Significant problems attach to the new standard form sale and purchase agreement produced by the Real Estate Institute of New Zealand (REINZ). Unless and until these are resolved, we strongly recommend that you continue with the ADLS form.
This Brief Counsel examines some of the issues behind our “don’t use” recommendation.
The REINZ form
REINZ’s aim was to create a ‘plain English’ form which could be easily understood by both the public and real estate agents. This is a laudable objective and has been achieved in part, but potential users need to be aware that the differences between the new form and the established ADLS form are significant and go beyond wording to a radical change in content.
The ADLS form, which was jointly developed by REINZ and the Auckland District Law Society, has been in use for over 20 years, is very familiar to conveyancing professionals and real estate agents and is recognised as generally striking a fair balance between vendor and purchaser.
Further, a large body of case law has been built up around it which can provide interpretation and guidance when dealing with disputes that arise in sale and purchase transactions.
Residential conveyancing is the area in which the REINZ form is most likely to be used because the parties to residential sales and purchases are less likely to seek specialist legal advice before signing an agreement.
Material differences between the REINZ form and the ADLS form
There is greater scope in the REINZ form for a purchaser to delay settlement and potentially cancel the agreement, due to many of the obligations of the vendor being described as ‘essential terms’. For example, if a code compliance certificate (CCC) for works undertaken by the vendor is not available on settlement, the purchaser can issue a default notice and delay settlement until the CCC is available. If the CCC is not available by the expiry of the default notice (10 working days), the purchaser is entitled to cancel the agreement. The purchaser has this right of cancellation even if the relevant works were extremely minor in the context of the transaction as a whole.
The consequences of a purchaser cancelling the contract are severe, and not just on the basis that the vendor has lost the contract. The vendor may also be liable to pay the real estate agent’s commission on the sale, given the commission is often payable on the unconditional date rather than being dependent on settlement occurring.
The warranties (called “promises” in the REINZ form) provided by vendors are wider than in the ADLS form. The wording of the warranties is ambiguous in places and is likely to result in greater uncertainty as to what steps a vendor needs to take to comply.
The treatment of conditions is quite different between the two forms. The REINZ form includes default conditions for property title approval, Land Information Memorandum (LIM) approval, finance, building report approval and tenancy approval.
In relation to each of these conditions (other than the finance condition) a purchaser is not simply permitted to cancel the agreement because it does not approve the title, LIM, building report or tenancy agreement. Rather, the purchaser must not unreasonably withhold approval and, if the purchaser proposes to withhold approval, must promptly issue a ‘refusal notice’ to the vendor setting out the matters the purchaser requires to be rectified (if those matters are able to be rectified). The vendor, on receipt of a refusal notice, may elect either to rectify the matters raised before settlement or cancel the agreement.
While at first glance this approach seems fair, we have two key concerns:
- If a vendor does not wish to comply with the refusal notice, it may then immediately terminate the agreement. Unlike the position under the ADLS form in respect of the title requisition and LIM approval provisions, the purchaser under the REINZ form does not get a second chance to waive the refusal notice if the vendor does not wish to comply. A purchaser will therefore need to weigh up the risk of termination before the purchaser issues a refusal notice because such notice puts the entire agreement at risk, and beyond the purchaser’s control.
- There is increased scope for disputes where a vendor claims a purchaser has acted unreasonably by issuing a refusal notice. For instance, is there a materiality threshold for defects identified in a builders report? Do several minor defects (each perhaps below a materiality threshold) viewed together equate to a defect which may be the subject of a refusal notice? Can a purchaser cancel where the individual defects themselves can be rectified but not an underlying systemic problem which is likely to result in further defects following settlement?
There are also a number of drafting deficiencies in the REINZ form, some due to a simple failure to properly define terms. For example, the vendor promises to release all ‘securities’ on settlement. The term ‘securities’ is not defined and may include an encumbrance. Given encumbrances are often put in place to secure an obligation to pay residents’ association levies or to secure an obligation to a local authority, there will be many occasions when it is neither appropriate nor possible for a vendor to release an encumbrance before settlement.
Overall, the new form results in far too much uncertainty for both vendors and purchasers. There will inevitably be increased disputes, which will result in higher legal and other transaction costs.
We note that our concerns are widely shared in the legal community.
We strongly recommend that you obtain legal advice before entering into an agreement for sale and purchase and that you continue to use the ADLS form until the problems with the REINZ form have been solved.