Five common problems when signing a sale and purchase agreement and how to avoid them

What is a sale and purchase agreement?

The sale and purchase agreement is a legally binding contract between a property buyer and seller. It sets out all the details, terms and conditions of the sale, including the price, any chattels sold with the property, whether the buyer needs to sell another property first and the settlement date. The agreement provides both parties with certainty about what will happen when.

You can learn more about sale and purchase agreements in this video(external link). 

What can possibly go wrong?

Here are the five most common problems the team at the Real Estate Authority (REA) hears about sale and purchase agreements, and what to do to avoid them:

1. GST

One of the very first sections in a standard sale and purchase agreement states yes or no as to whether the vendor is GST registered . Unfortunately, this question is sometimes overlooked when the document is drawn up. If the buyer signs the agreement on the assumption that the vendor is not GST registered, when in fact they are, then depending on what the vendor used the property for, that can mean that the buyer must pay an additional 15% of the purchase price. That is a significant number on top of a property sale. If the GST section in an agreement isn’t complete, don’t sign the agreement until it is. GST usually applies to commercial property, but it can apply to residential property in some cases, for example if the property has been used for a business.

2. Clauses

Usually, the sale and purchase agreement is the offer document from the buyer to the seller.  Buyers often add a sunset clause which gives their offer an expiry date – this means the buyer isn’t left waiting for a reply from a vendor and frees them up to look at other properties if their offer isn’t accepted. Sellers need to be aware of this clause and should respond before the expiry date or risk missing out on the sale. 

Experienced buyers and sellers may try to add clauses to the sale and purchase agreement that will allow them to cancel the agreement if they change their mind – especially if the other party is inexperienced. It’s important not to agree to additional clauses without legal advice. 

3. Conditions

Don’t rely on adding a condition to a sale and purchase agreement to give you a way out of an agreement if you change your mind about the sale. For example, if a buyer adds a condition that they need a satisfactory property report and the property inspector finds a problem, the seller may remedy that problem in which case the buyer must continue with the sale. 

4. Settlement date

Think carefully about the settlement date you are agreeing to before you sign the sale and purchase agreement. When the date is locked in, it may be impossible to change because other events may be linked to it, for example, other property sales in the chain. If you want to negotiate a change to the settlement date, or any other aspect of the signed agreement, it may give the other party an opportunity to renegotiate other details in the agreement, including the price.

5. Getting legal advice before you sign is vital

The above issues should demonstrate why it’s important to ask a lawyer or conveyancer to review the sale and purchase agreement before you sign it.

It can be tempting for a seller to get carried away by the relief of finding a buyer, or for a buyer to be excited about having their offer accepted, but don’t rush into signing the sale and purchase agreement before making an appointment with your lawyer or conveyancer.

It’s a good idea to choose a lawyer or conveyancer before you get to this point, so there are no delays.

The agreement will include general obligations and conditions that you will need to meet. These may include things like access to the property, insurance details and what happens if either party fails to meet any of the conditions in the agreement. Your lawyer or conveyancer will explain these clauses to you.

Your lawyer or conveyancer will also explain any conditions that the other party has included in the sale and purchase agreement. You can read more about conditions that buyers and sellers may include in the agreement at settled.govt.nz.

The real estate agent must give the New Zealand Residential Property Sale and Purchase Agreement Guide to everyone entering into a residential real estate sales and purchase agreement and both parties must be given time to read and understand it before signing the agreement. You can read the guide here.(external link)