Issue 41, Property Speaking, Summer 2022
Negative equity on your property?
Not necessarily a nightmare
What is negative equity?
A negative equity position is where the value of a property that provides security for lending falls below the sum that has been borrowed. The issue is that if the bank ever required the lending to be repaid, the proceeds of the property sale may not be sufficient to repay the full loan amount. With the current property market falling, this may put some property owners, particularly those who have recently purchased, in a vulnerable position.
Is it scary?
On the face of it, being in a negative equity position appears frightening. Lenders, brokers and other financial service providers, however, all indicate that it doesn’t need to be scary, but it is fair to say it does make property owners uncomfortable.
The key for borrowers is to ensure they keep up regular loan repayments. Banks make money by collecting the interest paid on loans, so it makes little sense for lenders to race in and force homeowners to sell. Only where a borrower begins to stop their repayments (a ‘default’) does this risk materialise.
Impact of rising interest rates
The second aspect for borrowers who have seen their property slide into a negative equity position is that interest rates continue to rise. Meeting current repayments may be quite achievable, however, when it comes time to re-fix the interest rate and the repayment amounts increase, then the strain on finances becomes greater. If servicing your mortgage already stretches your household finances, keeping up with repayments at a higher rate can become unachievable.
What to do when times are tough?
Before leaping to conclusions and thinking the bank will turf you out of your house and force a mortgagee sale, talk with your bank first. The bank does not want to see you homeless, and it will usually work hard to help you.
Mortgagee sale is a last resort
Whether or not your property is in a negative equity position, the mortgagee (usually a bank but also sometimes a private entity or person) always has the legal right to exercise their mortgagee’s power of sale where a borrower is in default on their loan.
The bank’s right to sell your home when you are in default (and the process to do so) is set out in the Property Law Act 2007. The legislation states that the bank owes a reasonable duty of care to obtain the best price obtainable at the time of sale. This means that the bank cannot simply sell for a price that covers the principal debt and its own costs; it must get the best price possible. After a mortgagee sale is settled, the balance of the bank’s debt any penalty interest and the bank’s costs are paid and any remaining balance goes to the borrower.
In a negative equity position, where the best price for the property is insufficient to repay the loan amount, the mortgagee will usually transfer the unpaid balance of principal debt, interest and costs to a personal loan; it will be up to the borrower to negotiate the interest rate applied for that loan.
While banks always have the power to sell as a last resort, in practice, borrowers can find themselves months in default without their bank exercising this power. It is always in the bank’s interest for borrowers to repay rather than force a sale. Usually, the borrower will receive several notices setting out the default and the penalty interest payable.
If the mortgagee believes that there is any chance of repayment, they are likely to agree to facilitate a repayment arrangement.
We can help
Going through this process can be intimidating; talking with us will help determine your rights, obligations, or what options you may have and can help limit any further debt or penalty being incurred.
Working together with us may also help you realise that the issue isn’t as serious as the notice seems. We can help you negotiate an amicable way forward with your lender and, most importantly, do our best to ensure you get to keep your home.
Vendor obligations after signing an agreement for sale and purchase
A case heard in the Supreme Court earlier this year presents a cautionary tale for property sellers[1].
In this case, a seller was embroiled in a long legal battle over their last-minute cancellation of an inspection for their buyer’s due diligence condition after the seller became aware of a potential better offer on the property. The buyer argued that, because the seller’s actions had prevented the buyer from gathering necessary information on the property, the seller could not also then cancel the agreement to pursue the better offer when the buyer was consequently unable to satisfy (or waive) the due diligence condition by its deadline. The Supreme Court’s decision came more than two years after the dispute first arose and was only focused on some preliminary legal issues (rather than resolving the dispute fully).
For all sellers, this case signals that even though you have a signed agreement for sale and purchase, there is likely to be more for you to do than just wait for settlement day when money will change hands.
In many agreements, the next stages of the deal are not necessarily left to the buyer alone; there can be obligations that you as seller must meet. If you don’t meet these obligations, you risk outcomes such as being pulled into a lengthy dispute preventing you from selling your property, as in the Melco case, or having your buyer request that money is held back on settlement. In this article, we cover some examples.
Meet any express obligations in the agreement
Your agreement might contain some express, deal-specific obligations for you as seller such as conditions you must meet or work you must complete before settlement. If you are using a standard ADLS/REINZ agreement, these obligations will be usually set out in the further terms of sale section.
Most agreements will also contain some warranties about the state of the property. For example, the standard ADLS/REINZ agreements contain warranties about the condition of chattels, rates payments being current and any work you have arranged on the property having appropriate consents.
Hopefully, where possible, you will have addressed any warranties before signing the agreement. If not, however, you must ensure that all warranties and other obligations are met by settlement day, otherwise this can lead to disputes around settlement, including the buyer proposing to retain settlement monies.
Help with the buyer’s conditions where necessary
As highlighted in the Melco case, even where there is not an express obligation, you may have an implied duty to assist the buyer with meeting the buyer’s conditions. You can help the buyer by, for example, providing any requested information in a timely manner and allowing access to the property.
The dispute in Melco also shows that even where you want to exit the deal, you should not do things like prevent your buyer from accessing the property for the purpose of gathering sufficient information for a due diligence condition. Taking this kind of action that deliberately blocks the buyer from fulfilling their conditions, or their own obligations under the agreement, could compromise your position.
Allow a pre-settlement inspection
Another area where a seller has obligations is pre-settlement inspections. Under the standard ADLS/REINZ agreement, the buyer may visit the property once for a pre-settlement inspection (with reasonable notice in writing). The buyer also is allowed another inspection to check you have met any agreement to carry out work on the property (no later than one day prior to settlement) if your agreement provides for such work.
Where your agreement provides for these types of inspections, you must allow this access, otherwise, the buyer could, for example, seek that money is held back until the inspection can take place.
Confusion can arise if the buyer wants to access the property for other purposes. If you want to allow this, you should be clear about the purpose of any access to avoid disputes about whether the access was for the set inspections under the agreement or for something else.
Failure to meet your obligations as seller can lead to long and costly disputes. Every agreement is different; please contact us for guidance about your obligations under your specific agreement to help avoid an outcome similar to what occurred in the Melco case.
[1] Melco Property Holdings (NZ) 2012 Limited v Hall [2022] NZSC 60