Entering into a sale and purchase agreement for residential property can be one of the most important contracts you will enter into. Often, potential buyers can be unaware of the risk of entering into an agreement without any protection against property defects or changes in their own circumstances. This article discusses the risks of an unconditional agreement and the importance of conditions to protect a buyer.
Buying a house is one of the biggest purchases you will ever make, so it is important to be protected. Too often we see sale and purchase agreements in our offices that leave potential buyer’s stuck purchasing a home that is not what they expected. This can result in stressful, lengthy and expensive disputes. It is imperative that appropriate conditions are inserted into any agreement (before signing!) giving you as the buyer time to do your homework on the property. Some of the important clauses that can protect you better are the LIM, Builders Report and Finance conditions.
A Land Information Memorandum (LIM) is a report issued by the local city or district council which provides a summary of all the information that local authority has on file about that property, including all works on the property that the council was involved in. A LIM condition gives you the opportunity to review and approve this information before committing to the purchase.
A LIM will typically include:
- Zoning information;
- Information on any natural features that may impact the use of the property (e.g. flooding or erosion);
- Any scheduled roads or utility (e.g. drainage) proposed developments which impact the site;
- Details of current rates, and any outstanding rates owed on the property;
- Information on any protected or heritage buildings on the property;
- Details of resource consents, along with any building consents issued for work on the property.
A LIM report will be able to tell you if any alterations or construction work done to the property have been signed off by the local authority or allow you to identify work to the property that may have been completed without a permit or consent. It can show areas liable to flood or that may be at risk of erosion issues in the future. The LIM may also alert you to things such as road widenings, or any other new routes being built that may affect the future value or use of the property. The LIM protects you against things that you may not notice in a viewing of the property.
While a LIM can contain important information on a property you are buying, it is important to remember that it will not contain all information that may be relevant to you. It will not cover anything that the local authority is not involved in including the structural integrity of the building, or address any suspected contamination from substances such as methamphetamine. It also will not include any recent survey measurements. If you want these concerns covered, you will need to have them addressed with separate building and meth contamination reports.
There is a cost involved with obtaining a LIM. Most NZ councils charge somewhere between $200 and $400. However, it is important to consider that the cost of the LIM outweighs the cost of finding something fundamentally wrong with the property that may affect your resale value or enjoyment of the property.
A building report should give you details on the current condition of the house, along with other buildings on the property. It needs to cover significant defects and maintenance such as areas of the house leaking, or areas of the property that have been built with shoddy materials. Without a building report, you will only be aware of the problems you can pick up through your own inspection. A builder’s report condition gives you the opportunity to review and approve a report from an independent builder before committing to the purchase.
A standard building report condition requires that you enlist a qualified and insured inspector (not your DIY-handy mate). Using a qualified building inspector will mean you have the benefit of professional indemnity insurance, and they will understand the legal requirements of their role. They will need to carry out their work in accordance with the New Zealand Property Inspection Standard. This will provide some protection for you if anything goes wrong later on that should have been picked up in the building report. If you discover any problems that the inspector should have included, you can make a complaint to the professional body that the inspector belongs to and seek compensation through the courts.
A quality property inspection is not cheap, and usually costs between $600 to $800. However, this cost is worth every cent if it enables you to avoid purchasing a property with significant defects or to negotiate a price reduction to cover identified repair costs. If you go on to cancel the agreement based on the findings of the building report, you will need to provide the vendor with a copy of it – making it even more important to have a professional and airtight inspection.
The Covid-19 pandemic has shown how much and how quickly financial positions can change due to outside influences that we could never see coming and that are out of our control.
Mistakes can occur when a buyer believes that “pre-approval” actually means the loan has been fully approved or where they believe all the lender’s requirements have been met when they have not. “Pre-approval” status is used by lenders for potential loans that will probably be approved if all of the assumptions made by the lender, based on information from the borrower, are correct. Inserting a finance condition means that if your finance is cancelled before the finance condition is due, you can cancel the Agreement. If any of the lender’s assumptions are incorrect, they have the right to withhold approval. For example, many pre-approvals are subject to the lender’s approval of the property being purchased, given that the property will be used as security for the loan.
A loan approval may also be considered “subject to valuation”. Generally, the purchase price for any property is regarded as the current market value and will satisfy this condition. However, if a valuation is required, it may indicate that the buyer has paid too much for the property. In this case, the lender may decide that the property does not provide enough security to secure the loan (e.g. if the borrower sold the property in six months the price would likely not cover the cost of the loan). In this case, the lender could also cancel the loan approval.
Even if finance is believed to be certain, unless you have written confirmation the loan is unconditionally approved a finance condition should be added in to your purchase agreement. If you do have written confirmation, it is good practice to provide your lawyer with a copy to receive advice regarding the nature of the loan approval.
When buying a property, we recommend that you speak to a lawyer about what clauses need to be included in the agreement, before signing anything. Entering into an agreement will likely be one of the biggest purchases of your life, so it is important to ensure you are adequately protected against anything that might mean the property you’re buying is not what you thought it was.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.
Published: 07 May 2020