When buying or selling land, the basic rule of ”buyer beware” (sometimes referred to as “caveat emptor”) applies.
The basic rule means the buyer takes the property “as is” and cannot claim against the seller if they discover a defect in the property after they sign the agreement. The seller has no duty to disclose defects in the property except for hidden defects in the seller’s “title” which the buyer is unable to discover on a physical inspection of the property. (The seller’s “title” is the term used for the seller’s legal rights to ownership of the property.)
Exceptions to buyer beware
There are exceptions to the basic rule – for example, there are clauses in the standard agreement for sale and purchase which have been developed for the buyer’s benefit relating to defects which may not be easily discovered by the buyer before committing to purchase the property. There are also some statutory provisions that make in-roads into the buyer beware rule.
The clauses in the agreement for the buyer’s benefit are called “vendor warranties”. Vendor warranties are promises or undertakings given by the seller about the property. If a vendor warranty turns out to be untrue the buyer may be able to claim damages. If the broken promise is serious enough, the buyer may be able to cancel the agreement. The standard vendor warranties cover such things as the condition of chattels, plant and equipment on the settlement date, unpermitted building work and outstanding legal requirements and claims.
In addition to the standard vendor warranties, farm transactions usually contain warranties for the buyer’s benefit about farming matters such as fertiliser application, RMA and Fonterra compliance, good husbandry, grass cover and plant and equipment condition. The wording of these promises is commonly given scant attention. It is not uncommon for these promises to come back and bite the seller if they are not given the attention they deserve.
Seller beware and a new warranty
Sellers now need to consider a new warranty that has been included in the latest version of the standard agreement. This warranty places a significant onus on the seller to disclose information about the property. Under this warranty the seller is liable to the buyer if the seller doesn’t disclose “knowledge or notice of any fact which might result in proceedings being instituted by or against the vendor or the purchaser in respect of the property”.
Proceedings are defined widely to include court, tribunal, arbitration, mediation and other dispute resolution procedures. The new warranty could therefore have very wide application, particularly if the property being sold is a farm property where there are numerous practical and legal matters to consider – title documents, District and Regional plan requirements, fencing, water supply, fertiliser application, resource consents, RMA, Health and Safety and Fonterra compliance and the state of the buildings, chattels, plant and equipment.
The new warranty is given by the seller as at the date of the agreement. Sellers will need to think carefully before they sign an agreement about whether there is anything that could be caught by this warranty.
It will be interesting to see how courts interpret the seller’s “knowledge” in the context of this warranty. Must the vendor have “actual knowledge”? Or will it be sufficient to show wilful blindness on the part of the vendor, or that the vendor wilfully and recklessly failed to make enquiries that an honest and reasonable
person would make?
The warranty extends not only to legal proceedings which might be brought against the seller, but also to legal proceedings which might be brought by the seller or by the buyer. The seller will therefore need to disclose any potential claims they might have against another party in respect of the property.
Experienced sellers could be caught out because the warranty extends their potential liability from what has been the situation in the past. A buyer might now be able to claim against the seller in situations the seller knew about when they signed the agreement where the buyer had no remedy under the previous version of the agreement – for example, if the buyer becomes embroiled in a dispute or claim after settlement for a fence which is not on the boundary, or a water supply or right of way easement that is not in the correct place; or if the buyer receives notice of a requisition from the Council for a building without a permit (which was not built by the seller), or for a non-compliant effluent system.
Caution advised before signing agreement
Sellers should err on the side of caution and make disclosure about anything they are aware of that could give rise to a dispute or claim in respect of the property. It goes without saying that they should take advice from a lawyer who has experience with farm