High Court rules purchasers lost the right to cancel by delay

A fork in the road: a decision from the High Court earlier this month shows how a right to cancel a contract can be lost.

Mr and Mrs Reid entered into an agreement to buy two townhouses in a proposed development. The agreement was subject to two conditions for the benefit of the developer: obtaining resource consent and confirming feasibility.

The developer satisfied both conditions, but failed to notify the Reids, as required by the agreement. That gave the Reids the right to cancel. However, for the next nine months they said nothing, even though they had driven by the development and knew that construction had started. It wasn’t until a change in their own circumstances nine months later that they sought to cancel.

The Court ruled that a party with a right to cancel must make an election to cancel or affirm the agreement. This is sometimes referred to as a “fork in the road”. A party need not make their election immediately, but they must do so within a reasonable time.

Although delay alone does not amount to affirmation, in the subsequent nine months the Reids knew that construction had begun, they received monthly updates and other emails about the development, and they entered into an agreement with a property manager in anticipation of renting out the townhouses. The Court ruled that they had affirmed the agreement by their actions, and thereby lost the right to cancel. They were liable for the developer’s losses on resale of the townhouses.

The Reids’ attempt to cancel seemed somewhat opportunistic, but the case is a good reminder: a delay in cancelling is always risky, and may lead a Court to conclude that the right has been lost.