The Court of Appeal’s recent decision is a good reminder that a well-drafted agreement can avoid the need for expensive and time-consuming litigation.

The Court of Appeal in Xu v Meng^[1] dismissed the appeal against the High Court’s decision ordering the return of a $200,000 deposit (plus interest) paid by a would-be purchaser in accordance with the parties’ oral agreement for the sale and purchase of a residential property in Auckland.

Background

The parties, who were longstanding friends, orally agreed in 2018 that the respondents would purchase the appellants’ investment property. Certain key terms of the agreement were subsequently agreed and/or varied via text message, including the purchase price of $1.78 million, and that the respondents would pay a $200,000 deposit to the appellants. The parties also agreed that the respondents would take occupation of the property prior to settlement and would pay all costs associated with the property during that time, but importantly they did not agree the date for settlement. The purchase never settled as the respondents were unable to secure finance to complete the transaction, and yet they remained in occupation.

For part of the time the respondents occupied the property, they made weekly payments to the appellants. The respondents also received rental income from renting out a portion of the property through Airbnb. The parties disagreed as to whether and to what extent the payments made by the respondents were paid in respect of the appellants’ mortgage interest and rates (which the Court said could not be deducted from the purchase price), and the appellants’ mortgage principal (which the Court said could be deducted from the purchase price).

Following the lapse of a caveat lodged by the respondents in 2020 to protect their interests as purchasers in possession, in 2021 the appellants successfully applied to the High Court for vacant possession. Relevantly, the appellants did not argue that the respondents had failed to perform their obligations under their oral agreement, which may have enabled the appellants to cancel that agreement and retain the deposit. Rather, the appellants’ position was that the agreement came to an end when the respondents were unable to obtain finance to satisfy the condition.

The High Court’s decision

In 2023, the High Court ordered the respondents to pay the appellants the shortfall in mortgage interest incurred by the appellants over the period the respondents were in possession of the property and ordered the appellants to return to the respondents the $200,000 deposit. The High Court dismissed the appellants’ counterclaims for rent, on the basis that the parties did not agree that the respondents’ early possession of the property was conditional on the payment of rent, and for income from boarders, on the basis of its factual finding that the appellants had agreed that the respondents could use income from boarders to assist in making other payments to the appellants.

The Court of Appeal’s decision

The appellants appealed the High Court’s decision (including the requirement that they return the deposit to the respondents).  In September of this year the Court of Appeal dismissed the appellants’ appeal of the High Court’s decision.

The parties could have avoided all of this litigation by documenting the terms of their agreement in writing, and in particular documenting the terms relating to the respondents obtaining early possession of the property and the treatment of amounts paid by the respondents to the appellants in that regard.

To discuss this decision, or how we can help you document your transactions, please contact any of our experts.

Special thanks to Bessie Isaachsen and Tawhiwhi Watson for their assistance in preparing this article.