Signing Conditional Real Estate Contracts 08 Dec 2011

Do I need legal advice before signing an agreement to buy real estate?

You may have noticed that on the back page of the standard form Agreement for Sale and Purchase of Real Estate there are recommendations to seek professional advice before signing (as well as directions to those recommendations directly above where you are to sign).

These recommendations are regularly overlooked, often on the basis that a purchaser believes the special conditions they have had inserted will act as "get-out" clauses, enabling them to simply back out of the agreement should they later have second thoughts about the purchase.

The following case serves as a timely reminder of the risks in taking such an approach, particularly in a slow market.

Background

Mr and Mrs Fleming owned a house at Beachlands, South-East of Auckland. They signed a conditional contract to buy a lifestyle block near Whangarei, owned by the trustees of the Mana Trust. One of the conditions of the contract gave the Flemings 90 days to enter into an unconditional agreement for the sale of their Beachlands property.

The Flemings did not sign an agreement to sell their house within the 90 day period. They therefore considered the contract with the Mana Trust to be at an end. The trustees disagreed. Eventually, the trustees found an alternative purchaser for their block. However, the purchase price was less than the amount the Flemings had agreed to pay.

The trustees successfully sued the Flemings for the difference between the contract price and the eventual sale price (approximately $100,000) together with interest (approximately $225,000) and costs. The interest exceeded the damages, due to the length of time before the original settlement date of the agreement and the date of judgment some two and a half years later.  Interest was calculated at the rate specified in the agreement, which was 14%.

Obligation to attempt to satisfy conditions

The standard form REI/ADLS agreement for sale and purchase includes a provision requiring each party to "do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment".  Even if this clause had not been in the agreement, the courts will usually imply a similar requirement into any sale agreement.

This means that in most conditional contracts to buy and sell property there is an express or implied obligation to take all reasonable steps necessary to satisfy any conditions. Without such a requirement, a party could use a condition to avoid their contractual obligations simply by taking no steps to satisfy the condition and allowing the contract to lapse. This would effectively undermine the certainty of the contract for the other party.

The Court found that the Flemings had not properly marketed their house. Although there were discussions with real estate agents, there was no formal listing.  Because of this, they had failed to do all things reasonably necessary to sell their house.

Beware

If you sign a conditional contract to buy a residential property, you need to be aware that you must be proactive and do all things reasonably necessary to ensure the conditions are fulfilled within the agreed time-limit.  This applies to all conditions, not just an obligation to sell your house.

For example, if your agreement is subject to approval of finance, you may be in breach of the agreement if you fail to approach  a bank to obtain finance.  If the first bank turns you down, you may still have an obligation to try to obtain finance through someone else.

There is no set formula as to what is reasonable. It will depend on the circumstances of each contract. However, to avoid the problems faced by the Flemings, you should discuss the steps you are proposing to take to satisfy the conditions with your Parry Field lawyer at an early stage - preferably before you sign the agreement. We can advise on the extent of any "special conditions" contained in the agreement so that you can be confident that they mean what you intend them to mean.