The recent High Court case of Mitchell v Zhang  NZHC 3208 helps to further define how far a vendor’s warranties and undertakings extend. One of the main issues addressed in this case was the extent of a vendor’s disclosure obligations to a purchaser under clause 7.1 of the ADLS Agreement for Sale and Purchase.
Clause 7.1 of the General Terms of Sale in the ADLS Agreement for Sale and Purchase provides:
7.0 Vendors’ warranties and undertakings
7.1 The vendor warrants and undertakes that at the date of this agreement the vendor has not:
(a) from any local or government authority or other statutory body; or
(b) under the Resource Management Act 1991; or
(c) from any tenant of the property; or
(d) from any other party; or
given any consent or waiver, which directly or indirectly affects the property and which has not been disclosed in writing to the purchaser.
Background of the case:
A landowners’ association made a plan change request that led to a plan variation that was incorporated in the Auckland Unitary Plan. At the hearing stage a Council officer recommended that the plan change incorporate a local road. The Vendor’s had received notice of the outcome of the plan change decision as a result of their involvement in advancing the plan change.
Ms Zhang made an unconditional offer to buy the property for $5.8 million on the same day she first inspected it and later that day learnt that the Auckland Unitary Plan showed an indicative road running through the eastern boundary of the property. The requirement to construct a road through the property would reduce the number of sections that could be formed by suddivision (expert evidence later established that the requirement for the road would mean the property was worth $4 million).
Ms Zhang claimed the failure to disclose the indicative road was a breach of the vendor’s warranties in clause 7.1 of the agreement for sale and purchase. After making further enquiries with the Council the Purchaser purported to cancel the agreement. The vendors applied to the High Court for specific performance.
The position established in Kaitaia Timber Company Ltd v Alternative Enterprises Ltd  NZHC 2497 (as approved in Western Park Village Ltd v Baho  NZHC 198,  NZCA 630 (CA)), is that a requirement to disclose under clause 7.1 will only arise where there is some action that is required to be taken with respect to the property. That position was accepted, and it was submitted that the plan change effectively required some action to be taken with respect to the property.
The notice the Vendor’s received about the outcome of the plan change decision was a notice under cl 7.1. It was submitted the correct interpretation of “notice” under cl 7.1 was that it “includes any notice which mandates an owner to positively construct something or to remove something in the event that the land is to be used for any purpose”. It was submitted that the notice required the Vendor or any developer of the land to construct the local road. It effectively required some action to be taken (or avoided by making application for resource consent without the road) particular to the property.
The Court did not accept the argument that the correspondence about the plan change constituted a notice as that term is used in clause 7.1 of the agreement for sale and purchase. There was no communication from the Council to the Mitchells of any demand, requisition or outstanding requirement in relation to their property. The claim for breach of warranty under clause 7.1 failed and Ms Zhang was ordered to specifically perform the purchase.
Considerations leading to the decision:
This case outlines the importance of completing your own due diligence investigations when purchasing a property. There are limits on how far the warranties and undertakings in clause 7.1 will assist a purchaser. A vendor will not be required to disclose information about their property that may require action in the future where that duty is imposed in a general way rather than by way of a notice or demand.