It is well established that settlement default risk increases during downturns in the property market. A settlement default occurs when a purchaser fails to complete the purchase of a property according to the terms of a binding sale and purchase agreement. At ASAP, we have personally witnessed an increase in the number of purchasers attempting to back out of such agreements due to recent declines in property prices, particularly presales entered into during the height of the market (late 2021). In light of this, we thought it timely to discuss the options available to developers in the event of a purchaser default.
ADLS Agreement for sale and purchase
The ‘Agreement for Sale and Purchase’ (ASP) comes in many forms however the Auckland District Law Society (ADLS) is by far the most common form of ASP used to transfer ownership of property in New Zealand. The ADLS ASP underpins much of the wealth transfer in New Zealand and the contract law surrounding this agreement is robust and fiercely protected with obligations under ASPs strictly enforced by courts. If a purchaser enters into an unconditional agreement to purchase a property, they are expected to follow through with the purchase.
In the unfortunate event of a purchaser default, the vendor has multiple options available to them under the standard form REINZ/ADLS ASP.
Specific performance
The first option is to seek a court order for specific performance, which would obligate the purchaser to complete the purchase. While this may seem like a logical solution, it is not always feasible. If the purchaser is unable to settle due to a lack of funds, a court order will not change their ability to meet their settlement obligation. Additionally, obtaining a court order can be time-consuming and costly, with no guarantee of success.
Nonetheless, it is perhaps one of the most underrated ways to ensure the performance of a purchaser. Having a court order against you (as a defaulting purchaser) immediately impacts your credit rating and will greatly impair your ability to conduct business in the future. If the purchaser genuinely has the ability to settle, then seeking specific performance may be your best bet. In our experience, a purchaser who feigns an inability to settle will often find a way to settle once face with a court order.
Cancelling the agreement
The second option is for the vendor to cancel the agreement and retain any deposit paid by the purchaser (not exceeding 10% of the purchase price), and/or to sue the purchaser for damages.
It is important for vendors to receive a deposit of at least 10% from purchasers to have this as a viable option. If there is nil deposit, or if the deposit is small, the vendor’s only recourse may be through the courts, which makes it easier for the purchaser to walk away from their contract if the vendor is not prepared to litigate. If the deposit amount is greater, be sure to amend Clause 11.4(b)(i) of the general terms to allow full retention of the deposit.
If you elect to seek damages through the courts, keep in mind that you cannot be put in a better position than you would have been if the original contract had been completed. In this sense, recovery of damages typically includes (but not limited to) the recovery of;
- Any loss incurred on any bona fide resale (you cannot make a claim simply based on a reduced valuation). The resale contract also needs to be entered into within one year from the date when the original purchaser was due to settle.
- Interest on the unpaid portion of the purchase price at the interest rate for late settlement from the settlement date.
- All costs and expenses reasonably incurred in any resale or attempted resale; and
- All outgoings (other than interest) on or maintenance expenses in respect of the property from the settlement date to the settlement of a resale.
The above damages are just some of the examples and all damages claimable at common law or in equity can be recovered by the vendor.
Re-marketing the property
The third option is for the vendor to remarket the property to third parties without cancelling the existing agreement. Clause 11.4(2) of the ADLS ASP allows the vendor to re-market the property – should the vendor enter into a subsequent agreement to sell the property during this process, the original agreement will automatically be cancelled. This may allow you to adopt a multi-strategy approach such as seeking specific performance while at the same time, seeking another party to purchase the property.
Sale to a company
If the purchaser is a company that is still trading, the vendor may seek a statutory demand from the courts as a means of pressuring the company to settle the purchase. If the company as purchaser, owns any other properties (perhaps as part of a wider property portfolio) then a statutory demand can be highly effective.
If a statutory demand is not complied with within 15 working days of it being served, then the company will be presumed to be unable to pay its debts and the vendor (as a creditor) can then rely on this presumption and apply to the High Court to have the company put into liquidation. This will impact the company’s wider portfolio so most will have no choice but to settle the purchase.
Lastly, we recommend considering inserting a personal guarantee clause into the further terms of your ASP. This means that a company that does not own any other assets, will not be able to liquidate and walk away from the sale without personally implicating the directors of the company.
Recommendations
- Have a robust ASP. Selling off-plan is a unique way to sell property. Seek input from both real estate agents (that excel in selling off plan) and lawyers who specialise in property development. This will ensure that you have the appropriate clauses inserted into your ASP as further terms of sale (and can also help with building out a wider marketing strategy).
- Make sure you have a deposit of at least 10% from purchasers.
- Undertake due diligence on purchasers and ensure they have the financial capacity to perform. Inform your real estate agent that you expect them to undertake due diligence on potential buyers. It is also best to avoid speculators and highly geared investors who are more likely to get into trouble.
- Should purchasers indicate that they may be unable to settle, let them know early about your intention to issue a settlement notice. You should also inform them that legal action may follow. While some may see this as an unreasonable and aggressive tactic, signalling is an effective negotiation tool that preserves you position.
- If a purchaser does default on their obligation to settle – act promptly. Serve a settlement notice as soon as possible as detailed above. Again, this preserves your position and gives the purchaser 12 working days to complete settlement after which you can decide on whether you want to exercise other available remedies.
- Obtain expert legal advice.
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