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Keeping the dream alive

By Richard Lang, Partner and Janine Ballinger, Senior Solicitor

First published The Press 16 April 2011

What happens to a property purchase if the house has been damaged by the earthquake? This scenario is happening right now all over Canterbury.

You had finally found your dream home, signed up, gone unconditional and booked the moving truck, but then came February 22. 

Your dream home now looks a little different.  There are cracks around the doorways, the lounge door doesn’t shut, the kitchen and bathroom tiles have cracked, the front fence is on a bit of a lean and the cobblestone pathway is out of alignment.  The settlement date is looming and you are not happy about paying the full price of the property on settlement.  You can easily live in the house but it is in a different condition from when you signed up. 

So, what happens now? Most agreements for sale and purchase do not allow you to cancel and walk away.

But there are a couple of ways to compensate you, as the buyer, for the change in the property’s condition. The first is through the vendor’s Earthquake Commission (EQC) claim, as well as the agreement for sale and purchase itself by allowing a reduction in the purchase price of the property.

Even though the agreement does allow for a reduced sale price, in practice the most common approach is for the buyer to pay the full price but to take over the vendor’s EQC claim.  However, this is not provided for in most agreements and must be agreed with the vendor. And if you are buying a property post-earthquake, you should think about adding special clauses. 

As a buyer, you must ensure that the vendor has lodged a claim with EQC - that claim will then be transferred to you on the settlement of your house purchase. This means that when the Earthquake Commission inspects the property and either pays compensation or arranges remedial work, that payment or the work completed, is for your benefit.  As a result, in theory at least, the property will be put back into the condition it was at the time you signed the purchase contract.

However, the EQC claim will only cover specific areas of your property.  As a buyer, you need to know what earthquake damage the EQC will not be covering.  For example, it will not cover your leaning fence or your cobblestone path.   The EQC claim will only cover claims up to $100,000 plus GST.  If the claim is for more, then you need to take an assignment of the vendor’s insurance claim as well, which can get tricky.

If taking over the vendor’s EQC claim is not going to work, then you must go back to the agreement:

• The most common form of agreement for sale and purchase of property (the Auckland District Law Society/Real Estate Institute of New Zealand agreement) contains provisions for this sort of situation. 
• Essentially the fine print in the agreement says that where the property has been damaged but can be lived in on the settlement date, the buyer still has to complete the purchase.
• However, the purchase price is reduced by a sum equal to the “diminution in value” of the property.  The amount that can be deducted from the purchase price on settlement must be determined as provided for in the fine print of the contract. This is not as easy as it sounds.  For example, it should be noted that the agreement doesn’t provide for you to deduct the cost of repairing the earthquake damage, but rather the reduction in value of the property - which may well be a different amount. 
• The deduction from the purchase price is primarily a valuation issue. If the damage is quite extensive, you will need an independent valuation to determine the property’s loss in value. 
• If the damage not covered by the vendor’s EQC claim is only minor, it may easily be resolved by getting quotes to fix the damage and to have that amount deducted on settlement.  Either way, you should have the money to fix the damage after you have moved in.

Don’t panic if you are a purchaser caught up in the fallout of the February earthquake.  While you are required to complete the purchase of your new home, with good advice and by working with the vendor you should be adequately compensated, and the property will once again be your dream home.

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.