Fate of quake deals

1 April 2011

By Richard Lang, Partner and Suzy Garnett, Solicitor
First published in The Press 2 April 2011

Can damage to a property from earthquakes or aftershocks let a buyer or a seller out of an unconditional property agreement?

New Zealand's most common form of agreement for sale and purchase (the Auckland District Law Society/Real Estate Institute agreement) covers risk and insurance and what happens when the property is damaged before a sale is settled.

In general, the agreement only allows the buyer to cancel an unconditional agreement where the damage or destruction happens before settlement, leaving the property “untenantable”.

The term “untenantable” relates to physical damage to the property, and is linked to the structural integrity and watertightness of the property. The question is whether the property as a whole is unfit for the occupation and use of the purchaser. This will depend on the type of property involved.

For example, damage that might render a residential property untenantable may not be sufficient to leave a rural or commercial property untenantable, because of the different intended uses of those types of property. The test is relatively high.

The damage must be to the property itself in order for the property to be untenantable. At first glance this sounds obvious, but remember that there are currently a number of undamaged Christchurch properties that cannot be accessed due to danger posed by neighbouring properties - under the agreement this is insufficient for a property to be untenantable.

The whole of the property must be damaged or destroyed to be regarded as untenantable. Partial destruction will not usually meet the requirements if the remainder of the property is in reasonable condition. For example, if a garage or sleepout has been affected by the earthquake but the remainder of the house is intact, the property will not generally be untenantable.

The classification of the property by Council assessments (the red, yellow, and green stickers) will be a good guide, but it is not the only consideration.

For example, if a structural engineer has assessed a property and it has been given a red sticker indicating that it is unsafe and needs to be demolished, there is a strong argument that the property is untenantable.

However, be aware that there are different categories of red sticker, and that some properties have been given red stickers because of danger from neighbouring properties or geological hazards (e.g. falling rocks), or because part of the property only has been severely damaged, neither of which would render the property untenantable under the agreement. If a property has been given a yellow sticker, the question of untenantability will not be able to be ruled out, however it will need to be determined on the specific facts relating to any damage.

In almost every area across the city, there was loss of services such as water, sewage and power following both earthquakes. The loss of services was, in most cases, due to damage sustained to the network of each service provider, rather than damage caused to the facilities within individual properties. Accordingly, the loss of services will not in itself make the property untenantable in terms of the agreement.

The property must also be untenantable at the date at which possession is to be given and taken under the Agreement. If the property can be repaired before the possession date, then the property will not be untenantable, and there will be no right to cancel the agreement.

If the buyer decides to cancel the agreement, the purchaser is entitled to have their deposit refunded. The purchaser is unable to cancel the agreement before the possession date (however, practically it may be advisable to let the vendor know of the purchaser’s intentions).

However, even if the property is untenantable, the buyer can still choose to continue with the purchase (assuming insurance and finance are still available), in which case the purchase price can be reduced by the amount the vendor, or their mortgagee, will be paid by the Earthquake Commission and the vendor’s insurer (unless the vendor’s insurer will repair the property).

This article provides a very simplified picture of the issues relating to untenantability. Each case will turn on its own facts, and you should talk to your solicitor as soon as possible to open up communication between yourselves and the vendor.

Richard Lang is a partner of national and trans-Tasman lawyers Duncan Cotterill. r.lang@DuncanCotterill.com

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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