Failed Manurewa house buyer’s $429,000 wallop: Three lawyers explain what we can learn

37 Pallant Street, Manurewa - Jay Bath offered to buy it, then tried to beat down the price and failed to settle. Photo / Dean Purcell

Lawyers say we can learn from a house buyer walloped with a $429,000 ruling for failing to settle a $1.16 million Manurewa purchase, but reneging was occurring more regularly in the depressed housing market.

Joanna Pidgeon of Pidgeon Law, John Waymouth, a specialist real estate barrister and Jeff Walters of Albert St practice K3, said the $429,000 judgment against Jay Bath this month acted as a warning.

The High Court ruled against Bath for failing to buy 37 Pallant St after trustees of the Sonny and Anna Whakaruru Family Trust successfully sought summary judgment against him for reneging. The vendors did eventually sell, but at much less than the $1.16m Bath had agreed. They only got $781,500 so sued for the difference and many other costs.

Pidgeon said reneging was rising, particularly among people who bought at the peak of the market with longer-term settlements. The market has turned on them with values of properties dropping, decreasing sale prices used to fund purchases or reducing the amount able to be borrowed against a property, and then interest rates increasing, increasing the cost of finance.

This was a perfect storm of events, with developers in particular caught out, unable to settle.

Real estate barrister John Waymouth. Photo / supplied

Waymouth said there were five lessons from the court case: “First, buyers can’t think they can control what the vendors do once a contract is unconditional. Those buyers must have the money they offer, or access to it from a financier.

“Secondly, vendors have many rights and as long as they act on professional advice, they can recover losses on house sales which fail. Third, the price of walking away from a contract is very expensive and that’s what we’re seeing here,” he said.

“Fourth, the worst lesson to be learned is reneging on a house purchase could possibly involve the failed buyer being bankrupted if the court judgment was not adhered to. Bath must pay the damages or appeal that punitive decision to the Court of Appeal,” Waymouth said.

The fifth lesson was the importance of getting a lawyer to read contracts pre-signature, “and I’m not just saying that because I’m a lawyer”.

37 Pallant Street, Manurewa: at the centre of the dispute over its failed sale. Photo / Dean Purcell

Waymouth said if a company reneged, it would be liquidated and attempt to escape liability if there were no assets. But Bath’s case was different because he’s a person and wasn’t buying as a company or another entity.

”There’s no obligation on the vendors to do anything once the contract has gone unconditional. When he tried to negotiate post-settlement date, again the vendors had no obligation to engage,” Waymouth said.

Reneging happened “more than people realise. I do know of a lot of Auckland contracts by developers who had six or 12-month settlements at the peak thinking they could develop or subdivide but the values dropped away, demand fell and they couldn’t settle.”

Waymouth said a lawyer might have asked if the buyer had arranged finance and could meet his obligations.

The vendor’s lawyer might have also asked “are you sure you want to give him six months?” Generally, a long settlement would draw a 10 per cent deposit, not 5 per cent, Waymouth said.

Joanna Pidgeon of Pidgeon Law cited 10 lessons for buyers.

Pidgeon cited 10 lessons for people looking to buy:

1. Do you have the money to purchase? If you do not have cash you should make your offer conditional on finance. Even if you have finance pre-approval, you may still need to get a valuation. Get your preapproval updated if it has lapsed. Lending rules and policies change over time so make sure you know what the current rules are.

2. Be aware of sales prices in the area, do your homework looking at trends over the previous six months or more so that you are in line with market trends and not paying over value when you sign up for the property.

3. Should your purchase be conditional on a valuation? Often banks require this, particularly when the market is moving, and if there is an extended period of time between signing and settling, values can change, which may reduce the amount you can borrow.

4. Do your due diligence on the property’s physical condition before going unconditional – a dream property at a good price might not seem such a bargain if it’s a leaky building, affecting a bank’s willingness to lend due to its lower value, and the need to spend money to repair.

5. Your personal circumstances may change over time – job losses, relationship breakups, pregnancies etc may affect your circumstances by the time it comes to settle. What is your back up plan – can family help, can you get a flatmate or boarder in? Maybe you need to onsell to minimise your risks.

6. In a falling market you are usually best to sell before you buy as then you know how much money you have to spend, or make your purchase conditional on selling your property at a high enough price.

7. If you can’t settle, the vendor may help you onsell.

8. Ask the vendor for vendor finance to close any financial gap.

9. Be wary of buying at an auction if you haven’t done thorough due diligence on the property and your ability to borrow. Don’t get carried away if you don’t have the funds all lined up for settlement.

10. Get legal advice before signing a contract and contact your lawyer as soon as you become aware of a situation that might affect your ability to settle, as they may be able to help with a strategy to resolve the issue or to minimise your exposure.

Jeff Walters from K3 Legal said the offending was serious. Photo / Greg Bowker

Walters said he was seeing situations like the Manurewa one more frequently, with buyers squeezed by the downturn and high interest rates.

Walters said a deposit - often of tens of thousands of dollars - was usually enough to cover losses but in a market where prices have fallen by up to 30 per cent, the vendor may sue for the extra loss, he warned.

Manurewa was an open and shut case: “The purchaser simply failed to settle, so the summary judgment process is generally a cost-effective and timely way of getting a judgment. The key call for the vendor will be whether the purchaser has the funds to pay a damages award,” Walters said.

There was little a buyer could do that was likely to be agreeable to a vendor in the case of default.

“If you have committed to pay X for a property then you take the risk that the property will be worth X at the time of sale. Covid delays have made this harder as buyers’ financial positions have changed and banks’ lending policies may prevent buyers from getting the funding they had initially anticipated,” Walters said.

Attempts by the Herald to discuss the case with the involved lawyers and other parties have failed so far: “I do not currently have instructions from my client to discuss the matter with the media,” said plaintiff lawyer Jonathan Loh of Inder Lynch.

Anne Gibson has been the Herald’s property editor for 23 years, has won many awards, written books and covered property extensively here and overseas.