Be wary of cancellation rights under Sale and Purchase Agreements

The recent High Court case of Strack v Grey has clarified the requirements to cancel an Auckland District Law Society (ADLS) agreement for the sale and purchase of real estate for non-fulfilment of a builder’s report condition.

Key considerations for purchasers cancelling due to an unsatisfactory builder’s report

Strack v Grey affirms that purchasers should not purport to cancel under the ADLS standard builder’s report condition clause:

  1. before receiving a written report;
  2. based on a matter that could not reasonably be considered to be an issue, or is not included in the report; or
  3. based on a written report that is not sufficient to meet the standard in clause 9.3 (for example, not prepared in accordance with standard practice, or not sufficiently detailed in relation to the particular issue that the purchaser is seeking to cancel based on).

While these first two points should be relatively straightforward to comply with, the third point may require purchasers to take a more critical approach to builder’s reports.

Where a report raises a theoretical issue, purchasers should ensure they have enough information to determine how this issue affects, or may affect, the particular property that is the subject of the report.

Strack v Grey – The facts

In Strack v Grey, the defendant (Mr Grey) contracted to purchase the plaintiffs’ (Dr and Mrs Strack’s) property, conditional upon the defendant arranging suitable finance, and a written report on the condition of the building, pursuant to clause 9.3 of the contract.

Clause 9.3 (the standard ADLS builder’s report condition clause) required the builder’s report to be prepared in accordance with standard practice, and satisfactory to the purchaser on the basis of an objective assessment.

The defendant purported to cancel the contract two days later, due to concerns over the type of insulation used at the property. At this stage, a licensed building practitioner had orally confirmed to the defendant that this type of insulation may cause watertightness issues, but the defendant had not been supplied with a written report.

After the plaintiffs requested a copy of the report on which the defendant had relied, the defendant had his builder prepare a very brief report and sent a copy to the plaintiffs. In response the plaintiffs purported to cancel for repudiation of the contract by the defendant.

The plaintiffs eventually sold the property to a third party at a shortfall of $150,000 and sued the defendant to recover this loss.

Cancellation must be objectively reasonable and based on a written report

The Court took issue with two aspects of cancellation by the defendant:

  1. a written report prepared by a licensed building practitioner had not been provided to the defendant at the time of cancellation; and
  2. the written report which was subsequently provided did not meet the standard required.

The builder’s report was held not to meet the standard required under clause 9.3, due to its failure to address how specific features of a property might mitigate a theoretical issue relating to insulation. The Court acknowledged that the report could be a report on only specific issues and did not have to be in any particular form, but it did need to provide a balanced view of the issue it addressed.

As the report was not valid, it invalidated the defendant’s cancellation pursuant to it, and the defendant was held to have repudiated the contract.

We can assist with the cancellation process

More generally, this case is a reminder that following the incorrect process to cancel a contract, even where you might have a valid cancellation right, can invalidate your cancellation and have costly ramifications.

It pays to always speak to a solicitor before attempting to cancel a contract, to help you navigate the process.

If you have any questions about any of the above, feel free to contact one of our experts listed below, who will be hapy to assist you.

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