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SEPTEMBER 2014

Beware of Vendor Warranties

The consequences to both vendor and purchaser of warranties given.

When you enter into an agreement to sell your property, it is almost certain you will be giving warranties (undertakings) to the purchaser. The scope of these warranties can often be underestimated and lead to significant financial woes for the vendor (the seller) in the event of a breach. The Auckland District Law Society Inc. (“ADLS”) provides the most commonly used agreement, the ADLS Agreement for Sale and Purchase of Real Estate (‘the Agreement’), with the warranties set out in clause six. It is important that all vendors are aware of the content of these warranties.

Works undertaken by a Vendor

In relation to any works the vendor has done, or caused or permitted to be done on the property, the vendor warrants that:

  • any permit, resource consent or building consent required by law was obtained;
  • to the vendor’s knowledge, the works were completed in compliance with those permits or consents; and
  • where appropriate, a Code Compliance Certificate was issued for those works.

This warranty will not extend to works done on the property by a previous owner, and purchasers are advised to carry out their own investigations rather than rely on the warranties. Extra vigilance must also be adopted where the property is a cross lease or unit title as these may be subject to additional requirements for any work carried out on the property.

Chattels in reasonable working order

When the chattels list is discussed before the Agreement is signed by all parties, an inspection as to the “state of repair” of each chattel is something that may not initially be completed by the purchaser.

Under Clause 6.2(1) of the agreement it states that “the vendor warrants and undertakes that at settlement the chattels are delivered to the purchaser in reasonable working order, where applicable, but in all other respects in their state of repair as at the date of this agreement (fair wear and tear excepted) but failure so to deliver the chattels shall only create a right of compensation”.

This is a two-fold clause.  From experience the inspection of chattels is normally completed when the pre-settlement inspection is attended too, which is normally within a couple of days before settlement and possession. At this point the “state of repair” of the chattels as at the date of the agreement may not be obvious or remembered by either of the parties.  So for Vendors, if you decide to add a chattel to the agreement make sure the chattel is in working order.  If you are ever in doubt, it is best not to put the chattel in the agreement at all. For purchasers, make sure you check the chattels thoroughly as to their condition at the time of signing the agreement.

It is always prudent to inspect all the chattels before signing the agreement. We recommend keeping a record of the state of the chattels, otherwise a legal battle can ensue with the result that either the vendor has to compensate or repair the chattels or the purchaser has to accept the chattels as is (if they cannot prove the chattels’ “state of repair as at the date of the agreement”).

Other warranties

Other warranties given by the vendor at the date of the Agreement include:

  • the vendor has not received any notice or demand and has no knowledge of any requisition or outstanding requirement in relation to the property; and
  • the vendor has not given any consent or waiver that directly or indirectly affects the property and that has not been disclosed in writing to the purchaser.

The ‘fine print’ of any agreement needs to be carefully considered and understood by all parties to the transaction. The implications and consequences of giving warranties that are not correct can be significant. If there are warranties that you cannot accurately give, amendments to the warranties will be needed before signing any agreement.

Consulting us from the outset is your best course of action.