Issue 33, Property eSpeaking, Autumn 2020

Property Speaking, Autumn 2020, No 33

Welcome to the first edition of Property Speaking for the decade. We hope you find the articles both interesting and useful.

If you would like to know more about any of the topics we have covered, or indeed on any property law matter, please don’t hesitate to contact us – our details are to the right.

Adapting the agreements can help property developers

Helps mitigate risk

There has been recent media attention on the way property development contracts are structured following the cancellation of a number of Agreements for Sale and Purchase by the developers of a project in Tawa, just north of Wellington. Reportedly, the developers said that without being able to cancel the existing agreements, the companies establishing the development would have otherwise faced liquidation and the development would have been halted.

In this article we look at how agreements can be adapted to suit the specific characteristics of a property development and how they can help mitigate the risks (and costs) to developers. As well, we address some of the questions you should ask to determine where the risks and burdens of the development will fall.

Who will own the land during the development?

 When undertaking a property development, you do not necessarily need to purchase the underlying land before on-selling to prospective buyers. Instead, you could make your purchase of the underlying land conditional on the development proceeding and the sections or houses being on-sold. This can limit the risk you will be unable to complete the development (because, for example, you cannot obtain the necessary consents for the development) after you have purchased the land.

 Any of your sale agreements that on- sell properties in the development must account for the fact that the sale of the land to you will need to go ahead first or contemporaneously. This holds true for any agreements or events on which the development is dependent. If there is anything that must happen before you proceed with the development then your sale agreements should be conditional on that thing happening.

 Who is responsible for the resource consent?

You can add clauses to any agreement to specify whether it is you, the owner of the underlying land or even the eventual buyer of a property in the development who is responsible for obtaining the necessary approvals and consents for developing the property. It is sensible to make both your land purchase and sale agreements conditional on the necessary approvals and consents being obtained. This will help ensure you are not bound to complete an unlawful development. 

You also should consider who should approve the conditions imposed on any approvals or consent. To avoid onerous conditions being placed on you, you may want to specify that, before the agreements become unconditional, you must approve the terms and conditions of the resource consent or other relevant approvals.

Agreement for Sale and Purchase of Real Estate

10th edition contains significant changes for buyers and sellers

The Auckland District Law Society and the Real Estate Institute of New Zealand (ADLS & REINZ) are the authors of the most common template Agreement for Sale and Purchase that is used by the majority of lawyers and real estate agents throughout New Zealand. In November 2019, ADLS & REINZ released the 10th edition of the agreement with changes that impact and benefit both buyers and sellers.

The 10th edition makes a number of changes to the agreement that include:                                             

»  Simplifying the terminology so it is consistent with the wording in the Land Transfer Act 2017
» Clarifying the obligations of the parties when fulfilling conditions, and
»  Setting a clear distinction between chattels that have an operational function and those that don’t.                        

Changes when fulfilling condition                

Finance condition wording: The finance condition no longer specifies with which lender the buyer needs to arrange finance, as long as the buyer takes all reasonable steps to obtain finance. If you are unable to obtain finance and you want to cancel the agreement, you have an obligation to provide evidence of the steps you took to try and obtain that finance. You cannot use this condition to cancel if you simply change your mind about the purchase.

Toxicology report: There is now the option for a buyer to obtain a toxicology report
as a standard condition in the agreement.
If selected, the condition requires the
buyer to hire a professional to test the property for drug contamination, primarily methamphetamine. The buyer has 15 working days to arrange the test to be done and to approve the written toxicology report.

Building report now must be in writing: The buyer now has 15 working days to arrange a builder to inspect the property and prepare a written report. If, for any reason, you don’t approve the report you must supply the seller with a copy of the report.

Property briefs

There have been a number of developments around property investment by overseas investors and also on residential tenancies. If you are an overseas investor or a landlord, you should ensure you are up-to-date with the latest changes and/or proposals.

Update on Overseas Investment Act 2005

An overseas investor attempting to circumvent the requirements of the Overseas Investment Act 2005 has received the first criminal conviction under that legislation. In February 2020, Dr Won Joo Hur was fined $100,000 for falsely stating to the Overseas Investment Office (OIO) that
a property was not purchased on his behalf and providing a false loan document to support his version of events. The OIO continues to take civil enforcement action against overseas persons who do not seek consent for relevant land purchases. Since 2015, the OIO has successfully sought financial penalties in the High Court and required the disposal of property in a number of cases where the Act’s requirements were not met by overseas investors. In one such case, the High Court ordered civil penalties totalling $2,970,256 .

These cases are a reminder that getting things wrong in this area can have serious consequences. It’s essential that you check whether you might need OIO consent for a purchase before entering into any Agreement for Sale and Purchase of Real Estate. Also, if there is any change to your company’s directors during the consent process, you must update the OIO. Otherwise, you risk delaying the consent process or there could be other penalties. If you or your company have overseas connections, we can help with assessing whether your property purchase requires OIO consent and to work through the consent process with you.

Download the full issue in PDF