By Belinda Green.

 

The Supreme Court has confirmed that you can’t cancel a contract for failure to satisfy a condition if your own behaviour had a material effect on the failure to satisfy. We talk more about the Court’s decision in Melco Property Holdings (NZ) 2012 Limited v Hall [2022] NZSC 60 here.

This is a very useful clarification from the court. But the legal argument in Melco is obscuring a much more practical concern: how do you lock in a deal and ensure that you won’t lose out to a third party offering a better price?

Why use a conditional contract?

Some markets simply accept the risk of a deal falling over while investigations are being carried out.[1] But in the New Zealand property market it has become the norm for parties to enter into a conditional contract.

This is supposed to give the best of both worlds. On the one hand, the parties know that the deal is locked-in. There is certainty of price, and a purchaser can spend money getting reports etc safe in the knowledge that the vendor can’t simply walk away if a better offer is received. On the other hand, the conditions give the purchaser some comfort that they can call the deal off if those reports throw up anything unusual. Not sure if you can get financing for the property on acceptable terms? Make the agreement conditional on satisfactory finance. Not sure what the seismic report might say? Make the agreement conditional on a satisfactory report.

However, there is only so much protection you can get from a conditional contract. So what might a purchaser do to best take advantage of the conditions in their contract?

Making the most of your conditions

In Melco Property v Hall,[2] Melco already occupied 1–3 Parliament Street in Lower Hutt, and contracted to buy Hall’s number 5 to expand its business premises.  The contract had a due diligence clause that ran over the Christmas holiday period. You can read more about the facts of the case (which included a camping trip, last minute cancellation of a seismic inspection, and 5:03pm contract cancellation notice) here.

The Supreme Court had to consider whether Hall’s behaviour materially contributed to Melco being unable to satisfy the due diligence condition. But wouldn’t it be nice to avoid going to court altogether. Here are some ways that Melco, and you, could make the most of your conditional contract.

Write your condition carefully

Remember that the starting point is that you have a binding commitment to purchase the property. The condition will only allow you to cancel the contract if the thing you want to cancel for falls within the scope of the condition.

There are standard conditions that can be activated using the ADLS REINZ Agreement for Sale and Purchase of Real Estate template, and the REA/REINZ also have a bank of standard clauses. However, sometimes it may be necessary to take legal advice to ensure that your condition is suitable for your needs.

In Melco Property v Hall, Melco had a reasonably widely-drafted due diligence clause. However, the clause didn’t actually state that Melco might obtain a seismic report, nor did it say that Hall had to give access to the seismic engineer. Luckily for Melco, Hall was willing to concede both these points, so the matter didn’t have to be argued in court.

Don’t forget the fine print

Most people know to write a careful condition and to include the date for satisfaction. But there are some other things you can add to your contract to help make the position clear.

In Melco Property v Hall, Melco had confirmed that the due diligence condition was for its sole benefit. This was useful because it meant that Melco could have satisfied or waived the condition. (In other words, even if no seismic report came through, Melco could have waived the condition and gone ahead with the deal, and Hall couldn’t have objected to that).

However, don’t be fooled into thinking that just because the condition is for your benefit, the vendor has nothing to do with it. The condition is for your benefit up until the condition date: after that, either party can cancel. That’s what happened to Melco: it could have satisfied or waived the condition at any time up until 5 pm on 9 January, but once the 5 pm deadline hit it was up to either party, and Hall was able to cancel the contract at 5:03 pm. (His cancellation may not be effective because he cancelled the seismic assessor’s access last minute, but it took going to the Supreme Court to confirm that! And the matter still has to go to full trial to get a final decision).

 

Diarise and monitor your condition dates

Your contract should state a time and date by which the condition must be satisfied (if it doesn’t, be sure to add these details in). The date might be a fixed date or calculated by reference to another act. In Melco’s case the date for satisfaction of the due diligence condition was fifteen (15) working days following execution of this agreement. Somehow, Melco got the dates mixed up and was working to a condition date of 2 February when in fact the date was 9 January. This would be bad enough, but the Christmas shut-down period exacerbated issues even further.

Melco also had issues finding a seismic assessor who had time to make a site visit. Not only that, but the assessor who could come noted that the report might be delayed because the report went through a QA process. So factoring in the time not only for a site visit but also for the process of writing and finalising a report is key to ensuring a smooth run-up to the condition date.

 

Hope for the best but plan for the worst

Most property transactions are completed without a hitch. So “gentlemen’s agreements” or friendly and casual correspondence about the transaction usually work out just fine. But there’s a reason that lawyers are so cautious: they’re always thinking about the worst-case scenario.

When it comes to varying the terms of a condition (or indeed, varying anything about your contract at all!), keep this in mind: if it was agreed in writing, you’d want the variation in writing.

When Melco noticed the condition date looming, it emailed Hall asking for an extension. Hall replied on Boxing Day that he did not see any issues with the request but would discuss it with his lawyer in the New Year. This kind of response might cause comfort to a purchaser but would cause concern for the cautious solicitor. On receiving such a response, we might urge the purchaser: hope for the best, but plan for the worst. This might mean calling up the seismic assessor to see if an oral report could be available, or meeting with the directors to agree on a strategy if worse comes to worst. If Melco was willing to take a risk on the seismic strength of the building, a waiver letter could have been lined-up for 4:59 pm on the 9th and Hall wouldn’t have been able to cancel at 5:03 pm.

 

 

 

[1] For example, buyers in the English real estate market can find themselves gazumped by a last minute offer from a third party, and vendors can suffer from the similar phenomenom of gazundering.

[2] Melco Property Holdings (NZ) 2012 Limited v Hall [2022] NZSC 60

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