Water Water Everywhere...
A constant and dependable supply of water is critical to any farming operation. Taranaki farmers will be wishing more rain had fallen during summer this year and less during winter. Unless a property has existing rights to draw water from natural sources, the regular supply of water will generally depend upon whether a water permit exists for the property.
Arrangements for the transfer of water permits must be correctly recorded in any contract for the sale and purchase of a property. If the arrangements are not correctly recorded and are not able to be transferred, various parties may be liable. We discuss a recent High Court decision involving water permits for a Marlborough farm property that was to be converted into a vineyard.
In this case, the purchasers were led to believe that the vendors held, and were able to transfer to the purchaser, all of the water rights relating to the property. This turned out to be incorrect. The permits were divided into Class A, B, and C surface water for pasture irrigation. The Class A water permit allowed the holder to obtain a reliable source of water year-round for vineyard development. The B and C water rights could only be utilised with a storage dam which had not yet been built on the property. The vendors had, in fact, transferred half of the A permit and all of the B permit to a third party on a sale of part of the property two years earlier. If the purchasers had known that only half the A permit was available and none of the B permit, they would not have bought the property or would have negotiated a lower price. The purchasers sought to recover their loss - the cost of building a storage dam to utilise the C water permit - estimated at $776,000.
Misrepresentation by the vendors
The court found the vendors liable, through their real estate agent and solicitors, for misrepresenting the status of the water permits, although the court accepted that the vendors themselves had done absolutely nothing wrong. The court found that the purchaser had made it clear to the real estate agent that its interest in the property was for vineyard development and that the purchaser required sufficient water for that purpose. The water rights were therefore held to be a material term of the contract.
Negligence by the district council
Prudent purchasers will make the offer to purchase subject to obtaining a satisfactory LIM report. In this case, the local authority had carelessly overlooked information in its records of the earlier transfer of half of the water permit, so the LIM was incorrect. Notwithstanding a disclaimer in the LIM report, the council was found to have been negligent.
Liability of the real estate agents
The real estate agents were negligent for failing to include accurate and complete information about the water permits in its sales brochure and failing to have carefully checked that information with the vendors and/or their solicitors before issuing the brochure.
Liability of the solicitors
The court found that the solicitors knew the vendors had transferred half of the A permit and all of the B permit in the previous sale, despite the fact different solicitors within the firm had acted for the vendors on each sale. The solicitors had a duty to check and clarify the position as to water permits with the vendors, despite there being a due diligence clause inserted in the contract for the benefit of the purchasers. The contract simply recorded that all water permits related to the property transferred on settlement.
Although the judgment was against both the vendors and the district council, all liability imposed on the vendors was transferred to the real estate agents and the solicitors. Liability was apportioned 52.8% against the real estate agents; 34% against the district council and 13.2% against the solicitors.
Although the facts of the case are unusual, the case is a reminder of the duties of all parties to farm transactions.
The content of this document is necessarily general and readers should seek specific advice on particular matters and not rely solely on this document.
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