The imposition of COVID-19 Alert Level 4 lockdown (“Lockdown”) is adding stress to what is generally a stressful time for New Zealanders buying or selling their homes. It has been said that an estimated 5,800 settlements will be affected during the four-week Lockdown.
We now need to reach practical and reasonable resolutions to avoid litigation which will only exacerbate the economic and mental impact of this period of uncertainty on all parties involved.
Should we defer settlement?
The Real Estate Authority and the Property Law Section of the New Zealand Law Society have issued a recommendation that parties should endeavour to amend their existing contracts for sale and purchase which are due to settle during the Lockdown as follows:
“The parties agree that settlement is hereby deferred to the 10th working day after the Government reduces the Covid-19 Level to Level 2 or below, or to such other date as may be mutually agreed. For the sake of clarity neither party shall have any claim against the other in relation to this deferral.”
When the recommendation was first issued before the Lockdown commenced, most of us will have referred the same to our clients for instructions and most, being practical and kind, would have agreed to accept the amendment. This has the effect of simply changing the settlement date.
While reference to “the 10th (or 15th or 20th) working day after the Covid-19 Level is reduced to Level 2 or below” is convenient, one should also consider the practicalities of everyone settling and needing to book movers for the same day. Perhaps consider the 8th working day, the 12th working day or the 16th working day after the Covid-19 Level is reduced to Level 2 or below.
As the likelihood of the Lockdown being extended becomes a possibility, parties should also consider negotiating a sunset date to give some certainty to the duration of the deferral. However, a sunset date is probably only fair if one is still negotiating the contract, not if there is already an unconditional contract to buy or sell.
To facilitate agreements to defer settlement, the parties may also discuss whether the apportionment of outgoings (rates etc.) should remain at the original settlement date, just a deferral without charging default interest. Vendor clients (apart from those selling unit titles) must continue to insure the property until settlement. It would also be fair that the vendor, remaining in possession, requests a special water meter reading only for the deferred settlement date.
In what circumstances can settlement appropriately go ahead?
The imposition of the Lockdown is not a blanket ban on settlements. Nor does it mean parties should take the opportunity to deliberately delay settlement or extend condition dates on contracts without good reason. Rather, parties should act in good faith, taking into account the best that they can do to maintain the status quo and already agreed terms of their contract so as to least inconvenience the other party. In short, ask “What if the shoe was on the other foot?”
At the heart of the difficulty is the restriction on the movement of people. A national state of emergency was declared that as at 11.59pm on 25 March 2020 “where you stay tonight is where you must stay from now on.” The activities and logistics normally involved with purchasing or selling a home such as open homes, moving furniture with the help of professional movers, family or friends, pre-settlement inspections, the handover of keys and providing 42 days’ notice to tenants where tenanted properties are to be sold vacant can no longer happen.
However, there are still certain settlements that can reasonably occur. Banks remain open as an essential service and despite delays, they remain available for drawdown of funds, loan variations and repayments.
Settlements for purchases of bare land and properties that are to remain tenanted by existing tenants, loan variations and re-financing are transactions that can proceed despite the Lockdown.
The New Zealand Law Society with the Department of Internal Affairs and with Land Information New Zealand have made practical changes in their regulatory requirements regarding certification, signing and witnessing to make it possible for lawyers to verify clients for AML/CFT purposes and for clients to execute necessary documents in the safety of their “bubbles” via electronic communication.
To facilitate settlement during the Lockdown, parties may wish to consider:
- A final water meter reading (where normally required) will not be available, so could a reasonable credit be provided instead? Watercare Services Limited has offered two options:
- An estimate based on previous usage;
- An invoice generated in reliance on your provision of a photograph of the meter reading.
- Will the purchaser face any difficulty obtaining finance or insurance? Has the purchaser’s Kiwisaver been affected by financial market reactions to COVID-19? Perhaps the purchaser could use the same insurance company as that which insured the property for the vendor?
- What are the bank’s specific requirements for signing and returning loan documents? Sufficient time should be allowed for meeting those requirements.
- We recommend keys (if any) be passed onto the purchaser after the Lockdown has lifted. Parties may wish to consider retention of funds to secure this obligation.
- Retention of settlement funds could also be discussed pending completion of the “pre-settlement” inspection of the property.
What does the contract say?
It is unlikely that any current standard form contract sufficiently contemplates the current unprecedented circumstances.
The most relevant clauses are the equivalents of clause 3.3 of the ADLS/REINZ 10th edition of the Sale and Purchase Agreement of Real Estate where the parties agree “possession shall be given and take on the settlement date”; and clause 3.15 which provides that where “neither party is ready, willing and able to settle… [settlement is to be] deferred to the third working day following the date upon which one of the parties gives notice it has become ready, willing and able to settle”.
While it has been argued that the purchaser’s ability to carry out a pre-settlement inspection is not a condition of settlement, the relevant clause makes it as a vendor obligation to permit the purchaser to carry out the inspection unless the right is waived.
The consolation is that should there be any major problems in breach of the obligations and warranties under the contract, rights are preserved after possession and settlement by non-merger clauses such as clause 12.0 of the ADLS/REINZ 10th edition of the Sale and Purchase Agreement of Real Estate.
For that to work, however, the vendor must be locatable and the vendor must have the means and willingness to meet its obligations; therefore, it is advisable to try to agree an adequate retention.
There are differing legal views on whether the inability to take physical possession of the property means parties do not have to settle. The question to consider is whether the purchaser must have the ability to take physical occupation of the property, or the purchaser merely has the right to do so (after the Lockdown has lifted)? The answer to this question is critical and remains yet to be decided by the courts.
The common law doctrine of frustration is also being explored, so the question is whether the contract has become impossible to perform, or the outcome which would be achieved from performance of the contract has radically changed from what the parties expected at the time they entered into the contract as a result of the Lockdown.
What if my vendor/ purchaser is pushing for settlement on the original settlement day?
We, including vendors and purchasers, are all urged to be kind at this time. A lot depends on parties acting in good faith and reasonably and not exploiting the other’s predicament as a result of the Lockdown. Should one party persist in requiring settlement on the original settlement date, you may wish to consider the following arrangements –
- Where the vendor must stay in the property, negotiate a residential tenancy agreement between the purchaser as landlord and the vendor as tenant. The terms should be reasonable and the purchaser should take care not to extort from a vendor an unreasonable rental.
- A retention of settlement funds pending completion of the pre-settlement inspection.
- If you are an unwilling purchaser, you may wish to request a reduction of the penalty payable for non-settlement. 12-15% is the standard default penalty but a vendor may be willing to consider a reduction due to the uncertainty of whether clause 3.15 under the ADLS/REINZ 10th edition of the Sale and Purchase Agreement of Real Estate applies.
As in all relationships, communication between the parties in good faith is essential for vendors and purchasers bound by a contract for sale and purchase. Where two parties are willing, there is no reason why a practical solution with minimal imposition on everyone involved will not be possible.
Lawyers must continue to advise, present options and then take instructions from their clients, and we believe in current circumstances must continue to act as a facilitator.
If you have any questions about property settlements at this time, please get in touch with our team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.