When entering into a Sale and Purchase Agreement (SPA), it is essential to identify which conditional clauses matter most to you and to the property you are buying. If you need finance and are unsure whether it can be arranged in time, a finance condition may be appropriate.

It is equally important to understand that, for any condition included for your benefit, you have a duty to make a reasonable attempt to satisfy it.[1] For example, if you include a finance condition, you cannot simply decide not to apply for finance and then claim the condition has failed.

Because that burden exists, courts interpret other conditional requirements narrowly and does not let a solicitor reject an agreement for any reason — only for legal issues. The same disciplined approach is applied to building-inspection clauses.

The Law

The most recent discussion of a building-inspection clause is found in Madhava Corp Ltd v Austin.[2]

The appellant owned a property in Mount Roskill. In early 2022 the respondents offered $815,000, with settlement on 3 March 2022. The Agreement, signed on 2 February 2022, was conditional on a building-inspection clause. The respondents engaged inspectors at their own cost, and the next day the report’s executive summary stated (in part):

The exterior cladding … presents in an average condition. The exterior weatherboard cladding … require[es] some general maintenance … the window outside bedroom one has insufficient fall on the windowsill, which is needed to protect the internal frames from water ingress. There are gaps under the windowsill that need to be filled also to protect the internal frames from water ingress. We also noted stepped cracking under the same window …”

After reading the report, the respondents instructed their solicitor, who asked the appellants to fix the window before settlement. The appellants instead offered a $7,000 price reduction. The respondents then purported to cancel, asserting that the building-inspection clause had not been satisfied. The issue became whether that cancellation was valid.

Three-Limb Test (Andrew J)

To cancel under a building-inspection clause, a purchaser must show:[3]

A written report by a suitably qualified person.
The report reveals a matter that would concern a reasonable, fair-minded purchaser (an objective test).
The report is supplied to the vendor with adequate notice of cancellation.

Only limb 2 was disputed. In applying it, Madhava confirmed:[4]

The purchaser must do everything reasonably necessary to fulfil the condition; merely asserting that the report is “unsatisfactory” is inadequate.
Unless the purchaser is entitled, on a fair and reasonable basis, to be released, they remain bound by the contract.

The appellants argued that a $7,000 discount meant no reasonable purchaser would cancel. The High Court disagreed, warning against scrutinising negotiation conduct too closely: the key question is whether the issue identified would concern a reasonable purchaser. Here, the window defects (and other minor issues) met that threshold, so cancellation was effective.

Strack v Grey

In Strack v Grey, the purchaser invoked the building-inspection clause but failed to satisfy limbs 1 and 3:[5]

A builder’s informal comments noted only minor items.
A valuer — not a building inspector — alerted the purchaser to possible moisture-trapping insulation between outer and inner brick walls. Which caused the purchaser to do his own research.
When the vendors requested the written report, the purchaser belatedly asked the builder to draft one.

Even though there was a sufficient issue, the risk of moisture within the walls. Because no written report from a qualified inspector existed at the time of cancellation, the purchaser’s reliance on the clause failed. The court held the purchaser in repudiatory breach, entitling the vendors to cancel and resell (ultimately for $150,000 less).

Summary

Have a qualified building inspector or builder inspect the building.
Have them write a written report setting out everything that may be a concern to you as the purchaser.
If there is, or even merely a risk of, an issue that a reasonable and fair-minded purchase would be concerned with, then you may cancel the agreement.
If, when purporting to cancel, the vendor requests the report, it must be provided so that they may see that the report is satisfactory. It is not for them to question the decision you have come to.

(1) Lerner v Schiehallion Nominess Ltd [[2003] 2 NZLR 671 (HC) at [29].

(2) Madhava Corp Ltd v Austin [2024] NZHC 975, (2024) 25 NZCPR 313.

(3) Madhava, above n 2, at [21].

(4) At [25].

(5) Strack v Grey [2018] NZHC 1254, [2018] 19 NZCPR 687 at [95]—[110].

Building Inspection Clause