Court urged the authors of the Standard Agreement to address this issue in an amendment, and the Auckland District Law Society is now undertaking that work.
The implications of the decision could create a very real difficulty for vendors who have to repay a mortgage upon settlement. It is likely that a reduced purchase price will mean that the vendor is unable to discharge the mortgage, and negotiations with the mortgagee will be necessary. It may be that the purchaser is ready, willing and able to settle (at a reduced price), but the vendor finds itself unable to settle, and therefore in default.
The decision is particularly significant for residential transactions, where the amount might be small and litigation is unlikely. The decision gives purchasers an improved ability to force vendors to address warranty issues, which the purchaser might otherwise have to accept.
Hopefully the guidance provided by the Supreme Court will encourage both parties to focus on resolving the claim between themselves.
Part of Property Ventures’ case related to an entitlement to compensation under clause 5.4 of the Standard Agreement, for a “misdescription”, in the contract, of the property.
Compensation under clause 5.4 would be one of the categories of loss that could be deducted under clause 6.5. However, the majority held that the specific warranty was a statement that, on the future settlement date, the building would have a warrant of fitness. As that date was in the future, the breach did not occur until the settlement date and was not therefore a misdescription as at the date of the contract, and therefore clause 5.4 did not apply.
Justice Tipping explained that “a misdescription is an erroneous statement of existing fact” and could not therefore include a statement of future fact. No compensation was therefore available.
The Chief Justice dissented, holding that the breach of warranty was a misdescription, because it was an erroneous statement that the property would have a warrant of fitness in the future. That was sufficient, in the Chief Justice’s view, to trigger a right to compensation under clause 5.4.