The Court of Appeal recently had to decide the meaning of a condition in a sale and purchase agreement which made the purchase of a property “subject to and conditional upon … approval of directors”. This is the first time that a “subject to director’s approval” clause has been considered by a New Zealand court.
Background
Shortly before Christmas 2007, Andrew Guest travelled to Wanaka to look at residential properties for Arcadia Homes Limited. Mr Guest was the only director of Arcadia. His aim was to buy a holiday home for himself and his family.
On 24 December 2007, Mr Guest entered into an agreement to purchase the property at 21 Waimana Place, Wanaka for $2,000,000.00. Below his signature, Mr Guest added the word “Director”.
The agreement was made “subject to and conditional upon prime approval of the directors of Arcadia Homes Limited by 4pm on 25 January 2008 and notifying the vendor’s solicitor in writing that this condition has been satisfied”.
On 6 January, Arcadia entered into a conditional agreement to buy another property at 49 Ridgecrest, Wanaka.
On 18 January 2008, Arcadia’s lawyers faxed the vendor’s solicitors cancelling the Waimana Place agreement because the directors were not satisfied with the property purchase. Arcadia then made the Ridgecrest agreement unconditional.
The vendors of Waimana Place did not accept that Arcadia was entitled to cancel the agreement, and served a settlement notice. When Arcadia refused to settle, the vendors cancelled the agreement. The property was resold for $1,410,000.00 on 7 November 2008. The vendors then sued Arcadia for the losses suffered on the resale. The vendors won the case in the High Court, but Arcadia appealed the decision.
Court of Appeal Decision
Arcadia argued that, because Arcadia only had one director at the time it signed the agreement, there was no one else whose approval was required. They argued that the only director had signed the agreement, so he had already communicated his approval by signing the formal written agreement. Therefore, the condition was meaningless, as it was already satisfied at the time he signed the agreement. The condition was never valid, and could be deleted from the rest of the contract, leaving the agreement unconditional.
The Court of Appeal did not decide the case based on this argument, but instead agreed with the previous court decision that Arcadia was legally required to use reasonable attempts to satisfy the condition (if it was a valid condition).
The Court of Appeal said that if the condition was valid, it gave Mr Guest a month to consider whether he should approve the agreement on behalf of Arcadia. This was on the basis that there is a distinction between his signing the agreement as director, and approving it as director. If this approach is followed, then Mr Guest would have to make or commission enquiries or investigations which had not been carried out when the agreement was signed, or obtain reports or information, and then decide whether the condition should be satisfied after considering those reports.
The Court of Appeal said that Mr Guest was required to “make a fair and reasonable decision” under clause 15 as to whether or not to approve the agreement, and in order to do that, he needed to have at least a guaranteed title search, a LIM, and a valuation from a registered valuer. He did not have any of those things, and based on the evidence, he had not arranged any other reports or made any meaningful enquiries.
The Court of Appeal therefore decided that if the condition operated at all, it was breached by Arcadia, because it did not comply with clause 8.7 (2) of the agreement, which requires the party relying on the condition to “do all things which may be reasonably necessary to enable the condition to be fulfilled by the date for fulfilment”.
Mr. Guest did nothing to investigate the property, so he had not done all things reasonably necessary to try to satisfy the condition.
Arcadia was therefore liable for substantial damages claimed by the vendors.
Lessons
If a company is buying a property, and there is only one director of that company, it is not a good idea to insert a “director’s approval” condition.
If a purchaser wants to be able to cancel an agreement for any reason at all, either the agreement should be in the form of an option, or it should have a properly worded due diligence clause added.
A purchaser is required to take reasonable steps to fulfil any conditions, including a due diligence condition, unless the wording allows the purchaser discretion as to what steps are to be taken.
