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The Professional Trustee Team

Property Contracts - the devil is in the detail

Property contracts, including sale and purchase agreements and building contracts, sometimes include clauses that can be harmful to the unwary. And by unwary, I simply mean people who are not used to dealing with such legal documentation. 

One of the advantages of using a professional trustee for your trust is that the professional trustee must review and approve contracts before they can be signed off. On more than one occasion, having a professional trustee has saved clients at GRA from entering into agreements that could harm them. I wrote about this in my March 2017 blog 'Professional Trustee Preventing Costly Mistakes', and we have had several other instances come through the GRA offices this year. 

I'm not suggesting there is anything illegal or deliberately underhanded in such contracts. However, if you don't know what to look for, you can easily be surprised down the track by fine print that seemed innocuous on the face of it but could end up putting you behind financially or getting you into legal strife. I outline a couple of case studies below (names and some details changed to protect the privacy of the people involved). 

Case Study 1
GRA act as professional trustee for Jack and Jan's family trust. Jack and Jan wanted to build a new home and they were about to sign a house-and-land package contract with a building company. Because the home would be owned by the trust, they needed sign-off from the professional trustee. When we looked at the contract we noted that their ability to borrow the required amount to settle the purchase depended on the end value of the property. 

The maximum the bank would lend them was 80% of the value of the finished property (irrespective of whether Jack and Jan had agreed to pay the building company more for it). To accurately determine the value upon completion, and thus ensure they could borrow enough to settle the purchase, we advised that they should obtain a registered valuation. Jack and Jan duly did this, only to find the end value was $200,000 less than they had been led to expect, and if they'd gone ahead they would not have been able to settle. So they did not proceed with the contract. 

Because we knew what to look for – and what that meant in practical terms – we were able to prevent our clients from making a mistake which could have had them in expensive legal and financial trouble. 

Case Study 2
Sanjay wanted to sign a contract with a development company that was building a new subdivision on the outskirts of Auckland. We looked over the agreement, which contained a clause allowing the developers to reduce the size of the dwelling by up to 12% without penalty. 

This sort of clause is not unusual in building contracts, but can leave purchasers with a property that is significantly smaller, and thus worth less, than they originally thought. Not only does this result in a home that is not quite what the clients envisaged, it can lead to problems with settlement due to an inability to borrow as much as they anticipated. As professional trustee, we would not sign such a document, and the clients were happy we had drawn their attention to it.

Even if you don't have a professional trustee, the lessons herein apply – have your contracts checked by a lawyer or someone who understands all the ramifications before you sign on the dotted line. This is even more important in a declining market because you need to be certain of the finished value and your ability to borrow the required amount so you can settle property purchases.

The Professional Trustee Team
The Professional Trustee Team
© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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GRA are a one stop shop for property investment resources. Really liked the examples and case studies in Property School - adds a lot of credibility. - Brenda Muller, June 2019
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