If the vendor has breached a warranty in an Agreement for Sale and Purchase, is the purchaser still contractually obligated to settle?

A purchaser of a commercial building discovered, shortly before the settlement date, that the building did not have a current building warrant of fitness. In addition, it became apparent that substantial remedial work, estimated to cost $500,000, would be required before a building warrant of fitness could be issued. The purchase price for the building was $1.5 million.

The building was materially non-compliant but the vendor still demanded settlement in full. The purchaser refused to settle. The vendor then purported to cancel the contract.

These were the facts in the case Property Ventures Investments Limited v Regalwood Holdings Limited (Regalwood), which went all the way to the Supreme Court.

The Decision

The Supreme Court held at the time that as the vendor was in material breach of its warranty, the vendor was not ready, willing and able to settle in accordance with the contract, and therefore that the vendor did not have the right to require the purchaser to settle in full.

Developments since then

In response to the Court’s decision in Regalwood, the standard form of Agreement for Sale and Purchase was adapted to provide certainty for the parties during a typically stressful time, while balancing the parties’ competing interests.

The standard form sets out in detail the process by which the purchaser may make a claim for compensation for a breach prior to the settlement date, if problems are discovered before then. There are strict requirements that must be followed.

Among these are:

1. That the notice of claim must be submitted no later than 5pm on the last working day prior to settlement;
2. That it must set out clearly the grounds on which the claim is made;
3. That it must include a genuine pre-estimate of loss suffered, and
4. That it must be particularised and quantified as far as reasonably possible at the date of notice.

Upon receipt of the notice, the vendor then in turn has a defined timeframe to respond on whether it disputes the validity of the claim and the amount claimed.

If the vendor accepts the validity of the claim but disputes the amount, then an interim amount, if it is agreed by the parties, is held by a stakeholder. If the interim amount is not agreed, then it is determined by experts appointed in accordance with clause 10 of the standard form Agreement.

In the course of following the process, depending on how soon the claim is raised and the extent to which it is disputed, it is possible that settlement becomes delayed as a result, pending resolution of the matter. It may also be costly for the parties. This may not be an outcome that the parties want.

A negotiated resolution?

It is important to note that the provisions of clause 10 do not preclude the parties from negotiating a resolution if they are able to do so prior to the settlement date.

However, ultimately, from a purchaser’s point of view, where problems are discovered close to the settlement date, it is critical to raise them with your lawyers right away to ensure that the avenue for pursuing a claim under clause 10 is not inadvertently missed.

We also recommend that purchasers carry out the pre-settlement inspection in good time prior to settlement, which would allow time to obtain sufficiently detailed information on the costs to fix should a vendor breach be discovered.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.