May 05 2011
It cannot be used to cancel the Agreement on a whim
Have you ever signed an Agreement for Sale & Purchase without first giving it to your lawyer to consider? What would happen if something went wrong with the contract? You wouldn’t be the first to believe that a ’solicitor’s approval’ clause will provide you with an out to cancel the Agreement.
The courts, however, have held that such a clause provides only a narrow area of protection.
A cautious approach pays, as has been highlighted by property purchases after the Christchurch earthquakes. You need to be aware that the solicitor’s approval clause does not operate as an ambulance at the bottom of the cliff.
A solicitor’s approval clause is often included in Agreements for Sale & Purchase. The exact wording of the clause/s may differ, but generally provides for the Agreement to be subject to your lawyer’s approval as to title, form and content.
This does not mean that the clause can be used to cancel the Agreement on a whim. The courts have held that solicitor’s approval clauses can only be used to cancel on the grounds of ‘conveyancing aspects’ of the purchase.
What is a ‘conveyancing aspect’?
‘Conveyancing aspects’ have been interpreted by the courts to include legal impediments and their implications. For example, you might validly cancel the contract using the solicitor’s approval clause if the seller is not the registered owner on the title and has no authority to sell the property.
The nature and extent of easements is another example of a ‘conveyancing aspect’ covered by a solicitor’s approval clause. A further requirement is that the solicitor’s approval must not be withheld unreasonably, and the lawyer must act in good faith.
‘Conveyancing aspects’ does not include the general wisdom, or commercial advantages or disadvantages of the purchase. While many people often rely on their lawyer to provide advice on the overall merits of the transaction, this type of advice is not covered in the solicitor’s approval clause.
For example, in one District Court case¹ the property was leased to five separate tenants. The buyer’s lawyer withheld approval on the grounds that the leases did not include personal covenants on the tenant companies. The High Court held that this was a decision as to the value of the transaction, rather than a ‘conveyancing aspect’. The buyer’s lawyer could not validly withhold approval on those grounds.
If your Agreement has failed to include conditions covering satisfactory finance or a LIM, a solicitor’s approval clause cannot be used to plug the gap. For instance, the High Court has decided² that the absence of a ‘subject to finance clause’ in an Agreement was not a legal or conveyancing impediment and therefore could not trigger cancellation under the solicitor’s approval clause.
Finally a solicitor’s approval clause cannot be used to cancel the Agreement when either of the parties has simply found a better opportunity elsewhere.
Agreements are binding
If the contract cannot be cancelled under the solicitor’s approval clause, your Agreement for Sale & Purchase will be binding despite the issues and defects. You may find yourself on the other end of an order for ‘specific performance’ to force you to complete the transaction or, if the seller has sold to another buyer, you may face a claim for loss on resale and penalty interest. For these reasons, it is always a good idea to see us before you sign an Agreement for Sale & Purchase. Do not rely on a standard form agreement to address all of the issues that may arise for that particular transaction.
We can provide you with advice on a much wider range of issues, and avoid any problems further down the track if something does go wrong.
¹ Ward v Gibson  DCR 360
² New Zealand Wines & Spirits (Properties) Ltd & Anor v Commercial Realties (NZ) Ltd (HC Wellington, A 413/82 & A 139/83, 23 May 1984, Savage J)