Cancelling under the standard building report condition

The facts

Assuming, as is generally the case, that the building report condition in play is the one found in the standard terms of the Agreement for Sale and Purchase, Eleventh Edition 2022 (3), it reads as follows:

9.4 Building report condition

(1) If the purchaser has indicated on the front page of this agreement that a building report is required, this agreement is conditional upon the purchaser obtaining at the purchaser’s cost on or before the building report date a report on the condition of the buildings and any other improvements on the property that is satisfactory to the purchaser, on the basis of an objective assessment.

This contains a critically significant amendment to the previous general terms in the use of the qualifier "on the basis of an objective assessment".

This means that a purchaser cannot cancel agreement for purely subjective reasons, however valid they may feel they are.

Common issues highlighted in building reports include:

1. Elevated moisture levels or evidence of past (or current) leaking; and,
2. Maintenance to the roof required; and, 
3. The potential presence of substances that are no longer considered safe such as “Scrim” (hessian material used in older construction methods instead of building paper that is noted in reports as being a potential fire hazard and might prevent insurance being available on the property), or asbestos containing products (which are very common in homes built prior to about 1990).
4. Unconsented or non-complying works (usually dealt with under the LIM report condition if present but often not identified until a building report is undertaken).

The insurance point is always relevant, as if no insurance certificate is available, there will likely be no finance drawdown available via any bank, so the extent of the material discovered or unconsented work at hand may well be sufficient to meet an “objective assessment” test. 

Threshold for the right of cancellation

In order to cancel under the building report condition as set out in the standard terms, a discovery from the report would need to constitute justification for cancelling the agreement "on the basis of an objective assessment".

The key term being objective. If it a subjective assessment of the report was all that is required, then whatever mattered to the particular purchaser in their personal circumstances would be sufficient to justify cancellation. (It is interesting to note here that a due diligence condition would absolutely allow cancellation for such a subjective reason.)

For a buyer to be able to cancel under the standard building report condition, the report needs to disclose issues that objectively are sufficient to cancel the agreement.

When an objective assessment is required, the courts often employ a “reasonable person test”.

Reasonable person test

This is usually a fairly simple question at first glance, “would a reasonable person consider that the building report received in relation to this house discloses issues sufficient to warrant cancellation of the contract?”

Relevant considerations are things such as:

• If the purchaser has knowingly entered into an agreement for the sale and purchase of a 100-year-old + house, for example where the marketing mentioned the era of the property or it is clearly evident from it’s condition.
• Whether or not the report states that the house is in an “overall” good condition for its age or that it’s condition is commensurate with its age (perhaps requiring some ongoing maintenance or work, as could reasonably be expected).

Therefore, when a building report raises issues that require maintenance, highlight the presence of material no longer considered safe, or indicate that some future work may need to be undertaken, it is not safe to presume that it is a straightforward process to cancel the agreement on grounds of non-fulfilment of the building report condition.

If, for example, the report states or concludes that the house is an “good overall condition for its age” and that “its condition is commensurate with its age”, requiring some work, further investigation into the state of the roof, weathertightness, or the extent of the presence of the undesirable material should be presumed to have to occur rather than the buyer being able to cancel without objection from the vendor.

What is a practical position then?

What generally happens if the issue is not extensive or unduly onerous in terms of the probable cost to remedy... is that the buyer’s solicitor will seek a discount in order for the contract to proceed.

This is usually negotiated between the solicitors, and is generally a much better outcome for all parties than outright cancellation of the contract. It happens routinely in the instance that the matters that arise are not so serious as to be likely to meet the objective “reasonable person” test, and avoids additional legal expense for the buyers attempting to justify their position – or further marketing costs and an extended campaign preventing the vendors moving on to their next step.

Consequently, if being able to cancel for any subjective reason or detail discovered in a building report is important to a buyer, it is imperative that they include a due diligence condition in their favour and do not attempt to rely on the building report condition contained in the standard terms.

However this step is not without risk, as it makes an offer significantly less attractive than most competing offers. The inclusion of a due diligence clause is often grounds, especially if the proposed condition is longer than a couple of working days, for the vendors to elect to engage with another offer, or wait for one with better terms entirely.