Vendor breached warranty in Agreement for Sale and Purchase
In the recent case of Y L New Zealand Investment Ltd v Ling  NZHC 1793, the High Court has held that a breach of warranty by a vendor caused loss to the purchaser of a property.
Ms Ling entered into an agreement to buy a property in Pukekohe. It comprised of a house on 4.6 hectares of land that had been used previously for equestrian purposes, but it was purchased by the parties for future development.
Ms Ling later on-sold the property to the purchaser YL NZ Investment Ltd on 21 December 2015 – before she became the registered proprietor under the first agreement.
The agreement between the parties recorded the purchase price of $3.5 million inclusive of GST. But, Ms Ling, circled “No” to the question on the front page of the agreement, where it asked whether the vendor was registered for GST for the transaction or would be registered at settlement.
Clause 14.1 of the sale and purchase agreement deals with zero rating and provides that the vendor warrants its GST registration status in respect of the supply under the agreement is correct. The purchaser was registered for GST and intended that the property would be used to make taxable supplies. The purchaser subsequently claimed a second-hand goods input tax credit on the property it acquired from Ms Ling, who was a non-registered GST person.
Inland Revenue rejected the purchasers claim for an input tax refund finding Ms Ling was not registered for GST but she should have been. Inland Revenue said that the supply under the agreement was zero-rated back in 2015 and registered the vendor for GST. That meant the purchaser could not claim the input tax refund on the purchase, which it had calculated at $365,869.57.
YL NZ Investment Ltd sued Ms Ling for breach of the warranty under the agreement due to Inland Revenue’s rejection of its claim for an input credit.
Ms Ling argued that she did not breach the warranty under the agreement because as a matter of fact she was not registered for GST. Ms Ling’s interpretation that a vendor was required only to state whether they were in fact registered for GST for the transaction and therefore did not need to turn her mind to the question whether she was liable to be registered was rejected by the High Court.
The court found Ms Ling had breached the warranty under clause 14.1 of the agreement that caused a loss to YL NZ Investment Ltd. The agreement would have otherwise provided the purchaser with an input tax credit, and its inability to obtain that credit resulted from the breach of warranty by Ms Ling. The Court gave judgment against Ms Ling for $390,044.04 for the amounts claimed by the purchaser plus interest.
This case demonstrates the care that is needed in completing an agreement, and in particular when it deals with the question of the GST status of the parties. If there is any doubt due to the nature of the transaction, it is strongly recommended that vendors take professional legal and tax advice before completing the GST question in a sale and purchase agreement.
If you would like further information, please contact Gaynor McLean.
Source: In Brief Summer 2017
Author: Sarah Leppard