A Tale of Two Defaults – When Can a Purchaser Cancel an Unconditional Contract to Purchase Property?

Two recent court cases shed light on the circumstances under which a purchaser may be entitled to cancel a sale and purchase agreement for a property after it becomes unconditional. While such cancellations are rare and generally difficult to achieve, the courts have recognised some limited situations where cancellation is legally justified.

Du v Youn – When a Property Becomes Untenantable

In Du v Youn (BC202560666), the purchaser, Mr Du, agreed to buy a property for $10.63 million and paid a 10% deposit of $1.063 million after the agreement became unconditional.

The property, perched on the edge of a plateau with sweeping views of Hobson Bay, Rangitoto Island, and the Waitematā Harbour, suffered a significant landslip in January 2023 following the Auckland Anniversary weekend storm. The slip severely compromised the land’s stability - affecting the area beneath the decks, damaging a concrete retaining wall, and exposing the foundations of the master bedroom.

Following the slip and after the settlement date had passed, Mr Du investigated the potential repair costs and sought to cancel the agreement on the basis that the property had become untenantable.

The vendor, Mr Youn, disputed the cancellation and sought to retain the deposit and take further action against Mr Du.

The Court had to determine whether the property had indeed become untenantable. The judge found that “untenantable” means a property is no longer fit for the occupation and use a typical purchaser would intend (such as living in it or renting it out). On the date of settlement, the property was under a Red Placard, prohibiting access without written consent under section 133BT of the Building Act 2004. In the Court’s view, the property was untenantable.

Accordingly, the Court ruled in favour of Mr Du. Mr Youn was ordered to return the deposit, pay interest on the amount held, and cover Mr Du’s court costs.

Other Grounds for Cancelling an Unconditional Agreement

While it is difficult to cancel a contract once it becomes unconditional, there are a few other recognised legal grounds for cancellation:

1.      Mutual Agreement: The vendor and purchaser may agree to cancel the agreement by mutual consent.

2.      Vendor Default: If the vendor fails to settle following the issue of a settlement notice, the purchaser may cancel the agreement.

3.      Misrepresentation or Breach of Essential Term: A contract may be cancelled if one party was induced to enter into the agreement by a misrepresentation (innocent or otherwise), or if an essential term is breached. The breach must either relate to a term essential to the cancelling party or substantially reduce the benefit or increase the burden of the contract.

4.      Defect in Title or Property: A material deficiency in the land or title—such as a defect that undermines the subject matter of the contract—may give rise to cancellation rights.

Maraposa Ltd v KWJ Construction Ltd – Weak Arguments

In Maraposa Ltd v KWJ Construction Ltd, a dispute arose from a subdivision development in Pukekohe. KWJ Construction Ltd contracted to purchase six sections from the developer, Maraposa Ltd. Le Construction Ltd agreed to purchase three additional sections. The respective directors of these companies, Ms Zhu and Mr Wang, provided personal guarantees for their companies’ obligations.

Following the agreements becoming unconditional, both companies failed to settle and Maraposa sought a court order for specific performance of the contracts.

In response to Maraposa’s enforcement of the contracts, the defendants raised several defences:

·         Ms Zhu claimed she was not aware she was signing as a guarantor.

·         She alleged the solicitor’s approval notice was not explained to her.

·         Both Mr Wang and Ms Zhu stated they had no recollection of the vendor waiving conditions for its benefit.

·         Finally, Ms Zhu claimed the change in lot numbers rendered the deal unacceptable, arguing that it was an essential term of the agreement that the original lot numbers summed to a lucky number 832, while the new numbers totalled 818, which she considered to be unlucky.

The Court found all of these arguments lacking in substance. It upheld the contracts and ordered specific performance and payment of damages- requiring the purchasers to complete the transactions as agreed.

Be Informed, Not Caught Out

These cases demonstrate the high threshold required to cancel an unconditional agreement for the purchase of land. While truly unforeseen events or breaches of essential terms may provide an escape route, more common arguments like misunderstandings or buyer’s remorse are unlikely to succeed.

If you are concerned about your ability to settle a purchase, a purchaser’s ability to settle, or if something significant changes after your agreement becomes unconditional, we recommend seeking legal advice early. The consequences of a failed settlement can be severe, including loss of deposit, court-ordered performance of the agreement, and liability for damages.