2 April 2020
As we enter week 2 of lockdown, issues are starting to emerge around property settlements. In an NZLS webinar, this morning it was noted there are thought to be 5800 settlements impacted.
A number of settlements are delayed until we return to COVID-19 Level 2, or 3. A number of settlements have also been completed during lockdown, as parties work together to constructively resolve issues. Some parties are still addressing whether settlements can proceed as planned, and negotiations continue. Some agreements are already in dispute around failure to settle.
We agree with the recommendations on today’s webinar, that parties negotiate, negotiate, negotiate – to work through issues rather than immediately take a position. The vast majority of agreements in play currently do not deal with this situation. Insisting on strict legal rights is one thing, but ensure you are very clear what the practical and other consequences of that actually are.
We believe these lockdown days are “working days” and the parties to contracts need to deal with their obligations. There has been some discussion about whether “lockdown days” are not “working days”. It is a challenging argument to say a “lockdown day” is not a “working day” when one considers most law firms are still open, as is LINZ, the banks, insurance companies, real estate agencies, water companies and Councils – all the parties involved in settlement. Moving companies are not open, but they are not critical to the settlement process. This may end up being tested where disputes arise e.g. as to whether penalties apply for late settlements.
Can parties insist on settlement?
The circumstances that surround each contract are key to understanding whether settlement can, for example, be compelled by a vendor or refused by a purchaser.
In the commercial property context, typically a property is either vacant or tenanted, so there is not the same physicality associated with the settlement process. In the most part, commercial settlements are continuing unaffected by the lockdown.
For residential property settlements, the issues include:
- Possession: Whether vacant possession is able to be given by a vendor and taken by a purchaser during this lockdown, and the extent to which both are a pre-requisite for settlement? The NZLS Property Law Section is seeking a barrister’s opinion on this. There are a number of practical possibilities. For example, if keys are unable to be provided by a vendor, is vacant possession being given? There is case-law as to whether vacant possession is being given by a vendor when, for example, there is rubbish on-site or the vendor is storing its chattels at the property. That has historically been held to be a matter of fact and degree. What is clear is that purchasers are unable to actually take physical possession given the restriction on movement of people. However, there is a question whether that is actually necessary to “take” possession – keyless entry to a new build is a good example. Delivery of the codes may arguably be sufficient.
- Execution of documents: For purchasers, there are issues emerging around the execution of documents for banks. We have e-signing tools and other options for signing but it is not clear whether all banks will accept these for everything. As we go further into lockdown this becomes more of an issue. Settlements completed in the past week typically already had loan and mortgage documentation signed already.
- Purchaser’s finance: There is some nervousness that loan offers might be revoked or amended post lockdown. If a settlement is deferred, that will be an issue where a purchaser is unconditional. That needs to be balanced against a purchaser’s ability to meet its commitments in the future under new lending.
Vendors must comply with warranties and other obligations
Other issues with agreements currently on foot include the vendor ensuring it meets its obligations under warranties.
Where there are agreements in place for a tenanted property (commercial or residential) the standard warranties (if not deleted) require delivery of any notice or demand received from a tenant. Tenants taking position under the “no access” clause in ADLS leases and presuming rent will be paid at a lesser rate without an agreement, and other tenants without abatement rights requesting to pay less rent (or simply cancelling their automatic payments) need to be considered by vendors in the context of warranties they have provided.
Even where there are no warranties, a vendor holds the property under a constructive trust for a purchaser. Particularly if agreements are being reached that are relevant beyond settlement, a vendor also needs to consider the purchaser’s interest. Vendors may need to take care to ensure they are not prejudicing a purchaser’s position for the property long term. For example by agreeing to allow rent and/or outgoings to abate fully, in circumstances where that is actually arguable.
Impossibility and frustration
We wonder if settlement risk starts becoming an issue. As we come out of lockdown where will values sit? Will loan offers be supported?
There is some prior case-law whether “impossibility” because of financial hardship is a reason that a purchaser can use to refuse to settle. In Matarangi Beach Estates Ltd v Dawson (High Court, 2008) the purchaser maintained impossibility because financial hardship meant specific performance, requiring the purchasers to settle, should not be ordered by the Court. On the evidence, the Court found the financial hardship was not great enough for the purchasers to be excused performance. In another case at summary judgment level, impossibility was recognised as a possible defence to a vendor’s assertion that settlement should proceed. Summary judgment was refused (Ngai Tahu Property Ltd v Dykstra (2009, High Court). The approach to date suggests impossibility is a high bar, as it should be.
We may all need to start considering whether agreements are frustrated under Part 2 subpart 4 of the Contracts and Commercial Law Act 2017. In those circumstances, a Court will order relief for contracting parties. Our view is this is not the case yet. Extended lockdowns or multiple progressive lockdowns might change this, but again, this is a high bar.