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Homework vital before purchase

By Richard Lang, Partner & Mark Mitchell, Solicitor

First published The Press 30 April 2011

If you have been considering buying a property in Christchurch but all the shaking has made you apprehensive, you won’t be the only one.  The earthquakes have tipped lives upside down and turned the property market into bit of a jigsaw puzzle. Many home owners have little knowledge about the true state of their houses and the future of their properties.

But what do you need to know if you are still keen to buy a new family home or investment property?

It all starts with the Agreement for Sale and Purchase which records the terms on which you are making an offer to buy a property.  Getting the agreement right from the start may be the difference between signing for a bargain, or for a lemon!

The standard Agreement for Sale and Purchase contains all the general provisions you need, including usual conditions such as finance, title and land information memorandum (LIM).  However, it doesn’t deal with earthquake specific issues which makes it vital that you have special earthquake conditions included in the Agreement, in addition to the usual fine print.  This will let you complete a proper review of the property so that you can make the purchase with your eyes wide open - and hopefully make sure your bank and insurance company’s requirements are covered too. 

As was the case before the earthquakes, you should be making your purchase conditional on arranging sufficient finance and your approval of the title, LIM, and a building report for the property, and (for properties built since 1990) consider a weather tightness report – just because we’ve had two earthquakes doesn’t mean leaky homes syndrome has gone away!

However, you also need to cover off the following:

• Insuring the property.  Insurance is a very touchy issue in Canterbury at present and the purchase should be conditional on getting replacement insurance for the property.  Some insurers will currently not insure a new property unless both you and the seller are existing customers.
  
• Taking over the seller’s EQC claim.  The agreement should include a clause requiring the seller to assign their rights under any EQC claim they have made to you so that you get the benefit of any EQC payment covering earthquake damage to the property.  The New Zealand Law Society has published a standard form of assignment document, but you and the seller need to agree on who pays the EQC excess.
  
• Taking over the seller’s insurance.  If the damage to the property might exceed the EQC claim threshold of $100,000 plus GST, then the agreement should also require the seller to assign their private insurance cover to you.   In any case, the Agreement should include a warranty that the seller has made an EQC/insurance claim for any earthquake damage and that, at the time of the earthquakes, the property was fully insured (to replacement value) and that the policy has not been compromised by any of their actions. 
  
• Structural engineer’s report.  Although a builder’s report is useful and advisable, both your lender and insurance company will probably require a report from a registered structural engineer to assess the dwelling and other structures on the property to ensure that they are safe and hygienic to live in. The Agreement should be conditional on a satisfactory structural engineer’s report.
  
• Geotechnical engineer’s report.  If you are buying a section, or if the land (as opposed to the buildings) has been damaged by the earthquake, or if the property is in a known high risk area, you should also get a report from a geotechnical engineer to assess ground conditions on the property. Apart from anything else, your bank and insurance company are likely to require this. If you’re not in this situation, you should still consider this option for your own peace of mind.  Even if it is not immediately evident on viewing the property, there could be issues below ground level which are yet to become apparent. This is especially so if there are any water courses located close to the property. A geotechnical engineer’s report will help with any hidden issues.
  
• Bringing the LIM up to date.  The Christchurch City Council has warned that LIMs currently being issued may be incomplete because up to date post-earthquake information is unavailable.  As such, you will also have to make further queries to ensure the property information contained in the LIM is actually correct.  In particular, in light of this warning from the Council, you should be arranging a drainage expert to assess the property to ensure that the sewer and storm water services are still operating as intended because recent events of drainage or flooding on the property will not be included in the LIM.
  

Getting all of the above reports, as well as the legal work associated with dealing with the EQC and insurance issues, will substantially increase the cost of buying the property.  However, now is not the time to save money by foregoing these reports.  It is the time to spend money to make sure that you know what standard of property you are getting.  If your contract does not include the right to review all aspects of the property, you may not be able to get out of the contract if you discover issues not covered by your conditions.

If you are selling your property, you should expect prospective buyers to want the above conditions in the Agreement.  If you are willing to obtain the information in advance to provide to prospective buyers as part of your marketing material, this may cut down on the uncertainty for the buyer and increase the saleability of your property.  It may also highlight issues you didn’t know existed and give you the chance to put them right before buyers bring them to your attention.

Your lawyer will have told you many times never to sign anything they have not looked over first.  Never has this been more true than it is right now.  You have to protect yourself and seeking the advice of your own lawyer will be a good place to start if you are in any doubt.

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.