Back-Up Offers on NZ Property: How to Protect Yourself | NZ Legal

You have found a property you want to buy. There is one problem: it is already under offer. The agent tells you the current buyer is conditional, with finance pending and a LIM review still to come. There may be a chance.

Welcome to the world of the back-up offer. In New Zealand, making a back-up offer is a legitimate and reasonably common strategy. But it comes with real legal risks if the contract is not structured correctly. Here is what you need to know before you sign anything. If you are at the start of the process, our buying property page walks through the wider purchase journey.

What a back-up offer actually is

A back-up offer is a second Agreement for Sale and Purchase, signed by a different buyer, while the vendor is already bound by a first agreement. The defining feature is that the back-up agreement is conditional on the first agreement coming to an end.

Until that happens, your back-up agreement is dormant.

Dormant is not the same as optional. Signing a sale and purchase agreement creates a legally binding contract. Once the first agreement ends and your conditions are met, you are committed to buying. If you want the ability to pull out while you are waiting, that right has to be written into the agreement before you sign.

In practice, back-up terms are written into the Further Terms of Sale in the standard ADLS and REINZ Agreement for Sale and Purchase of Real Estate. They are not part of the printed form, so your lawyer will need to customise them for your offer and your circumstances.

What “the first agreement has ended” actually means

The first agreement has to be genuinely at an end, not merely looking shaky. Where the first buyer or the vendor cancels, the Contract and Commercial Law Act 2017 provides that cancellation does not take effect before it has been made known to the other party. So, the vendor’s written notice to you should confirm that the first agreement has already been brought to an end (which will typically be communicated through the vendor’s lawyer).

The real risk: paying for due diligence on a property you may never get

Here is what actually costs back-up buyers money. You sign the back-up agreement, and unless the agreement says otherwise your condition dates start running from the day you signed. That means your finance, your LIM and your building report all have to be done now, inside the usual ten to fifteen working days. This could cost you a couple of thousand dollars, and you are spending it on a property that is still under contract to somebody else and that you will most likely never own.

The alternative is not that you quietly go unconditional — an unsatisfied condition does not do that. It is that you run out of time to investigate. You either confirm your conditions without having properly looked at the property, or you let them fail and lose the deal. So once those dates are running from signing, the choice is between spending the money early and going in blind, and you are making that choice while you are still sitting behind another buyer.

The fix is in the drafting, and it is set out below. Your condition dates should not start until your back-up has actually been declared live. Get that right and the order of events reverses: you wait, you spend nothing, and you do your due diligence only once the property is genuinely yours to buy.

The second risk is simpler, and it is the one most back-up buyers meet. The first agreement does not end at all. The first buyer satisfies their conditions, a notice arrives telling you they have gone unconditional, and your back-up agreement expires. That is the most likely outcome by a wide margin, which is why you should keep looking at other properties while you wait. There is also no natural end date to that wait unless you negotiate one into the agreement.

How the back-up agreement should be structured

A well-drafted back-up offer includes the following protections.

• Termination condition. The agreement must be expressly conditional on the first agreement coming to an end and must spell out what counts as coming to an end.
• Written notice mechanism. The agreement should require the vendor to give you written notice activating your back-up, and should say what that notice must confirm: that the first agreement has actually been brought to an end. In practice that notice will come through the vendor’s lawyer.
• When your condition dates start. This is the clause that decides whether you spend money before you know you have the property. Your finance, LIM and building report dates should not start running until the first agreement has actually been cancelled and your back-up agreement has been declared live. So each condition should be expressed as a period running from that activation date — for example, ten working days from the vendor’s written notice — rather than as a fixed calendar date or a period from the date of the agreement. Get this wrong and your due diligence has to be done, and paid for, while the property still belongs to someone else’s deal.
• A limit on how long you wait. If the vendor extends the first buyer’s condition dates, you sit in the background for longer than you bargained for, with no say in it. In practice vendors will usually agree not to grant any extension of the conditions in the first agreement, so ask for that undertaking. It is the term that does the work here and it is normally accepted, because the vendor wants the first deal resolved as much as you do. A long-stop date is worth having as well: if your agreement has not been activated by an agreed date, you can cancel it, or it lapses automatically. The first stops the wait being extended, the second puts an outer limit on it.
• Right to withdraw. You should have an express right to cancel before the agreement is activated. Without that clause you do not have one.
• Deposit timing. Your deposit should not fall due until two things have happened: your back-up agreement has been activated, and you have gone unconditional on it. Paying earlier puts your money at risk on an agreement that may never activate, or that you may still walk away from on a condition.

The back-up offer process, step by step

1. Step 1

   Back-up signed

   You sign the Agreement for Sale and Purchase. It includes the termination condition, the clause setting when your condition dates start, and your right to withdraw. If the agreement is drafted correctly, no deposit is due yet. You are in back-up position.

2. Step 2

   Waiting period

   The first agreement runs its course. Keep looking at other properties and keep your finance pre-approval current.

3. Step 3

   First agreement resolves

   Either the first buyer goes unconditional, and your back-up expires, or the first buyer does not satisfy a condition and the first agreement is cancelled.

4. Step 4

   Written notice from the vendor

   The vendor gives written notice confirming the first agreement has ended, and saying how and when. Your condition dates start running from that date.

5. Step 5

   Your condition dates start

   Your finance, building inspection and LIM dates start running now, from the date of the notice. If the agreement is drafted correctly your deposit is still not due, because it falls due only once you go unconditional.

6. Step 6

   Go unconditional

   If you satisfy your conditions within that period, you confirm unconditional and settlement proceeds as agreed.

Keep looking at other properties

Do not stop looking just because you have a back-up offer in place.

A back-up offer is a chance, not a plan. You have no way of knowing whether the first agreement will fall over, and no control over whether it does. If you stop searching while you wait, you can lose weeks and end up with nothing to show for it. Hold the back-up in the background and carry on looking.

Do not sign a second agreement until your back-up is gone

Looking is free. Signing is not. Your back-up is a binding contract that the vendor can activate by giving notice, without needing your agreement at that moment. So if you sign a second agreement on another property while your back-up is still in place, you can end up bound to buy two houses at once — which is a finance problem and a settlement problem at the same time.

Before you sign anything else, the back-up has to be out of the way. Either it has expired because the first buyer went unconditional, or you have exercised your right to withdraw and the vendor has confirmed in writing that your agreement is at an end. If you do want to move on a second property before that happens, tell your lawyer first — the second offer can be drafted so that it is conditional on your back-up being cancelled, but that has to be written in before you sign, not sorted out afterwards.

There is limited room to move on price

Vendors in a back-up situation already have a deal at a known price. As a back-up buyer you are unlikely to negotiate a materially lower price than the first agreement.

Where there is room to move is on conditions and timing. Fewer conditions, a shorter condition period, or a settlement date that suits the vendor’s own plans can all make your back-up offer more attractive without costing you money.

Be careful about cutting conditions just to win the position. A back-up offer with no finance or building condition is a real commitment to buy the property once it activates, whatever you find out afterwards. Ask your lawyer what you are giving up before you take a condition out.

If your back-up is promoted, be ready to move

If the written notice arrives, you need to move quickly, because your condition period starts running from the notice date and it is usually short.

That does not mean spending money while you wait. A LIM and a building inspection are real costs on an agreement that will most likely never activate, so do not order either until your back-up has been declared live. What you can do in the meantime costs nothing. Check with your lender how long your pre-approval actually runs and get it refreshed if it is close to expiry. Identify a building inspector and confirm they could attend at short notice, without booking the job. And find out what the council’s current LIM turnaround is, because that tells you whether your condition period is long enough to get one at all. If it is not, that is a drafting problem to fix before you sign, not something to discover after the notice arrives.

Ready to take the next step?

A back-up offer looks like a simple document, but none of what protects you is in the printed form. The termination trigger, when your condition dates start, how long you are prepared to wait and when your deposit falls due all have to be written into the Further Terms of Sale, and they have to be customised to the particular property and to your own circumstances. There is no standard back-up wording to fall back on, which is why this is a conversation to have with your lawyer before you sign rather than after.

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Sources

1. Real Estate Agents Act 2008, s 123 (money to be held by agent for 10 working days)The agency must not pay out deposit money for 10 working days after receiving it.
2. Real Estate Agents Act (Professional Conduct and Client Care) Rules 2012, rules 9.3 and 9.7A licensee must keep the client well informed of matters relevant to the client's interest (9.3), and must recommend legal advice and allow a reasonable opportunity to get it before a person signs a sale and purchase agreement (9.7).
3. Contract and Commercial Law Act 2017, s 41 (when cancellation may take effect)Cancellation of a contract does not take effect before it is made known to the other party.
4. Settled.govt.nz (Real Estate Authority), Understanding the sale and purchase agreement when buyingA sale and purchase agreement is a legally binding contract; the deposit is payable either on signing or on the agreement going unconditional depending on what the agreement says; if the deposit is not paid on time the seller's lawyer may give three working days to pay.
5. Settled.govt.nz (Real Estate Authority), Receiving and making counter offersA vendor may continue to market the property and deal with more than one interested buyer, and does not have to accept any particular offer.
6. ADLS / REINZ Agreement for Sale and Purchase of Real Estate (industry standard form)Back-up terms are added as Further Terms of Sale to the standard form, not printed in it. Cited as the document template only, not as authority for a legal proposition.