Claiming for compensation under the ADLS/REINZ Sale and Purchase Agreement
What happens if the purchaser discovers a defect with the property or a breach of the sale and purchase agreement by the vendor when settlement is coming up, and such issues cannot be resolved prior to settlement?
The ‘claim for compensation’ provisions in the Agreement for Sale and Purchase (“Agreement”) sets out the process. It includes strict compliance and notice requirements, which must be followed carefully. If a claim is made in a non-compliant manner it can mean a purchaser misses out.
The purchaser can only make one claim for compensation, though such claim may address one or more grounds. In making a claim, a purchaser should act reasonably but if the vendor considers that the purchaser is acting unreasonably this does not affect the claim process. The claim must be made no later than the last working day before settlement (unless it relates to late settlement or the failure to give possession).
Clause 10 in the Agreement sets out mechanisms for if the vendor disputes there is a claim (settlement is deferred pending determination of a claim) and for if the vendor accepts the claim but disputes the claim amount (settlement proceeds pending final determination).
The process: claim for compensation provisions under clause 10 of the Agreement
- Notice of the claim must be served in writing.
- The claim must be served on or before the last working day before the settlement date (unless the claim is made under clause 3.13 in the event of late settlement by the vendor or the failure to give possession).
- The notice must state the grounds on which the claim is based. This may be a breach of the Agreement or misrepresentation, for example. The claim should be particularised by referring to the clause (if relevant) and also state the specific issue.
- It must also state a genuine pre-estimate of the loss suffered by the purchaser which shall be particularised and quantified to the extent reasonably possible. If possible it would usually be supported by the purchaser getting a quote or an estimate.
- The claimant must not have made a prior claim under the clause 10 compensation clause as there is only one opportunity to make a claim.
What happens if the claim is disputed?
If the vendor disputes the purchaser’s claim for compensation, the vendor must give notice to the purchaser within three working days after service of the purchaser’s notice. If the vendor fails to serve a notice within the prescribed timeframe, then the vendor is deemed to have accepted the claim.
If the vendor gives notice within the relevant timeframe that they do not agree that the purchaser has a valid claim for compensation, the dispute resolution provisions in clause 10 are triggered. An experienced property lawyer or experienced litigator will be appointed to determine the purchaser’s entitlement. The appointee’s costs shall be met by the party against whom the determination is made or otherwise as determined by the appointee. Clause 10.12 of the Agreement provides that the appointee can consider reasonableness of the conduct of the parties in assessing costs.
In the event the settlement date will pass before the determination is made, the settlement date is deferred to the second working day after notice of the determination.
What happens if the amount of compensation is disputed?
If the purchaser’s right to make a claim is accepted but the amount of compensation claimed is disputed, then settlement still proceeds but an interim amount is held in trust until the amount of the claim is determined. The parties could agree between themselves on the interim amount that is payable on settlement to the third-party stakeholder. If the parties cannot agree on an interim amount however, then the interim amount shall be determined by a third party (and that appointee’s costs shall be met equally by the parties or otherwise as determined by the appointee).
If the parties remain in dispute as to the amount of compensation following the determination of the interim amount, the parties need to either reach an agreement or agree on an alternative dispute resolution method such as mediation or arbitration. Otherwise the compensation sum may need to be settled through the Disputes Tribunal or the court.
This article is based on the third version of the Eleventh Edition 2022 of the ADLS/REINZ agreement which was recently updated and came into force on 9 May 2023 incorporating various changes.
Please get in touch with our property team if you would like more advice and have any queries.