But that’s what we agreed …

Written by Nick Aveling
Originally published in The Profit

A wise and respected local businessman once gave my father some sage advice which he has often repeated: “You are a fool if you do not understand what you are signing”. Not so long ago a handshake and a discussion of the broad terms of an agreement were often enough to create a lasting and workable arrangement. Whether or not you have a written contract or a verbal agreement, in this increasingly complicated, volatile, and litigious era care needs to be taken when entering into agreements or arrangements in day-to-day business.

Agreements come in many forms: leases, contracts for sale, loan agreements or a simple agreement to provide a service and they exist to record an arrangement and the expectations of the parties entering them. They exist to be relied on. Courts can enforce them. Sometimes the arrangements are verbal but more commonly not, and verbal agreements can give rise to a whole different set of issues concerning what was actually agreed and lack of evidence of this.

Whilst all is ticking along nicely the agreement will sit in a drawer and the exact nature of the verbal terms may essentially be forgotten but when things go pear-shaped the actual arrangement comes into sharp focus. I illustrate the point with a few examples of issues we often come across where people are caught out:

  • If you sign a contract that includes an ‘entire agreement’ clause, then the contract you sign represents the entire agreement you have made. Any other communication or agreement you have made is excluded and is not legally binding including the negotiations leading up to entering the contract.
  • The most common security used by banks is an “all obligations mortgage”. Under this security your lender can use your property as security for anything you’ve borrowed or might borrow from them in future not just your home loan, and this may include credit cards and personal loans.
  • You decide to rent a premises for your business and conclude negotiations and put this in writing in the form of an Agreement to Lease. Although this is not a lease document, it is binding on you, and you are obliged to enter a formal Deed of Lease.
  • You decide to sell your lifestyle block and for many years have had a verbal agreement in place to take water from your neighbour’s spring. Now no-one is quite certain what exactly was agreed, and you find your neighbour now refusing to enter a formal easement or continuing the arrangement with your potential buyer.

Remember also that contracts cut both ways: for instance, as a landlord a formal written lease can provide protection and security, but that lease also obliges you to provide certain services and comply with certain regulations for the tenant’s benefit.

More than ever in comparatively uncertain times such as these understanding your obligations and ‘reading the fine print’ is necessary. Signing up for a gym membership in January and finding out it is for a contractual 12 months when you try to cancel in February may not break the bank but guaranteeing a commercial lease for a term of 5 years might.

When Mrs Smith blithely guaranteed her grandson’s 5-year lease of that 50 hectares at Turamoe which he had been cropping so successfully, she thought no more about it and headed off to her unit in Port Douglas for her annual holiday. If he couldn’t pay his rent surely his landlord would be good about it all, after all, she knew his mother. Markets have since shifted and Tom can’t pay his rent. Mrs Smith didn’t go to Port Douglas this year as her unit has been sold and she couldn’t afford her annual holiday.

As the world moves into a cycle of more uncertain times, what you have agreed can have huge ramifications on your future. On the other hand, a well understood and thought-out agreement can alleviate many problems.

After more than two decades in the UK, Nick has brought his wealth of experience and expertise back to Hawke’s Bay. Specialising in residential and commercial property, asset planning, Estates, and Trusts, Nick’s professional journey in London included serving a diverse clientele, from high net-worth individuals and investors to public entities and first home buyers. A graduate of the University of Canterbury with a Bachelor of Laws and a Bachelor of Arts, Nick’s early career involved working with a respected law firm in the Manawatu before he set off for Europe. Now back in Hawke’s Bay, Nick enjoys the relaxed pace of life in one of New Zealand’s most spectacular regions. His return reunited him with family, allows him time to catch up with old friends, and enjoy the proximity of some of the world’s best vineyards right in his backyard.

Contact: [email protected] / 06 872 8210