Most property purchases and sales proceed to settlement without difficulty. But what happens if you discover a problem just before settlement day?

Perhaps a heat pump isn't working, an agreed repair hasn't been completed, or something included in the sale is missing.

In New Zealand, Clause 10 of the standard Agreement for Sale and Purchase provides a process for addressing certain compensation claims without necessarily cancelling the transaction.

However, strict deadlines and notice requirements apply, so it's important to act quickly.

What is a Clause 10 compensation claim?

Clause 10 of the commonly used TLANZ | REINZ Agreement for Sale and Purchase of Real Estate (Eleventh Edition 2022 (4)), and similar earlier versions, allows purchasers to claim compensation in certain circumstances.

These include where the vendor has:

• Breached a term of the agreement.
• Made a misrepresentation about the property.
• Engaged in misleading or deceptive conduct, or made an unsubstantiated representation, contrary to sections 9 or 12A of the Fair Trading Act 1986.
• Done something that gives rise to an equitable set-off.

Clause 10 can also apply to certain disputes involving late settlement, failure to provide possession or damage to the property before possession is given.

Importantly, not every defect or unexpected problem justifies compensation. There must be a recognised legal or contractual basis for the claim.

What property problems could lead to compensation?

Issues often come to light during a pre-settlement inspection, when the purchaser checks the property's condition before completing the purchase.

Depending on the agreement and circumstances, potential claims include:

• Missing or damaged chattels – such as an oven, heat pump or garage door opener.
• Incomplete agreed work – repairs or other work the vendor agreed to complete before settlement.
• Property damage – damage occurring after the agreement was signed.
• Vacant possession issues – where the vendor hasn't provided possession as required.
• Incorrect warranties – for example, where work was completed without a required building consent.
• Misrepresentations – where the property materially differs from what was represented before the agreement was signed.

Claims may also arise where one party suffers losses because the other wasn't ready to settle on time.

Can a compensation claim delay settlement?

Yes, although not automatically.

A Clause 10 claim doesn't cancel the sale and purchase agreement. The process is designed to allow the transaction to continue while the dispute is addressed.

If an independent determination required under Clause 10 cannot be completed before settlement, settlement may be deferred until the second working day after the parties are notified of the determination.

To obtain that deferral, the purchaser must confirm they are otherwise ready, willing and able to settle.

Complex or strongly disputed claims can take several weeks to determine, potentially affecting moving arrangements, finance and other property transactions.

What are the deadlines for making a Clause 10 claim?

Timing is critical.

A purchaser must serve written notice of their claim as soon as reasonably practicable, and generally no later than the last working day before settlement.

Limited exceptions apply, including where the other party's conduct prevented the claim from being made in time. Different timing rules also apply to certain late-settlement and possession claims.

The notice must:

1.     Identify the breach, representation or other legal basis for the claim.

2.     State a genuine pre-estimate of the purchaser's loss.

3.     Provide details and quantify the claim as far as reasonably possible.

A purchaser can generally give only one notice under this part of Clause 10, although it may cover several issues.

This makes it important to investigate all known problems and obtain legal advice before submitting a notice.

What happens if the seller disputes the claim?

If the vendor accepts the claim and amount, compensation can usually be deducted from the purchase price at settlement.

If the vendor disputes whether the purchaser has a valid or reasonably arguable claim, they must give notice within three working days of receiving the purchaser's notice. Otherwise, they may be deemed to have accepted the claim.

Where the parties cannot resolve the dispute, Clause 10 provides for independent determination.

If the right to claim is accepted or established but the amount remains disputed, a reasonable interim amount is held by a stakeholder on an interest-bearing deposit pending the final determination. The final claim amount isn't limited to that interim amount.

Is making a Clause 10 claim worth it?

Not every dispute warrants the cost and complexity of the formal process.

Preparing a claim can involve urgent legal work, evidence gathering and estimating losses. Independent determination also involves additional costs, which are generally shared initially but may be allocated differently depending on the parties' conduct.

For smaller claims, negotiating a practical adjustment to the purchase price may be more proportionate.

In some circumstances, a purchaser may settle and pursue a claim afterwards, including through the Disputes Tribunal where appropriate. However, legal advice should be obtained before settlement to ensure the claim is preserved. This approach doesn't provide the Clause 10 mechanism for retaining part of the purchase price.

For more significant claims, the formal process may be justified.

Get advice as soon as a problem is discovered

If you identify an issue during your pre-settlement inspection, document it and contact your lawyer promptly.

Clause 10 claims involve strict deadlines, technical notice requirements and potentially significant consequences for settlement.

Smith and Partners' Residential Property and Civil Litigation teams can advise buyers and sellers on compensation claims, including preparing or responding to notices, negotiating resolutions and assisting with independent determination.

If you've discovered a problem before settlement or received a compensation claim, contact our team for advice as soon as possible.

Frequently asked questions about Clause 10 Compensation Claims