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DECEMBER 2013

Subject to Director's Approval

Special conditions in agreements for sale and purchase

As we reported in our Spring Edition of our Law Report, the recent Court of Appeal judgment in Arcadia Homes (in liquidation) v More To This Life Limited has brought to light potential issues with special conditions that have become common place in Agreement for Sale and Purchase contracts. In particular a “subject to Director’s approval” clause has, for the first time, been considered by the Courts. The resulting decision has implications for purchasers who seek to rely on these types of conditions to cancel an agreement.

The Case

In the Arcadia case the Company and its sole Director were found to be at fault in relation to the cancelled purchase of a property in Queenstown. Arcadia’s sole Director had signed an agreement to purchase a property with the only special condition being a “subject to Director’s approval clause”. After the Director found a more desirable property Arcadia cancelled the agreement. The Vendor eventually resold the first property some months later for a staggering $632,000 less.

The argument became whether Arcadia had the right to cancel the Agreement under the Director’s approval clause given that there was only one Director and that Arcadia had failed to carry out any real investigation before cancelling the agreement. It seemed that Arcadia had signed the Agreement to hold the property over the busy summer months and simply cancelled when something better came along.
The Vendor was successful in its claim against Arcadia and was awarded the $632,000 difference in price as damages plus a substantial amount of interest. The award to the Vendor was upheld in the Court of Appeal.

The Clause

The Court considered a number of factors when deciding this case. However the wording of the clause and its application was crucial. The clause was not worded carefully and was open to interpretation.

Arcadia believed that the clause simply created an option to purchase the property and that it could cancel the Agreement if it chose not to take up the option to purchase. The Court saw the clause very differently. It believed the clause created a legal obligation on Arcadia to take all reasonable steps to investigate the property so the Director could make an informed approval. Arcadia did not fully investigate the property and therefore Arcadia had no right to cancel the Agreement.

Interestingly the Court likened the Director’s approval clause to common place due diligence clauses. The Court considered that the same obligations are created in relation to due diligence conditions. A Purchaser must actively investigate the property before deciding whether to proceed with the purchase. Using a due diligence clause to “hold” a property or purporting to cancel if you change your mind will not be a valid use of a due diligence clause.

Lesson One

Most Purchasers insert conditions into agreements for sale and purchase. Some are specifically provided for in the contract such as finance, LIM reports and Builders reports but some conditions are added to the further terms of sale page in an agreement. More often than not real estate agents or the parties themselves draft those special conditions. Because wording in an agreement can be crucial poor drafting can make all the difference between a straightforward interpretation and a major dispute. Make sure any special conditions are either REINZ approved clauses or better yet have us check an Agreement before it is signed. Once the Agreement is signed it is too late to have any drafting problems corrected.

Lesson Two

You should only sign an Agreement if you are serious about purchasing a property. You cannot rely on a “subject to approval” or “due diligence” clause to simply change your mind. Approval and due diligence clauses create an obligation for you to investigate the property. You need to actively investigate the property by doing things such as getting title searches, checking Council property records, getting a valuation and getting a builder’s report. If you don’t do any investigations and just change your mind you could very well be facing a claim from a disgruntled Vendor. Once an agreement has been signed you should immediately contact us in relation to your “subject to approval” and “due diligence” investigations.