KEY POINTS:
This agreement is subject to and conditional upon the purchasers entering into an unconditional agreement for the sale of their property at ... on or before ... such sale does not eventuate, then this agreement shall be voidable ... and neither party shall have any right or claim
against the other.
Those words, well known to anyone who agrees to buy a house before selling the one they live in, have given great comfort to buyers, possibly too much comfort.
A Court of Appeal decision featured on the Herald's front page on Tuesday is a timely reminder for home-buyers that a conditional agreement is a two-way commitment.
The seller agrees to cancel the agreement if the buyer cannot sell his existing home by a specified date, and the buyer is obliged to "do all things which may reasonably be necessary" to sell it. The Appeal Court, upholding a High Court decision, has ruled that an Auckland couple failed to meet that obligation when they did not put their existing home on the market in the conventional way.
The couple, Bill and Carol Fleming, wanted to sell their Beachlands home as quietly as possible so their local lawn mowing business would not lose customers. They listed the property with agents, but insisted it was not to be advertised, no signs were to be erected, no photographs put in agents' windows, no "open homes". The Flemings simply wanted word put around in well-heeled circles that the $1.4 million house was for sale, and when a similar property was auctioned in their street they asked that buyers be referred to their place afterwards.
This covert marketing, as it is called, brought no offers at the price they wanted and the Flemings' conditional agreement to buy the other property lapsed.
The sellers of that property sold it some time later for less than the Flemings had offered and then sued the Flemings for the difference plus interest plus the costs of re-advertising plus legal costs. The suit was successful and the Flemings, still in their Beachlands home, must pay $300,000 to the sellers of the house they did not buy. All up, their non-purchase has cost them $400,000.
They are naturally aggrieved but the decision seems right. Most of us probably have assumed that a conditional agreement did not bind us to do anything in particular. If we could not get the price we wanted for the existing home, or fell out with the agent or simply got cold feet, no harm done. How wrong that has turned out to be.
And how timely for the courts to declare so, just as the long real estate boom seems to be finishing. Conditional agreements posed little problem for either party when properties were selling fast on a seemingly ever-rising market.
Now that the pace is slowing, sellers cannot have the same confidence that a conditional agreement will go through. At least lawyers can now re-assure them the buyer is obliged to do everything reasonably expected of somebody seriously intent on selling a house.
It is less clear that "covert marketing" would always fall short of what the law reasonably expects. It might depend on the circumstances of each case. The judges were not convinced the Flemings needed to be quite as covert as they were. There are ways to advertise the selling features of a property without publicly identifying it.
But the basic lesson is clear: when prospective buyers sign a conditional agreement, they are legally as committed to the transaction as the seller. More than one sale may depend on their contractual good faith.
Happily, when people find a house they want, they normally become too willing to relinquish their old one. But a conditional agreement allows no second thoughts.
Buyers beware.
