Pitfalls of residential property purchases – Essential clauses for your agreement

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Buying a house is a momentous occasion, and after all those weeks (or months) of searching for the right place it’s important that you don’t spoil all that work by signing a standard sale & purchase agreement without ensuring you, the purchaser, are protected.

The best way to avoid a lot of problems when buying residential property is to take any agreement for sale and purchase to your lawyer before signing it.

Once you sign an agreement for sale and purchase, it is a legally binding contract and can be enforced in the Courts. You cannot get out of it simply because you have a change of mind. Even if you discover something wrong with the property the agreement will be binding – unless you have the right and correctly worded clauses written into the agreement prior to signing. This is why it is so important to talk to your lawyer first.

Sometimes you need to ‘make an offer’ and there may not be time for you to take the agreement to a solicitor before you sign it.  In that circumstance, you can ask the real estate agent to insert a Purchaser’s Solicitor’s Approval Clause.

This clause should be drafted to allow your lawyer at least 2 working days to peruse the form and content of the agreement and determine whether or not they approve it. This gives your lawyer the opportunity to suggest additional clauses or amendments that help protect you as Purchaser. - The bottom line is that you can cancel the agreement if your lawyer does not approve it. Please note though, that your lawyer will not be able to give you any advice as to the purchase price and whether or not you are getting good value for your investment.

The following are clauses that I recommend always be included in every agreement for sale and purchase:

Finance Clause - This should be inserted even if you already have pre-approval from your Bank. Your lawyer should insist upon written confirmation of finance from your Bank before satisfying this condition.

If, for any reason, there is a delay with your purchase funds coming from your Bank which in turn delays settlement, you may be charged default interest by the Vendor. If you have written confirmation from the Bank and the delay is caused by an error on the Bank’s part, they are more likely to cover those default interest costs.

Builder’s Report Clause – It is important to ensure that this clause is comprehensive and sets out exactly what is to happen if the report identifies defects with the property. For example, once you raise the defects with the Vendor, they have a certain time period to decide whether they will rectify the defects (at their cost) or refuse.  If they refuse then you can either cancel the agreement or you can choose to waive the condition and accept the property with the defects. While builder’s reports can be used to identify things such as broken door handles and clogged spouting, it is imperative that they be used to determine whether or not the property is structurally sound, weather-tight and free of moisture. These major issues have the potential to cost you thousands of dollars to rectify.

LIM Report – A LIM report contains information held by Council on the property. The main thing to look for in a LIM report is that the dwelling, garage, alterations, fireplace (installed after the house was built) and any spa or swimming pool have either a Code Compliance Certificate or a Certificate of Acceptance issued. If these are not present on the LIM report, and you have identified that a LIM Report is required in the box on the front page (making a LIM Report a condition of the agreement), you can ask the Vendor to rectify this at their cost. As with the Builder’s Report Clause, the Vendor can refuse, at which point you can either cancel the agreement or waive the condition and accept the property with knowledge of the defects.

If you choose to accept the property and the Council finds out, they could compel you, as owner, to obtain the appropriate certificate or remove the unauthorised or non-compliant works. Even if the Council doesn’t find out about the works, they could cause you problems when you on-sell the property by discouraging future purchasers.

A well drafted agreement for sale and purchase which includes the above clauses provides you as the Purchaser more protection. Without these clauses, even if you find problems with the property, the contract will still be binding and you may not be able to pass the costs of rectification on to the Vendor. Your lawyer can identify and reduce these and other possible areas of risk that arise when signing a legally binding agreement.

Communication with your lawyer is paramount and if that communication can start before the agreement is signed, the transaction will be smoother for all parties involved.

If you would like to discuss any matters related to buying and selling residential property, please contact Fiona Taylor,  on 09 837 6885 or at fiona.taylor@smithpartners.co.nz