Strict obligations for purchasers settling real estate transactions

The Supreme Court has agreed with a vendor under an agreement for sale and purchase that payment by the purchaser of a deposit by personal cheque is insufficient to give certainty of actual receipt of funds, and the vendor was entitled to cancel the agreement. In another recent case concerning due payment under an agreement for sale and purchase, a purchaser was denied specific performance after faxing confirmation of the deposit of settlement funds seven minutes late.

Case 1: personal cheque does not satisfy obligation to pay deposit

The facts of the case before the Supreme Court (1) involved two agreements for the sale and purchase of parcels of rural land in North Otago, which both provided for a deposit of 10% of the purchase price. The agreements were in the form of the standard ADLS Agreement for Sale and Purchase of Real Estate, the conditions of which (a) require the purchaser to pay the deposit immediately on execution of the agreement and (b) allow the vendor to cancel if the deposit is not paid within three working days of notice of a default in payment. The agreements were signed and a number of months passed without payment of the deposits. The vendor's solicitors gave notice in accordance with the agreements of an intention to cancel the agreements, and the deposits were consequently paid by way of personal cheque from the purchaser shortly before the expiry of the notice period. However, the vendor's solicitors advised that the personal cheque was not legal tender and did not comply with the agreements and gave notice of cancellation.

The Supreme Court dismissed the purchaser's appeal. It found that a person entitled to payment of a deposit is entitled to "the certainty of actual receipt", and that payment must be made by legal tender (bank notes), bank cheque or other cleared funds. A vendor who takes a personal cheque without specifically objecting to it must be taken to have dispensed with that requirement, but otherwise a vendor is entitled to refuse to accept a personal cheque as due payment (and the vendor had no obligation to advise the purchaser in advance that a personal cheque would be unacceptable). The Supreme Court's decision emphasises the importance of certainty and security to the vendor's position.

Case 2: fax settlements and electronic funds transfers

In the second case (2), the purchaser entered into agreements to purchase ten apartment units in Papakura. The vendor's solicitors subsequently wrote to the purchaser's solicitors specifying that settlement would occur on receipt of the deposit of the settlement amount by bank cheque into their trust account, and that confirmation of this was to be given by fax. The purchaser in fact deposited the settlement amount by electronic funds transfer no less than six minutes before the 5pm expiry time for the settlement notices. The purchaser's solicitors, in attempting to confirm the deposit of the settlement amount, found the vendor's solicitors' fax line to be engaged and did not manage to send confirmation successfully until 5.07pm. The vendor purported to cancel the agreements on the basis of non-tender of settlement, and the purchaser sought specific performance.

The High Court focused on the contractual obligations of the parties (over and above evidence about common conveyancing practices) and found that the standard ADLS Agreement for Sale and Purchase of Real Estate contemplates face-to-face settlement. In this case, however, the parties had subsequently agreed to remote settlement by fax. The Court therefore concluded that the vendor was not entitled to cancel on the basis that face-to-face settlement was required. However, the Court also found that remote settlement is not complete until the fact of payment has been confirmed to the vendor, if the requirement for confirmation has been agreed between the parties. Unfortunately for the purchaser, it was not enough just to dial the fax number - in order for the confirmation to have been "sent", the purchaser needed to show that transmission to the vendor's solicitors' fax number actually occurred. Since successful transmission had occurred seven minutes late, the purchaser was denied specific performance.

The High Court also discussed whether the electronic funds transfer was good performance of the purchaser's payment obligations. Although it was not required to make a decision on the point, it suggested that the time has come for electronic funds transfers to be seen as equivalent to payments in cleared funds by cash or bank cheque. However, this would not have assisted the purchaser in the particular circumstances in question since deposit by bank cheque had been specifically stipulated.

 

1 Otago Station Estates Ltd v Parker (SC CIV 6/2004, 19 April 2005 )

2 Rick Dees Limited v Larsen (CIV 2004-404-1357, High Court Auckland, 29 April 2005 )

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.