ADLS/REINZ Sale and Purchase Agreement: Claim for Compensation

Note: This article is based on the Eleventh Edition 2022 of the ADLS/REINZ Agreement for Sale and Purchase of Real Estate.

If the purchaser discovers a defect with the property or breach of the sale and purchase agreement by the vendor just days before settlement is due, what can the purchaser and vendor do in that situation? Can the vendor force settlement? Should the purchaser be allowed to claim a reduction in the purchase price? The claim for compensation provisions were designed to achieve both objectives, requiring settlement to occur subject to some adjustment of the purchase price payable on settlement.

That adjustment can be a negotiated and final compromise of the purchase price. However, if that cannot be achieved, the agreement provides a mandatory process for an interim adjustment with an either agreed or independently determined portion of the purchase price to be deposited by the purchaser into a stakeholder's trust account; pending the parties later resolving their dispute after the sale has settled and title transferred.

How does the claim for compensation provisions work?

Clause 10 in the Eleventh Edition 2022 of the ADLS/REINZ Agreement for Sale and Purchase of Real Estate ("Agreement") allows for a sum to be deducted from the purchase price payable on settlement. The use of the provision by the purchaser triggers a process that cannot be avoided by the vendor.

There are strict compliance and notice provisions that must be satisfied by the purchaser to trigger the compensation provisions. Importantly, the purchaser must serve notice of the claim on the vendor on or before the last working day prior to the settlement date, unless the claim relates to amount payable under clauses 3.12 or 3.13.

The notice must state the ground on which the claim is based upon and a genuine pre-estimate of the loss suffered by the purchaser. This may be a breach of any term of the Agreement, misrepresentation, breach of sections 9 or 14 of the Fair Trading Act 1986, or equitable set-off. The Eleventh Edition added a requirement that the purchaser must have acted reasonably before they can claim compensation.

To make a claim, the purchaser just has to show that there is a reasonably arguable claim – it is not necessary to prove that the purchaser would likely succeed if they were to bring legal proceedings against the vendor.

In the Tenth Edition, the purchaser is able to serve multiple claims on the vendor as long as it was served on or before the last working day prior to the settlement date. The Eleventh Edition has now made it clear that the purchaser can only make one claim for compensation, though such claim may address one or more grounds.

The vendor must elect to accept or dispute the claim. If the claim is accepted and the amount of compensation is agreed upon, the amount will be deducted from the amount to be paid by the purchaser on settlement. However, if the vendor disputes the purchaser's entitlement to make a claim, the vendor must give notice to the purchaser within three working days after service of the purchaser's notice. The vendor is deemed to have accepted the purchaser's entitlement to make a claim if they fail to serve a notice within the prescribed timeframe.

The vendor's dispute of the purchaser's entitlement to make a claim triggers the dispute resolution mechanism in clause 10. An experienced property lawyer or experienced litigator will determine the purchaser's entitlement. The party against whom the determination is made is liable for the appointee's costs, unless the appointee determines otherwise.

If the purchaser's entitlement to make a complaint is established but the parties cannot agree on the amount of compensation, the parties could agree on an interim amount that is payable on settlement to a third party stakeholder until the amount of the claim is determined. If the parties could not agree on the interim amount, the parties could apply to the appointee to determine the interim amount. The appointee's costs shall be met equally by the parties or otherwise as determined by the appointee.

Where the settlement date has passed before the determination is made, the settlement date is to be deferred to the second working day following the date of notification to the parties of the determination. Under the Eleventh Edition, deferral of the settlement date, while a determination is pending, requires a written confirmation from the purchaser's lawyer to the vendor's lawyer that but for the resolution of the claim for compensation, the purchaser is ready, willing and able to complete settlement.

Unlike the Tenth Edition, the Eleventh Edition gives the appointee the ability to make an order that one party must meet the reasonable legal costs of the other party.

Case Study  

EXH is a property developer and an on-seller. A sale and purchase agreement was entered into between EXH and FXL using the Tenth Edition of the ADLS/REINZ Agreement for Sale and Purchase of Real Estate for a brand new property constructed by EXH. The purchase price was $1,285,000.00 and the settlement date was agreed to be 5 March 2022.

Three days before settlement, FXL served a notice of a claim for equitable set-off and compensation in the amount of $300,000.00 on EXH pursuant to clause 10.3 of the agreement. The claim relied on breaches of implied warranties under the Building Act 2004.

On the same day, EXH notified FXL that they deny the validity of the claim and demanded settlement in full. On 27 April 2022, the parties agreed to submit the dispute for expert determination. The dispute was to be determined by an expert property litigator, and the issues to be determined were whether FXL was entitled to make the claim for compensation and if so the quantum of any interim amount to be retained on settlement.

The expert determination was released to the parties on 7 July 2022. It was held that FXL was entitled to make a claim for compensation, but the interim amount to be reduced on settlement was $12,500.00 instead of $300,000.00. FXL was required to complete settlement on 11 July 2022 following the determination.

Key Takeaways

For purchasers

• The claim for compensation provisions do not defer your obligation to settle, but it gives you the ability to claim a reduction in the purchase price payable on settlement for certain breaches by the vendor.

• The claim for compensation provisions are unavailable where you have acted unreasonably in the sale and purchase process. For example, if you seek compensation on the ground that the vendor breached a term of the Agreement, but the breach was in part caused by your action or inaction, then you cannot rely on the compensation provisions.

• Do not act hastily in serving the notice of claim on the vendor. You only get one shot at making a claim. It is a good idea to get legal advice on all the possible grounds for a claim before serving the claim.

• The vendor is more likely to accept that you are entitled to make a claim if you include with your notice detailed documentations evidencing your right to make a claim. You only have to show that you have a reasonably arguable claim.

• You can still pursue a claim for compensation or specific performance after settlement even if a determination was made that you are not entitled to make a claim for compensation under clause 10.

For vendors

• You cannot avoid compliance with the compensation provisions. Once the purchaser serves a valid notice of their claim, you have no choice but to go through the process.

• Where there is evidence to suggest that the ground for compensation is reasonably arguable, you should not contest the purchaser's entitlement to make a claim. It is more cost-effective and time efficient to accept their entitlement to make a claim. If the issue is determined by an expert and a determination is made against you, you are liable to pay all of the expert's costs, which can run to several thousand dollars (approximately $22,000.00 in the case study of EXH v FXL).

• Referral of the matter to expert determination can significantly delay settlement.  

• Since most claims are made close to the settlement date, the Eleventh Edition requires the purchaser to give an undertaking that they will settle on the second working day after the determination is released to the parties.

• The expert determination process is costly. Both parties are liable to incur significant fees/costs, including legal fees spent on submissions, witness statements, collating evidence, and in some cases associated professional consultants/witness fees, eg building consultants.

• Legal fees incurred may be recovered but recoverability is at the expert's discretion and only to the extent that they are reasonably incurred.

• If the nature and extent of the dispute, and the associated monetary stakes, are modest relative to the overall value of the transaction, consider reaching a prompt compromise with the purchaser, either on an interim basis or, better still, as a full and final settlement of the claim raised by the purchaser.

For more details, please contact:

Craig Andrews (Partner) on (09) 306 6745 (candrews@mcveaghfleming.co.nz)

See our Expertise pages

Commercial Land & Property Disputes

Litigation & Disputes

Residential Property - Buying & Selling

Written by Craig Andrews and Eryanto Widjaya‍