KEY POINTS:
Q: We recently sold a commercial building in an unconditional sale with settlement later this year.
The purchaser wanted to take possession before settlement so we agreed a nominal rent for the period. On the first day of possession heavy rain fell, the guttering did not take the deluge and water overflowed inside the factory walls. We were unaware of any leaking issues before this and we have a roofer checking the guttering this week.
However, the purchaser is now bringing up other building maintenance issues. I understood he bought the building as is. Can he legally hold back any funds on settlement date if he is unsatisfied with the condition?
A: As vendor, you must take all reasonable steps to preserve the building until settlement, to the same state and condition as it was at the date of signing of your contract. In this sense, pending settlement you are a constructive trustee of the building for the purchaser. You must take reasonable steps to preserve the building, act prudently to prevent deterioration and take reasonable care to prevent it being damaged.
The crucial aspect of your question turns on whether the guttering defect existed before the signing of the contract or has come about since then.
If the defect existed before signing, the purchaser will not be entitled to hold back or deduct any settlement money. As the contract is unconditional, the purchaser will be required to take title to the building in its current state. Any doubts could have been avoided by the purchaser if he had included a due diligence clause and satisfied himself as to the condition of the building.
Alternatively, if the defect came about since the contract signing, then the purchaser could possibly claim compensation or damages against you for a breach of vendor's duty of preservation. If the damage to the building is caused by breach of vendor's duty, the purchaser is not entitled to cancel the contract for this reason alone but is limited to a claim for compensation or damages.
Where the claim is for compensation, the purchaser may deduct the amount of loss from the purchase money on settlement. However, he cannot claim compensation or deduct any settlement money based upon the other issues he has raised with you, regarding maintenance of the building.
Another important aspect of your question concerns what exact terms you agreed with the purchaser about his taking of possession before settlement. These terms, as well as your contract, need to be considered before accurate legal advice could be given. In future, before agreeing to grant a purchaser early possession of a property before settlement, ensure agreement to the following conditions:
* Upon you giving possession to the purchaser, all risk attaching to the building should lie with the purchaser. In this instance, he would have taken possession pursuant to a right given in the contract and would be in possession as purchaser and not as a tenant. So cost of the damage would remain his liability.
* Settlement should be effected by the purchaser without any deduction to the purchase price. Deductions which a purchaser may properly make from the purchase price in tendering settlement are strictly limited, that is where the vendor has breached a duty of preservation. However, if you give possession as a purchaser the building risk lies with the purchaser and he would not be entitled to deduct any settlement money.
* The purchaser should insure the property, as requested by the vendor. The basic rule for you should be: "No money, no key!"
If a purchaser is not going to undertake settlement in accordance with your contract, don't give him keys to the property.
