Non-occupancy clauses: Buyers beware (especially if you’re a lawyer)

Like age clauses, non-occupancy clauses appear regularly in Dutch property purchase agreements. Sometimes they are used in combination with each other, and then they reinforce each other. This was shown in a recent court case.

The buyers in this case, after moving in, found serious structural defects in the attic of the home they had purchased. There was a danger of collapse. The repair costs were approximately €60,000. The buyers held the seller liable, but to no avail. The fact that both buyers were lawyers did not work to their advantage.

Background

In this case, a charitable foundation inherited a residential property in The Hague. The foundation sold the property, relying on the much-used NVM model (NVM: Dutch Association of Real Estate Agents and Valuators) as the basis for the purchase agreement. Article 6.3 of the purchase agreement was a standard “normal-use clause”. In such a clause, the seller guarantees that the property is suitable for normal use.

In the first version of the purchase agreement, it was mentioned that the property sold has the characteristics for normal use as “immovable property”. What was special in this case was that, at the request of the buyers, “immovable property” was changed to “residential accommodation” as generally mentioned in purchase agreements. The buyers stated that they had discussed with the seller’s agent that it was important to them that the property could also be used as residential accommodation.

In Dutch property transactions, sellers often rely on a clause stating that they are not liable for hidden defects they could not have known about because they have never occupied the property themselves. A common clause to this effect is called a “non-occupancy clause” (niet-zelfbewoningsclausule).

Article 26 of the purchase agreement was such a non-occupancy clause, worded (in translation) as follows:

“The purchaser is aware that the seller has never actually used the property sold itself and that the seller is therefore unable to inform the purchaser of any characteristics or defects of the sold property that the seller could have been aware of if it had actually used the property sold itself. In view of this, notwithstanding article 6.3 of this purchase deed and article 7:17(1) and (2) of the Dutch Civil Code, the parties have agreed that the buyer bears the expense and risks of such characteristics or defects and that this has been taken into account when determining the purchase price. The buyer indemnifies the seller against all possible claims by third parties.

Sellers also often rely on a clause stating that they are not liable for any hidden defects relating to the age of the property. A common clause to this effect is called an “age-related-defects clause” or just an “age clause” (ouderdomsclausule).

Article 27 of the purchase agreement was such an age clause with this (translated) wording:

“The purchaser is aware that the immovable property is more than 110 years old and that the facilities in the immovable property are more than 5 years old, which means that the construction quality standards are considerably lower than for new houses. Unless the seller has guaranteed the quality, the seller does not guarantee the quality of the following, among other things: the technical installations, the equipment, the floors, the pipes for electricity, water and gas, the sewerage and the absence of penetrating and/or rising dampness. Notwithstanding article 6.3 of this purchase deed and article 7:17(1) and (2), the buyer bears the expense and risk of the complete or partial absence of one or more characteristics of the immovable property for normal and special use and any other non-compliance of the property with the contract.”

Before the sale of the property, the buyers had a structural survey carried out. The following statement about the roof boarding was in the report:

“The roof boarding was inspected only partially and in certain spots. It is of course impossible to inspect the entire roof surface.”

In the course of renovations, serious structural defects were found in the attic after the transfer. The structural consulting firm recommended replacing the entire roof structure. Repair costs: approximately €60,000.

A supplementary report by the firm stated the following:

“Question 1.

In your opinion, are the defects identified serious structural defects that impede normal use as a residential accommodation?

Answer 1.

Yes, serious structural defects were found. The structural values are locally only 20% – 30% of the overall strength of the structure. As a result, it amply exceeds the design value (including safety margins). There is a risk of collapse.”

The sellers asked the foundation to remedy the defects. The foundation denied liability.

Court’s decision

The buyers commenced a lawsuit against the foundation asking it to pay the repair costs of approximately €60,000. The buyers held the foundation liable for the defective roof because the property was not suitable for normal use as residential accommodation because of these defects. They relied on the normal-use clause in the purchase agreement.

In its interpretation of the purchase agreement, the court was guided by:

• the meaning that both parties could reasonably attribute to the provisions of the purchase agreement, and
• what was reasonable for them to expect from each other.

The court ruled that the buyers should reasonably have understood that the foundation would not be liable for defects such as those found in the roof.

Among the reasons for the court to come to this decision were the following:

• in general, liability for lack of characteristics of the property for normal use was excluded in the age clause;
• both the non-occupancy clause and the age clause were broadly worded and reinforced each other.

The buyers found it unacceptable under the standards of reasonableness and fairness, that the liability exclusion in articles 26 and 27 could prevail over the normal-use clause. They responded indignantly that it could not be the case that a legal entity like a foundation could inherit a property worth over eight hundred grand and then, when selling this property to consumers, exclude liability for all possible defects.

The fact that the buyers were consumers and the foundation a legal entity did not alter the court’s opinion. The court even pointed out that the plaintiffs were also both lawyers(!)

What can you do to prevent such an outcome?

It is understandable that a seller, in this case a charitable foundation, wants to limit its liability to a far-reaching extent. But of course, a seller is also not keen on getting mired in litigation after the transfer.

The court answers this question: in general, it is questionable whether it is wise to include a normal-use guarantee in a purchase agreement if that guarantee is set aside or limited in the same purchase agreement. In other words, as I have described earlier, just strike out the normal-use clause in a situation like this. It is better for the situation to be clear to the parties.

For a buyer, it is of course more favourable for the age clause and the non-occupancy clause to be worded less broadly.

But what if the only way for a buyer to buy a property in this overcrowded housing market is to hold his nose and sign on the dotted line? In any case, the parties should at least be aware of the risks involved, for the buyer (risk of defects and costs) as well as for the seller (risk of legal proceedings with an uncertain outcome).

My advice?

Don’t let the overheated housing market rush you into making a hasty decision. I am reminded of a striking quote in an article in the Financieele Dagblad called “Hidden defects: The buyer usually ends up paying”:

“Buyers often say: I’ve won a bid. But it’s not a holiday auction; it’s the biggest financial decision of your life.”

For more information, feel free to contact me.

(Image: Jonathan Ybema, Unsplash, for illustration purposes only)