Background

The plaintiff (purchaser) paid a deposit of over $1million after agreeing to purchase from the defendants (vendors) a $10.6million Remuera property with unobstructed views of Hobson Bay, Rangitoto Island and the Waitemata Harbour (property). Following the Auckland Anniversary Day weekend extreme weather events in 2023, the purchaser cancelled the sale and purchase agreement (SPA) alleging that the damage caused by the weather made the property untenantable.

The SPA was a standard form agreement for the sale of real estate by tender prepared by the Auckland District Law Society and the Real Estate Institute of New Zealand.  As ADLS agreements are the most commonly used templates for the sale and purchase of real estate, this case will apply widely.

In the days leading up to the property settlement (due 31 January 2023) heavy rainfall, flooding and landslips sent Auckland into a declared state of regional emergency. This included a substantial landslip across the cliff face on the northern frontage of the property – causing significant damage to the houses below and the death of one inhabitant. The slip included land below the decks of the property and a concrete crib retaining wall, and it left some foundations exposed.

The property was subsequently “red stickered”, recording that the building was at risk from an external hazard, that a major landslip had occurred, and that part of the building foundation structures was likely compromised. Access to the property was not permitted without written authorisation.

Auckland Council advised that the red sticker would be removed subject to a favourable geotechnical and structural engineering report. In March 2023, Auckland Council replaced the red sticker with a yellow one, allowing restricted access to certain parts of the building (including the deck and master bedroom).

Subsequently, the vendors gave notice to the purchaser that it required settlement (on adjusted terms, including credit towards damage to and diminution in the value of the property). This was followed by notice that the purchaser’s failure to settle was a breach of the SPA. In response the purchaser purported to cancel the agreement on the basis that the property was untenantable and requested a refund of the deposit. The vendors contested the untenantability of the property, arguing that the cancellation was in fact a repudiation of the contract, and the vendors were entitled to retain the deposit.

Ultimately, proceedings were commenced to have the issue resolved by the High Court.

The Court’s decision

There was no question that the property was damaged during the time between the parties entering into the SPA and the settlement date. The issue was whether the purchaser was entitled to cancel under clause 7 of the SPA.  Clause 7 deals with risk and insurance and has specific provisions on what can be done when a property is destroyed or damaged before settlement. This turned on a determination of what the settlement date was and whether the property was untenantable at that date.

On the settlement date, the property was considered untenantable for the following reasons:

• the property was red stickered because it was considered that the building was at risk from an external hazard and that part of the building foundation structures was likely compromised; and
• access was not permitted without written authorisation, meaning no one could occupy the property and no-one would be able to live there or rent it out.

These circumstances meant that the property was untenantable, irrespective of the fact that the red sticker was issued on the basis only of a visual inspection and irrespective of the findings of the later geotechnical engineering and structural engineering reports.

Since the property was untenable on the settlement date, the purchaser was entitled to cancel the SPA under clause 7 and was entitled to the return of the deposit in full (plus interest).

The Court also considered that, even if the question of tenantability could have been assessed at the point when the red sticker was replaced by a yellow sticker, it would still have been untenantable because the deck and master bedroom could not be accessed.

Takeaways

This case provides useful interpretation for the term ‘untenantable’ in the context of the ADLS sale and purchase agreement and purchasers’ corresponding cancellation rights. The Court affirmed that the question of tenantability must be assessed as at the settlement date and must take into account whether the property can still be used for the purchaser’s intended purpose.  In this case, even if the property could have been partly occupied (excluding the master bedroom and decks) it was unusable for the purchaser’s intended purpose, as a family home.  

It also highlights the importance of a vendor:

• retaining insurance for the property until settlement has occurred; and
• having a contingency plan (such as bridging finance, if obtainable) where it relies on settlement occurring to complete the purchase of another property. 

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Please get in touch with one of our experts if you would like to discuss this further.

Special thanks to Tom Hammond for his assistance in preparing this article.