Void Purchase Agreement – A Good Reason Not To Settle?

by | Sep 22, 2011 | Business Law, General property Law, Subdivisions

A number of property subdivisions completed within the last 2 or 3 years were originally pre-sold at levels well above market value at the time of settlement.  This is no surprise to any of us who have lived through the GFC and its impact on the property and finance sector in New Zealand.  As a result, for economic reasons, a number of purchasers are questioning whether or not they should settle.

Many developments have communal facilities or shared property.  Often, such added extras are “securities” under the Securities Act.  Developers have to comply with the conditions of Securities Act exemption notices.  Conditions include the transfer of communal facilities prior to settlement and a number of disclosure obligations.  If conditions are not satisfied, the agreement is “void”, i.e. of no effect.

AlexanderDorrington has been involved in a number of subdivisions affected by void securities.  We have provided advice and been involved in the recent Court decisions in this area.

In our experience, exemption notice conditions are frequently unsatisfied.  Often this arises through an accident.  The consequence is that agreements are, technically speaking, void.  Therefore, settlement cannot be enforced.

One would think that this provides a useful tool for purchasers.  They can identify conditions that have not been complied with, claim the agreement is void and then not settle.  This has happened on a number of occasions.  However, experience tells us that this approach provides little more than “breathing space”.

The Securities Act was amended in 2004.  The amendments added a procedure allowing the Courts to validate void securities.  Effectively, a contract will be validated (i.e. brought back to life) unless the purchaser can prove that they have been prejudiced by the developer’s failure to comply with conditions.  Anecdotally, it is very difficult to show any prejudice in a property purchase.  Certainly, in the cases to date, objections to validation applications have been unsuccessful.  Validation has been obtained, then settlement demanded.

What may appear to be a way out of a difficult situation for an unfortunate purchaser could seriously backfire.  For those wishing to go down this path, all you may win in the long term is a few months’ grace.  A resolute developer will likely obtain validation and insist on settlement.  On top of the settlement price will be other costs including penalty interest, lawyers’ bills and possibly the developer’s Court awarded costs.  Other options, such as settling on time or negotiating another solution could be better alternatives.  They will certainly be cheaper!