Vendor warranties – Promises worth keeping

We all make promises at different points in our lives. Sometimes we break them. However, breaking vendor warranties – promises made when selling or purchasing property, can have far-reaching and damaging consequences.

A vendor warranty is a contractual promise given by a vendor to a purchaser as part of a sale and purchase agreement. Essentially, the vendor will promise the purchaser that a particular state of affairs exists at the time of signing the agreement, or even sometimes at settlement.

Some common examples include:

• The sale property has all necessary government approvals or licences and complies with all relevant legislation and/or regulations.
• The Vendor has no knowledge of any fact that might result in legal proceedings being initiated in respect of the sale property.
• There are no outstanding arrears or charges against the sale property.
• All chattels included in the sale agreement are delivered in reasonable working order.

The underlying principle for a purchaser is caveat emptor buyer beware! However, over time there has been an erosion of that principle in property transactions. Consequently, extensive base vendor warranties are included in the standard agreement for sale and purchase.

Vendor warranties provide legal certainty that the purchaser is getting what they paid for. This is especially crucial in cases where the purchaser has not been able to conduct thorough due diligence.

A vendor breach will result in the purchaser having the opportunity (for up to six years) to seek compensation or equitable set-off for a sum equal to the cost of remedying the breach. Depending on the nature of the warranty, this could be a significant amount.

Recent Example

Section 8 of the ADLS Agreement for Sale and Purchase of Real Estate (11th edition) provides the unit title and cross-lease provisions. Notably, clause 8.2,

8.2       If the property is a unit title, the vendor warrants and undertakes as follows:   

(7)        The vendor has no knowledge or notice of any fact which might give rise to or indicate the possibility of: 

(a)  the owner or the purchaser incurring any other liability under any provision of the Unit Titles Act [2010 & 1972].

Miles v Gadd

This specific warranty has been addressed in the recent court of appeal decision of Miles v Gadd [2022] NZCA 227 [7 June 2022].

In this case, the vendor, Mr Gadd, sold his unit to the plaintiffs. Shortly after settlement, numerous weather tightness defects became apparent. After an investigation, the body corporate determined the only viable option was to reclad the entire structure.

The cost quickly ballooned to a projected $22 million.  A cost to the unit owners through special levies that severally affected the value of each unit in the building.

The plaintiffs sought remedy for this through the High Court and argued that Mr Gadd, having not disclosed these defects of the common property, was in breach of 8.2(7)(a) of the agreement.

The Court’s decision

The High Court’s interpretation of the warranty was that it was unit specific and limited to actual knowledge of the facts giving rise to the possibility of liability.

The Court found Mr Gadd was not aware of any reason as to why repairs would not be addressed under ordinary maintenance for a complex such as this and paid for with funds available to the Body Corporate.  Accordingly, the Court ruled Mr Gadd had not breached the vendor warranty.

Although the appeal to the Court of Appeal was dismissed due to the factual circumstances, the High Court’s interpretation of the term ‘any other liability’ in the warranty was departed from.

The scope of ‘any other liability,’ was determined not to be limited to prospective liabilities relating solely to a vendor’s unit and extended to include prospective liabilities relating to common areas.

It is a very wide interpretation. It means a vendor selling unit title property must be clear on the current state of affairs within their body corporate before agreeing to the standard warranties.

How AlexanderDorrington can help

This decision relates specifically to the aforementioned vendor warranty for unit-titled properties. However, it highlights how easy it can be to enter into an agreement without realising what you are promising to the purchaser through vendor warranties.

Gaining sound legal advice from the outset of your sale will give you peace of mind throughout any transaction. Our expert knowledge of property law makes AlexanderDorrington a good choice for your conveyancing, particularly if you need a unit titles specialist.

Call us on 09 375 2770 or email us directly at lawyers@alexanderdorrington.co.nz.