Can we trust real estate purchase contracts?

Our lives are dominated by contract law. Even many of our small decisions carry legal obligations and, in an age obsessed with digital activity, everything from your contract with your internet and mobile provider – right through to the terms and conditions you agree to every time you sign up for an online service, app or social media add-on – require you to give something up in exchange for access to a product or service.

Of course, most of us simply ignore these and click “agree” so that we can get past the formalities and into the fun stuff, and for the most part that’s a harmless approach. But every once in a while we agree to a term or condition that we might never have agreed to if we’d examined the contract more carefully or understood what we were signing.

In most cases, the consequences of doing this aren’t life or death – a stray $40 gets debited to your credit card for a purchase you didn’t know you’d agreed to, or Mark Zuckerberg starts sharing your Facebook data with a company you’ve never heard of – but it’s a reminder that the party seeking your agreement isn’t always your friend and that, particularly with significant transactions, you should know what you’re signing up to.

That’s especially true with sale and purchase agreements for the purchase of property. For most of us, buying a home is the most significant purchase we’ll ever make and the implications of getting any part of that transaction wrong can be personally and financially devastating.

That’s where the sale and purchase contract comes in. In theory, an agreement could be made to exchange a property for an acceptable sum by scrawling “I agree to buy your house for $xxx on such and such a date” on a bit of paper and getting both parties to sign it, because that’s all a contract is – an agreement on the terms of a sale and purchase. But over the centuries the process of doing this has become more and more complicated and we now need to be conscious of all manner of things which might affect our financial or legal position.

Fortunately, this has been largely taken care of, for you, by the Auckland District Law Society. This august institution produces a standard sale and purchase agreement used by most real estate agencies in New Zealand. If this document didn’t exist, you would need to rely on your lawyer to produce an equivalent – and the potential for disagreement, and litigation, between parties would be huge – so we can be enormously grateful for the work which has been done to improve this contract over the years.

But make no mistake, the ADLS Sale and Purchase Agreement is a document which favours the seller (vendor) over the buyer and where the interests of the parties are in conflict it is generally contingent on the buyer to add conditions or “clauses” to protect their position. These can be conditions which state that the purchaser can back out of the deal if (for example) an inspection identifies a problem, if a valuation doesn’t stack up, or if the purchaser is unable to secure finance.

In respect of this last example – there’s been recent media coverage of the latest version of the ADLS contract and a significant change to the finance clause. This means that a purchaser who is unable to arrange finance is now required to provide evidence of this before a vendor will release them from a deal. No doubt the new clause was well meaning and was intended to stop the practice of purchasers ‘holding’ a property while shopping round for a better one – but clearly it comes with unintended consequences and may well impede the market, which is in no one’s interests. There are even anecdotal stories of Real Estate firms already requiring purchasers to prove that they were unable to secure finance from any bank – not just the one that they traditionally deal with.

It’s important to understand that despite recent claims you don’t actually have to accept the ADSL contract in its totality. It is simply a template and you are absolutely entitled to strike out a clause, provided the vendor agrees to that action. However, most of us don’t have the proper legal knowledge to do that and could actually weaken our own position by doing so.

Instead, I’d advise you to take your lawyer's advice on the consequences of provisions of the new contract before you make an offer on a property. This may cost you a little more – but could save you thousands or help you to avoid a potentially disastrous decision.

- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. Email him at ashley@nzemail.com