Chris, a real estate agent, was very excited when he finally received an offer on a house which he had found difficult to sell.  He arranged for the purchaser to sign an Agreement for Sale and Purchase that day.  The purchaser requested that settlement date be 60 days out from the date of signing the Contract as they needed to move out of their existing house and were travelling overseas for a couple of weeks.

Chris therefore entered in the settlement date on the front page of the agreement as “60 working days after the date of this agreement”.  The purchasers did not notice the word “working” (and Chris didn’t explain it to them) and happily signed the agreement. 

The purchasers moved out of their existing house and went overseas for their two week holiday, thinking that they would see their lawyer to sign the mortgage documents the week after and move in (which would be 60 days after signing the Agreement for Sale and Purchase).  It wasn’t until they returned from overseas that their lawyer advised them that settlement was actually still another month away as it was 60 working days after signing the contract, not days.  The vendor was not able to move out any sooner than that and the purchaser’s efforts at requesting an earlier settlement were to no avail.  The purchasers had to desperately find alternative accommodation for a month and were not at all impressed with Chris.

Why are time frames important?

Time frames in agreements (including in Further Terms of Sale) are absolutely crucial in property transactions.  Real estate agents need to ensure that time frames suit both the vendor and the purchaser and that they understand what those time frames mean.  Had Chris drawn the word “working” to the purchaser’s attention, they would not be in a situation of having to find themselves alternative accommodation for a month.

The difference between days and working days is crucial.  Working days exclude weekends and certain public holidays as referred to in the Agreement for Sale and Purchase.  The difference between “days” and “working days” is extremely crucial over holiday periods such as Christmas and Easter.  When drafting clauses regarding settlement or possession dates or special conditions, you should ensure that you use references to days or working days in accordance with the Purchaser or Vendor’s instructions and that you explain to them what that means.

Time frames for LIM reports…

Time frames are also very important with LIM Reports.  If you are circling the LIM condition on the front page of the Agreement for Sale and Purchase, it means the purchaser has five working days to obtain the LIM Report and ten working days in which to give notice of any requisitions on the LIM Report to the vendor.  You need to make sure both purchaser and vendor are aware of these time frames and take care not to put a conflicting condition in the Further Terms of Sale regarding the LIM Report.

Other important time frames to remember…

Time frames are also important where the settlement date is only a short period away from the date the agreement was signed.  You need to be conscious that a purchaser always has ten working days from the date of the agreement in which to requisition the title to the property.  Also bear in mind, when a unit title is being sold, that the vendor’s lawyer must make a section 36 certificate available to the purchaser five working days prior to settlement.  This can hold up settlement if it is not provided so it is in your best interests to ensure there is adequate time for this to happen.

When drafting conditions it pays to ensure you explain clearly to the purchasers and the vendors the effect of including “working days” or “days” in their agreements.  It makes sense in our experience to ensure all parties are on the same page when it comes to confirmation and settlement dates.  Ultimately it should save you, your vendors and purchasers a lot of unnecessary stress and potentially can help to avoid you having an unhappy client.

When preparing contracts it is very important that the parties to the contract are correctly described.  The Vendor will usually be the person or persons named as the registered proprietors of the property on the title.

We had a recent example where a property was owned by a company but the contract was prepared with the names of the shareholders in the company as the Vendors.  Unfortunately litigation arose from the contract and the Purchasers were able to sue the shareholders of the company even though the property was, in fact, owned by the company.

An up-to-date search of the title will ensure that the persons you are dealing with are the persons who actually own the property.

Tip#2 – Trusts

If either Purchaser or Vendor is a family trust the correct way to describe the relevant party is by the names of the Trustees as Trustees of the Trust, e.g. “John Smith, Mary Smith and (professional trustee) as Trustees of the Smith Family Trust”.  The trust is itself not a legal entity (unlike a company).  The Trustees enter into the contract, but in their capacity as Trustees of the Trust.

If the name of the Trust is left off, then there is a risk that the Trustees could be taken to have entered the contract in their personal capacities.  If only the name of the Trust is used (e.g. “Smith Family Trust”) then there is a risk that the contract is not binding.  This could have various consequences, including the agent losing their commission.

Tip #3 – Companies as Parties to a Contract

If a company is a party to a contract, the word “Limited” should always be used at the end of the company name e.g. “John & Mary Smith Limited”.  Again if the word “Limited” is left off, there is a risk that the contract is either unenforceable or enforceable against somebody other than the company.  If you are dealing with a company as Vendor or Purchaser, it is a good idea to get an up-to-date free company search from www.companies.govt.nz .

Tip #4 – Signing the Agreement … Watch for Simple Traps Affecting Contract Validity

In rare circumstances, someone other than the actual owner of the property can sign the Agreement on behalf of the owner.  Usually the owner or owners of the property sign the Agreement, but where that is not possible another person who has been specifically authorised by the owner to do so, may sign the Agreement.

There are specific methods of authorising another person to sign a contract on behalf of the owner.  When someone other than the owner is signing, check that they are actually authorised to do so, otherwise the contract may not be binding.  For example, obtain written evidence that the person is authorised to sign, or at the very least make a phone call to the owner to confirm the authority and make a file note of that authority.

Tip #5 – Date the Contract

It is very important that contracts are dated on the day they are signed.  If a contract is incorrectly dated (e.g. dated 10 September 2008 but in fact signed on 12 September 2008) the true date of the contract is the date that it was actually signed by the parties … not the date on its face.

Leaving a contract undated or inserting an incorrect date can put the contract at risk for both Vendor and Purchaser.  If a contract is undated or, even worse, incorrectly dated, the parties may incorrectly calculate the date for confirmation of special conditions, with the result that a date for confirmation of a special condition may be missed.

Tip #6 – LIM Report or Property Report … Beware of Timing Traps

We recently acted for a Purchaser of a townhouse where the Sale and Purchase Agreement was made conditional on the Purchaser obtaining a Property Report from the Wellington City Council within five days of the date of the Agreement.

A Property Report is a “short form” report that can be obtained from the Wellington City Council where a full LIM Report is deemed to be not necessary.  A Property Report can usually be obtained from the Council within three working days, whereas a LIM Report can take up to ten working days to obtain.

However, a Wellington City Council rule is that Property Reports cannot be obtained for properties where there are more than two dwellings on the allotment.  In our Purchaser’s case the property being purchased was a unit-titled townhouse in a development containing twelve units and it was therefore not possible to obtain a Property Report from the Council.

Fortunately the Vendor agreed to an extension to time for confirmation of the condition and that allowed our client to obtain a full LIM report.  It pays to be aware of your Council’s requirements when deciding on a LIM or Property Report.

Tip #7 – Get the Correct Deposit!

Getting the correct deposit from the Purchaser at the correct time is very important.  If the contract calls for the deposit to be paid on acceptance then that is what should be done.  You should bear in mind that under the standard contract a Vendor cannot cancel a contract for non-payment of the deposit without having first given the Purchaser three days notice in writing.  You should also be aware that if the deposit is not paid on the due date, the Vendor is entitled to charge interest for the late payment at the penalty rate specified in the contract.

Be careful that deposits are only released when it is in order to do so.

Typically, where a deposit is paid into a real estate agent’s trust account, the agent is required to retain the deposit for 10 working days before releasing it to the Vendor.  Where a contract is conditional and the conditions are confirmed, the deposit can then be released to the Vendor even if it has not been held by the agents for 10 working days.

Tip #8 – Agent Safety

An important issue for Real Estate Professionals is safety when you are “out in the field”!  This is highlighted by the recent attack on a Real Estate Professional on a remote property in the Wairarapa.  Accessibility to clients is a crucial part of professional success, but also poses a risk, particularly after hours or in remote areas.  We recommend the following precautions:

Where possible, check out background details of clients whom you do not know, e.g. ask for a work number or landline and call them back to confirm that it is legitimate.

Let others know your schedule!

Have a backup buddy with whom you keep in regular contact.  This could be a PA at your office.  Make a confirmatory “all okay” call/test to your backup buddy.  if you fail to do so, this should trigger your backup buddy to call you.  if you cannot be contacted, then your backup buddy should then alert Police.

If in doubt take someone with you or call off the meeting!

Your safety is important.  Common sense and these tips will hopefully help you to avoid danger.

Most properties with a delayed settlement require up to a 10% deposit.  A Bank or Deposit Bond is a financial guarantee provided to the vendor by a bank or other lender.  It provides a guarantee that the vendor will receive an amount equivalent to the balance of the deposit at a pre-determined future date. 

The benefit for the purchaser is that it provides an alternative to paying a cash deposit, to secure the new property.  Lenders usually charge around 5% of the deposit per annum for the service.

Of course the full purchase price must still be paid when the building is complete or title is issued!  For this reason financial lenders will have eligibility criteria.  These will include the purchaser’s overall financial position and ability to complete the purchase.

In the event that the purchaser defaults, the bank will pay the deposit to the vendor and will then pursue the purchaser for the amount along with any costs.  The bank’s right to do so will usually arise from an indemnity the purchaser signs when obtaining the bond.

Tip 1 – Legal Advice

The term ‘buyer beware’ applies more than ever in the context of a mortgagee sale, but making the risks absolutely clear to prospective purchasers is the best way to avoid having to explain to upset or angry buyers why they ended up on the losing end of a deal.

Because it is unlikely that a standard agreement will be used, legal advice is even more desirable than with an ordinary purchase.  Encouraging prospective purchasers to take legal advice can minimise the risks to them and will also ease the burden on your shoulders.

Tip 2 – Information

A purchaser at a mortgagee sale needs as much information as possible, as soon as possible, so that they can do their homework on the property.  It is a good idea to have ready for anyone showing real interest:

• A copy of the proposed Agreement for Sale and Purchase;
• A copy of the Title to the property;
• A copy of the LIM report (if any); and
• Any other information you might have about the property (for example rates, body corporate levies, any restrictions on the Title).

It is also a good idea to ensure that they know:

• That the Agreement being used is not standard (if it is not the standard form agreement or contains deletions of vendor warranties), and may lack many of the usual protections;
• That the property may be withdrawn from the market at any time before sale if the defaulting mortgagor makes and arrangement with the bank to repay the mortgage.  In some cases, even if the purchaser has entered into a conditional agreement to buy the property, the mortgagee could still potentially cancel it before it goes unconditional;
• That purchasers may not be able to gain access to see the property until settlement; and
• The mortgagee will usually not guarantee that the purchaser will get vacant possession on settlement.

Sometimes prospective purchasers may not even know that the sale is by the mortgagee – this is one thing that they can’t afford to be unaware of.  We know of one situation where the bankrupt homeowner whose house was being sold by the bank cut up all the walls and stuffed them with dead fish, as well as cutting all of the wiring, ready for the oblivious purchasers to move in the next day!  Purchasers at a mortgagee sale should always be prepared for the unexpected, and you are likely to be the easiest person for them to blame if they do get a nasty surprise.

Tip 3 – Key Potential Issues

Because most vendor warranties will almost certainly have been deleted from the Agreement a buyer will usually have to do their own research on the property.  Agents can suggest that prospective purchasers check out:

• Rates: are there any rates owing on the property?
• Chattels: what chattels are deleted from the chattels list?  If chattels are deleted from the Agreement, which is usual, there is a risk that they will be stripped from the house before settlement.  Where they have not been deleted, it may be possible to withhold funds in some cases if chattels have been damaged or removed.  In a recent example, the bankrupt mortgagor stripped the house of everything down to the carpet, then held the purchaser to ransom for an extra $10,000.00 to be paid to her personally for their return!
• Insurance/risk:when does the Agreement provide that risk passes to the buyer?  Defaulting owners have been known to trash the house the day before settlement and if the risk passes at the fall of te auctioneer’s hammer, then the purchaser will be stuck with the bill for the damage.
• Restrictions on the property/rights granted to others:  the purchaser should check with the Council whether there are any restrictions on what they can do with the house or land, or whether any rights to the land (for example a right of way) have been granted to others.

In some cases defaulting owners may be willing to provide further information on the property or even allow access for open homes – it never hurts to ask!  You should always be careful about any information you relate to the purchasers and never make any representations yourself as to the accuracy of this information.

Tip 4 – Know Your Client

Is your client the mortgagee?  If so, it is crucial that you remember that the mortgagee is your client – not the owner of the house.  You may end up dealing more with the house owner than with your client and it can be easy to forget whose instructions you are obligated to follow.

Is your client the house owner?  Assuming the mortgagee has started the mortgagee sale process, then your client can only sell with mortgagee consent.  If you find a buyer you will have to liaise with the mortgagee’s agent before the deal is sealed, or your client could enter into an unconditional Agreement which they are not able to honour.

Tip 5 – Mortgagee’s Duties

To reduce the chance of challenge by the defaulting owner, or anyone else with an interest in the property, you should bear in mind the duties of the mortgagee regarding the sale.

The mortgagee has a duty to try to get the best price reasonably possible for the property and this duty extends to their Agent.  Both you and the mortgagee should be able to show that you made all efforts (within reason) to get the best price possible for the property in the circumstances.

The mortgagee also needs to understand that it is the mortgagee’s responsibility to ensure that all legal requirements for the sale to proceed have been met; for example, the serving of appropriate notices on the defaulting mortgagor and others.

Bottom Line

By following the above tips you will minimise the risks not only for vendors and purchasers but also for yourself as a property professional.  A disgruntled purchaser trapped in a bad deal will usually have no rights against the mortgagee as vendor and may turn their attention to you as the Agent.  If you have provided them with helpful and relevant information, advised them about the risks, are careful not to make representations about the property, and encouraged them to obtain legal advice, such action by a disgruntled purchaser is unlikely to be commenced, let alone succeed.

• Creates a Disciplinary Tribunal administered by the Ministry of Justice to deal with more serious complaints.
• Sets out licensing processes and makes provisions for a public register.
• Sets more modern offence provisions with a wider range of penalties and remedies including the ability for consumers to seek compensation in cases of demonstrated financial loss.
• Increases industry entry requirements, including a requirement for ongoing training.
• Makes changes to the conduct required in the running of a real estate agency business.  New requirements relate to mandatory disclosure (including possible conflicts of interest), provision of information to consumers in specific situations, and auctions.
• Abolishes the Real Estate Agents Licensing Board.
• Removes the requirement for compulsory membership by real estate agents of the Real Estate Institute of New Zealand.

With property prices so variable at the moment and the possibilty of an appeal, we recommend getting clear instructions (preferrably in writing) from clients about their price expectations before advertising a property you are selling using a “buyer enquiry over” price.  If there is any doubt or uncertainty we recommend that BEO price advertising should not be used.

We have set out four traps which you and your team need to be wary of.

Trap One:  Failure to get your vendor’s written appointment of you as agent

The effect of not complying with this requirement is to make the agency contract entirely unenforceable.  You cannot deduct commission from the deposit, and you cannot recover commission as a debt due from the vendor (Section 62 Real Estate Agents Act).

Trap Two:  Failure to collect the deposit

If the contract provides for payment of a deposit, as is usual, then the Agent is under a duty to collect the depositk, or to advise the vendor if it has not been paid.  Failure to comply with this duty, while not automatically disentitling the agent to commission, invariably causes delays in getting paid, and worse, can lead to difficulties in obtaining your commission at all.

Trap Three:  Failure by the Agent to exercise due care and skill

An agent should:

• Advise as to the best method of sale, and the price likely to be obtained.
• Avoid misrepresentation, by ensuring that any information given to a purchaser is accurate.
• Ensure that the agreement is properly drawn up, that it accurately describes the property, and is correctly signed by all parties.

Trap Four:  When an Agent purchases from his or her vendor … failure to strictly comply with the Real Estate Agents Act requirements

These are:

• Vendor’s consent must be obtained.
• Before seeking the consent or, if the vendor agrees, within 14 days after obtaining the consent, an independent valuation is to be supplied.

These rules apply not only to the listing Agent personally, but also to any partner or other employee of the Real Estate Firm, and any spouse or child of any of these persons.

Any contract made in contravention of these rules is voidable at the vendor’s option, and whether or not the sale proceeds, no comission is payable.  If any commission has been paid, it must be refunded in full.

Each cross lease title is based on a flats plan or a “footprint” of the building.  The boundary of the title is the exterior walls of the house.  Enclosed extensions built outside that flats plan may make the title defective.

The process of correcting the title is not easy though.  The property needs to be re-surveyed by surveyors who will mark the new outline of the property.  Lawyers then apply for a new title to the property.  This can be a time consuming and expensive ordeal.

Other structures such as garages, which do not attach to the “footprint” of the building, do not make the title defective. However, building such a structure requires the consent of the owner or owners of the other flats.