Implied Warranties Not Fit For Purpose

Rosie Clark

This article appeared in the Otago Daily Times, April 2016.

Health and safety and earthquake strengthening are two of the hottest topics currently facing our commercial clients. A recent case from the Court of Appeal, Overton Holdings Limited v APN New Zealand Limited touches on both of these topics.

APN sold its premises to Overton in 2007 then leased the premises back without incident until 2011 when four of the seven buildings were assessed as being below 33% of the NBS. Discussions between the parties were initiated, but ultimately each party took the position that it was the obligation of the other to remediate the earthquake prone buildings. APN progressively vacated the premises between 2012 and 2014 but continued to pay rent and outgoings until the term expired on 14 October 2015.

Overton brought proceedings in the High Court to cancel both the sale and the lease on the basis that APN had misrepresented that the premises were fit for its business use. It also sought damages from APN for allegedly failing to remediate the premises in accordance with a health and safety provision in the lease. Overton was unsuccessful in the High Court so appealed to the Court of Appeal, where it was also unsuccessful.

There was nothing in the agreement for sale and purchase which suggested that the property was fit for its business use so the Court of Appeal had to decide whether there was an implied representation by APN that the property was fit for its business use. The Court of Appeal began with the general rule that “in the case of the sale or lease of a property, there is no implied term or representation that the property sold or leased is fit for the use intended by the purchaser or lessee”. This is the well known rule of “let the buyer beware”. Overton needed to establish that this case necessitated an exception to this general rule.

Overton asserted that where an agreement for sale and purchase contemplates that the premises are to be put to a specific use then the vendor is impliedly representing that the premises are fit for that use. In this case, that would have meant that the premises should have been fit for use by APN (as tenant) for its “commercial offices (including newspaper and media administration)…” The Court of Appeal noted that a pre-contract information memorandum which was provided to Overton contained a disclaimer that no undertaking was given about structural integrity matters. Ultimately the Court of Appeal did not accept that there should be an exception to the general rule of “let the buyer beware” in this case.

Overton also claimed that APN had breached the lease by failing to comply with a health and safety provision in the lease. That provision required APN to comply with the Health and Safety in Employment Act in respect of “the premises and its fit out, fixtures and fittings, equipment and any alterations…” including a requirement to take “all practicable steps to eliminate, isolate or minimise hazards…” In reliance on this provision Overton asserted that APN was required to remediate structural deficiencies in the building. This issue had already been canvassed in the High Court, where the Judge was not convinced that APN could be required to remediate structural deficiencies. The Court of Appeal agreed that an earthquake prone building is not a “hazard” that needs to be identified or eliminated for the purposes of the Act, and noted that there are other terms in the lease which reinforce that APN has no obligation in relation to structural work.

If you are buying a commercial property it is essential that you undertake a thorough due diligence investigation so that you can satisfy yourself that the property is fit for your intended purpose. If you want to rely on something that the vendor has said or done, or you think they might do, then you need to ensure that this is specifically and effectively provided for in your agreement.