Property
Real estate contracts
Introduction
In a controversial move, the Real Estate Institute of New Zealand (REINZ) has developed a new sale and purchase agreement.
It’s expected to replace the most commonly used sale and purchase agreement, which was jointly produced by the Auckland District Law Society (ADLS) and the REINZ. We look at what this means for consumers.
Why change the contract?
The Real Estate Institute of New Zealand (REINZ)'s chief executive Christine LeCren said agents and their clients didn't understand the old form and a plain English version was needed. But it appears there was a breakdown in the relationship between the Auckland District Law Society (ADLS) and REINZ that led the real estate agents to go it alone.
While a plain English contract is welcome, consumers may face increased costs and some legal uncertainty in the next few years if there’s a dispute over the terms of the new contract. It’s for these reasons some lawyers prefer the old joint contract – because they, and buyers and sellers, are familiar with it.
Chris Moore, chairman of the NZ Law Society's property law section, says you should always consult a lawyer before signing any sale and purchase contract or you could be playing Russian roulette. That’s particularly the case now with two contracts likely to be in use – and one of them new.
What to watch out for
Here's what to be aware of if you're using the new contract:
Getting both parts
The REINZ contract has been split into two parts: an agreement and a book of standard clauses. There’s a risk some buyers or sellers may not receive or read the book of standard clauses because the two documents aren’t stapled together. This could lead to a dispute as to whether both parts of the agreement are binding.
Legal twists
The new contract hasn’t been tested in court yet – so no legal precedent has built up around it as there was with the older joint agreement. Buyers or sellers may get a nasty surprise if a dispute over the new agreement ends up in court, although the agreement requires the parties to go to mediation before court action.
Harder to cancel
The new agreement may be harder to cancel if you’re a buyer. For example, if your contract is subject to a pre-purchase inspection your approval cannot be “unreasonably withheld” once you receive the report. John Meads of law firm Kensington Swan warns that if a buyer wants the ability to approve a builder’s report, the REINZ contract will need to be amended.
A buyer will also need a good reason for objecting to a title defect and must tell the seller the reason. In many cases objections to easements will now be seen as unreasonable, particularly if it’s obvious that the objection is just an excuse to pull out.
The REINZ’s view is that the new contract is designed to stop buyers using “frivolous” reasons for cancelling a contract.
Higher legal bills
Legal bills for conveyancing are likely to be higher for a while with the new contract – lawyers aren’t familiar with it and will take time to get up to speed with its provisions. They may also suggest amending the contract.
You could end up buying and selling at the same time using the two contracts. You will need to be careful that any conditional or unconditional clauses in the two contracts match up and don’t have a different interpretation.
The ADLS view
The Auckland District Law Society (ADLS) has published a legal opinion from barrister Rod Thomas on the Real Estate Institute of New Zealand's (REINZ) plain English agreement.
Thomas says that the REINZ form is "unsound and unsafe to use". The key point, he says, is that the new agreement makes a number of "run-of-the-mill" terms - such as failure to issue a settlement statement within the timeframe set out in the agreement - into "essential terms", which then allow people to cancel the agreement where there's a breach.
Although there is a clause requiring a "default" notice before cancellation, the clause is so badly worded it is self-defeating, says Thomas. This means that the agreement can be cancelled without further notice for inconsequential breaches.
Thomas also argues that the new agreement favours the purchaser over the vendor and will also cost more in conveyancing for both parties. And he believes real estate agents have a greater risk of being sued if they use it.
Mike Elford, REINZ National President, told us he had referred the opinion to his organisation's panel of legal experts. He continued to back the agreement, which was drafted by lawyers.
Our advice
- Speak with your lawyer before signing any sale and purchase agreement.
- You will need a genuine reason for not approving a condition you have put into the REINZ contract - such as an inspection report. You won’t be able to use the inspection report as a reason for not wanting to go ahead if you've changed your mind about the purchase.
- For now ask to use the old joint contract (8th Edition ADLS/REINZ form). All real estate agents should still have copies.
- A lawyer can amend either contract to your liking providing you haven’t signed it, although the other party has no obligation to agree with your changes.
More information
- Real Estate Institute of New Zealand: www.reinz.org.nz
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