There are three main issues to consider when deciding whether to assign, nominate or to novate in respect to Agreements for Sale and Purchase of Real Estate as follows:
1. Liability to the vendor
2. Enforcing the vendor’s contractual warranties and undertakings
3. GST implications
1. Does the purchaser named in the contract (contractual purchaser) remain liable to the vendor if the nominee / assignee / novatee (ultimate purchaser) fails to complete settlement?
It is important to note that in the case of assignment and/or nomination the contractual purchaser named in the Agreement for Sale and Purchaser of Real Estate will remain liable to the vendor in the event that the nominee / assignee does not complete settlement.
Only a novation will release the contractual purchaser from liability. This is because the vendor must be a party to and sign the Deed of Novation which includes a specific provision for the contractual purchaser to be released from all obligations under the original contract. In effect a new contract is created between the vendor and the novatee. The difficulty with a novation is obtaining the agreement and signature of the vendor.
2. Can the assignee / nominee / novatee (ultimate purchaser) sue the vendor for breach of the vendor’s warranties and undertakings contained in the contract?
A novatee can sue the vendor for breach of the vendor’s contractual warranties and undertakings because a novation creates a direct contractual relationship between the vendor and novatee.
A recent decision of the Supreme Court in Laidlaw v Parsonage [2009] NZSC 98 confirms that where an Agreement for Sale and Purchase of Real Estate records a named purchaser “and/or nominee”, the nominee though not a party to the Agreement is sufficiently designated by description in terms of section 4 of the Contracts (Privity) Act 1982 so that the nominee is entitled to sue the vendor for breach of contractual warranties and promises.
Previously, a formal assignment together with notice of the assignment being given to the vendor was the safest way (short of a novation) to ensure that the ultimate purchaser had rights to enforce the contractual warranties and promises against the vendor
3. What are the GST implications?
The Taxation (GST and Remedial Matters) Act 2010 has clarified the GST treatment of land transactions in the case of nominations (where a contractual purchaser has nominated another person or entity (the nominee) to receive the land from the vendor. All such supplies made from 1 April 2011 will be treated as one supply from the vendor to the nominee. The new rules do not apply to assignments or novations.
An assignment and, prior to 1 April 2011, a nomination (except bare nomination) could give rise to a second transaction (two supplies) for GST purposes. This could result in unanticipated liability for GST.
A bare nomination is where the contractual purchaser settles the transaction in full but the title is transferred to the nominee. A bare nomination creates only one supply for GST purposes between the vendor and the contractual purchaser. This is because there is no financial transaction between the nominee and the vendor.
A novation creates only one supply for GST purposes between the vendor and the novatee as the original contract is effectively cancelled and a new contract substituted. However, if a novation is entered into after the time of supply is triggered under the original contract eg: payment received (such as the deposit) or invoice issued (such as the settlement statement) then the GST position of the vendor and purchaser under the original contract must be reversed under section 25 of the GST Act and by satisfying credit note requirements.
It is very important to consider the different GST implications of assignment / nomination / novation before proceeding. It is strongly recommended that the GST treatment of the transaction is specifically addressed in Deeds of Nomination / Assignment / Novation so that the position is clear between the parties.
If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:
Fahra Manning
fmanning@farry.co.nz
09 379 0055
The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.