Diana Clement: Contracts need scrutiny

Sale and purchase agreements are incredibly important documents. They're legally binding contracts between buyer and seller for the sale/purchase of a property.

In theory you could scrawl an agreement to buy a home on the back of a napkin. But you'd be stark raving mad if you signed such an agreement.

As it is, too many buyers just sign on the bottom line of an agreement they've been given without having it checked out by a lawyer.

That is quite astounding for a purchase costing hundreds of thousands if not millions of dollars. If something goes wrong, there aren't too many legal legs to stand on.

Fortunately, most of the time buyers are presented with the ADLS/REINZ agreement for Sale and Purchase of Real Estate, which is published jointly by the Auckland District Law Society and Real Estate Institute of New Zealand.

The agreement is periodically updated and it's important to ensure that you've been given the latest version (currently, ninth edition 2012 (6)).

"For a standard residential property purchase, using the ADLS/REINZ form is the way to go," says John Stirling, partner at Turner Hopkins. "It is a very even-handed document."

Nonetheless, buyers shouldn't sign even the standard document without checking with a lawyer. There are various clauses that can be struck out.

The agreement has a long list of optional clauses that can be added.

If, for example, the buyer wants to test for methamphetamine contamination, then a pre-written clause covering this can be added.

There may be conditions related to the sale of the purchaser's property: obtaining finance, solicitor's approval of title, obtaining a building or valuation report, the purchaser's access prior to settlement, a requirement to see body corporate minutes, a confidentially clause or one of many others.

Twenty years ago it was common to be given non-standard sale and purchase agreements that contained draconian clauses.

It's rare, says Stirling, for that to happen these days, although he sometimes comes across clauses drafted by a real estate agent that may not stand up in a court of law.

"We advise the client of the reason why we believe it is not an appropriate form to sign," says Stirling.

Tim Jones, convener of the ADLS Documents and Precedents Committee, says that when the standard ADLS clauses are edited or removed they are intended to show up as strikethrough text, thus highlighting what has been removed.

"However, some parties may create their own documents which look like the ADLS/REINZ standard form but which are not, sometimes with many important clauses protecting the buyer removed. These omitted clauses are difficult to spot even for trained lawyers.

However, lawyers who regularly work with the documents have the best chance of knowing when one has been tampered with."

This is why buyers and sellers should have a lawyer review even apparently standard sale and purchase agreements before signing.

When it comes to sections, off the plan purchases and new builds, contracts can still use the standard ADLS/REINZ form, but have appropriate clauses added.

"Agreements where the purchaser is looking to buy something yet to be built can be conditional, for example, on the vendor obtaining and getting all the necessary consents required to do the development," says Stirling.

"It might (also) be dependent on finance and sufficient level of sales of the development."

Many developers, however, draft their own agreements which are heavily weighted in their favour should the development not proceed.

If Stirling was drafting an agreement for a developer client he would add specific clauses such as his client's responsibilities to bring the project to market or carrying out the physical work to be able to apply for the titles.

Despite the bad press sunset clauses sometimes get, they ensure that if the development doesn't go ahead within a certain time period the deal is cancelled and the buyer's deposit returned. If there is no sunset clause, Stirling would recommend that buyers don't sign.

Sometimes he would recommend clients negotiate the clause concerning time for completion.

Too short and the developer might use your deposit to support the finance needed to get the project underway, but cancel the deal later to sell at a higher price. Too long and the purchaser might be waiting years for completion.

It is important to do your due diligence about the developer before signing a contract for something that is yet to be built.

Sometimes he will recommend a client not sign because the developer in question has been involved in a previous project that didn't proceed.

A lot of apartment projects fail because of difficulty getting funding or building costs escalating.