A refinancing mortgage, a stranger's caveat and a defective LIM
Priya Nadar signed an agreement to buy a two-bedroom apartment in Wellington from Kauri Developments Ltd for $980,000, paying a 10 per cent deposit to the vendor's solicitor as stakeholder. Settlement is set for Friday 20 June. On 3 June her solicitor searches the title and finds that on 27 May Kauri granted a mortgage to Southern Cross Finance Ltd for $1.2 million, and that on 30 May the Ridgeway Family Trust lodged a caveat claiming an interest under 'an agreement for sale and purchase dated 12 February'. The vendor's solicitor says the mortgage is 'a refinancing that will be cleared at settlement' and the caveat is 'a clerical error'. The LIM discloses a converted garage with no building consent and no code compliance certificate. The vendor refuses to give an undertaking to discharge the mortgage before settlement, and there are 12 working days until settlement. Priya wants to know whether she can walk away, and whether she can keep the apartment.
1. Explain Priya's interest in the land, the priority position against the registered mortgage and the Ridgeway caveat, and the steps she should take immediately.
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Her interest. Priya holds an unregistered equitable interest under the agreement for sale and purchase. Under the Land Transfer Act 2017 title passes on registration (s 51), so the Southern Cross mortgage, registered on 27 May, will defeat her unregistered interest unless it is discharged at settlement or the mortgagee's registration is defeated by fraud. The s 6 definition of fraud requires dishonest conduct by the registered owner or its agent; a refinancing mortgage is not fraud. The real question is therefore performance, not priority: the vendor must give clear title at settlement.
The caveat. A caveat is a warning, not a proprietary right. Priya should lodge her own caveat under s 138 immediately to protect her position against further dealings, and serve it on the vendor. The Ridgeway caveat must be taken seriously: if the Trust holds an earlier binding agreement, the vendor cannot convey to both, and the earlier equitable interest will generally prevail.
Immediate steps. (1) Lodge her caveat. (2) Require the vendor to discharge the mortgage at settlement and obtain the discharge authority and repayment figure. (3) Demand a copy of the Trust's agreement and a written explanation, with a deadline. (4) Confirm her finance is unconditional. (5) Warn her in writing that specific performance may be impossible if the Trust's contract has priority, and that her fallback is damages.
2. The vendor fails to settle on 20 June. Set out the settlement notice process under the Property Law Act 2007, the remedies available, and the traps in using it.
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The notice. If the vendor does not settle, Priya may give a settlement notice under s 225 of the Property Law Act 2007. It must be in writing and specify a new settlement date no less than 12 working days after the notice is given. A notice given before the settlement date has passed, or by a party not itself ready, willing and able to settle, is ineffective - so her finance and her own arrangements must be unconditional first.
Consequences. If the vendor does not settle by the notice date, Priya may cancel, recover the deposit from the stakeholder, and sue for damages; or she may affirm and seek specific performance.
Remedies. Damages are usually the difference between the contract price and market value at cancellation, plus reasonable costs, with the deposit returned; consequential losses are recoverable only if within the parties' contemplation.
Traps. Specific performance is discretionary and futile if the vendor cannot make title. Cancelling on a defective notice can itself amount to repudiation, exposing Priya to a damages claim. And giving notice while the caveat position is unresolved risks losing the apartment and the remedy at once.
Practice. Make time of the essence, obtain the mortgagee's written discharge figure and settlement statement, keep her caveat in place until settlement or cancellation, and advise against possession or further payment before title is clear.
3. Advise on the unconsented garage conversion: what the LIM discloses, Priya's contractual remedies, and the risk she carries if she settles.
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The breach. Building work requires consent under s 40 of the Building Act 2004 and a code compliance certificate on completion. The LIM shows neither. Under the standard ADLS/REINZ agreement the vendor warrants that where a consent was required it was obtained, and the LIM triggers a disclosure obligation on the vendor.
Remedies. Priya must give written notice of the objection before settlement, in the period the agreement allows for objections and requisitions. Her options are to require the vendor to remedy (rarely feasible in the time available), negotiate a reduction in price recorded in a deed, or cancel if the breach is substantial and unremedied. She cannot compel the council to issue a code compliance certificate.
Risk after settlement. A notice to fix under s 164 of the Building Act 2004 can be issued to the owner, which after settlement means Priya. Unconsented work can also affect insurance and resale, and a certificate of acceptance may be required.
Strategy. Because she wants the apartment, the commercial answer is usually to settle with a price adjustment and a written disclosure. Get a builder's report and a remediation costing before deciding whether the adjustment is adequate. If the vendor refuses any adjustment and the cost is material against the deposit, cancellation through the settlement notice process is the alternative. Record the instructions in writing.