Alert Level 3 - Property settlements

New Zealand will be at Alert Level 3 from Tuesday 28 April. We will hold at Alert Level 3 for 2 weeks, before Cabinet reviews how we are tracking and makes further decisions on 11 May. What will this mean for property settlements?

 

Residential

It appears that the majority of residential property settlements that were stalled are permitted at Level 3.

Moving trucks are permitted, moving house is permitted, a pre-purchase inspection in the most part would be possible – vacant possession can now be given and taken.  There may be some factual scenarios where an alternate argument can be made but these will be few and far between. Perhaps a vendor where a vulnerable person is housed and has nowhere safe to go?

Where settlements are currently deferred to Level 2, we expect parties will in the most part be keen to renegotiate to bring settlement forward.

Where settlements are dependent upon some other criteria (e.g. we have seen somewhere the ability to physically access the property triggers settlement) then that criteria would seem to be met at Level 3.

It is likely some purchasers may now be in a position where settlement is difficult. That may simply be buyer’s remorse and concern that the market may fall away.

For residential purchases, it may be because some purchasers now face real hardship. This may be due to job losses, shrinking Kiwisaver balances reduced income from employers or business failures. It is encouraging to see the supportive messages coming from the banking sector and government in the residential sector. These include most recently the suggestion the LVR rules may be relaxed. An unconditional purchaser faces real difficulty extracting themselves from an agreement for sale and purchase. They may be better to step back and take a longer-term view if they can still achieve bank funding.

 

Commercial

Commercial property settlements have typically continued at Level 4 and will, of course, continue to do so at Level 3.

In the commercial sector, the issues are around tenant failures, non-payment of rent. That is, under most agreements for sale and purchase, the purchaser’s risk, albeit the vendor may have duties to discharge. A vendor may, for example, have to agree with a purchaser before concluding a rent abatement deal with a tenant. There may be obligations to notify if rent is not paid if the tenant requests relief. These obligations can be a balancing act for a vendor, especially given the very real need to manage settlement risk.

For purchasers, the value equations and the impact on finance are going to become a very real issue where there is insufficient equity and tenants not performing. Recent property valuations in the press demonstrate the issues. Some asset classes will, of course, be harder hit than others.

The commercial sector has had little support to date through various government initiatives. Property investment (and development), whether residential or commercial is an excluded purpose under the government-backed bank loans that are offered. They are excluded alongside such business activities as manufacturing cluster munitions, anti-personnel mines or nuclear devices, tobacco, whale meat, recreational cannabis, firearms and illegal activity. So one gets the sense the sector is not viewed in a particularly favourable light by the government.

We have heard that there is more work occurring in government in relation to wage and non-wage costs for business (including rent). So there may be more to discuss in the coming weeks in this space.

Denise Marsden