Updated standard estate agency terms for the sale of real estate companies – simplification or greater degree of complexity?

| Insight

In December 2019, the Norwegian Real Estate Association and the Forum for Commercial Brokers published an updated version of the standard estate agency terms for the sale of real estate Companies. Compared to the previous standard estate agency terms, it is our assessment that the updated standard represents a more complex contract system that requires a higher level of legal competence on the hands of the users of the standard.

The changes made to the updated standard are reportedly based on experiences made with the previous standard estate agency terms of October 2015, including clauses that historically have been subject to negotiations, and a desire to make the contract more reader-friendly for non-lawyers.

The standard estate agency terms has still not been updated in accordance with section 8-10 of the Companies Act, which came into force effective from January 1, 2020. This has particular significance for the closing agreement accompanying the purchase contract. We assume that this will be available in the spring of 2020.

In the following, we will present some remarks with a selection of the most significant changes:

Determination of the revised purchase price

In the standard estate agency terms of October 2015, the starting point was that situations where the parties disagreed on the determination of the revised purchase price should be handled by parties’ nomination of an independent state-authorized auditor. The result of this determination should be regarded as an arbitration decision with limited opportunities to set aside the determination, cf. Section 42 of the Arbitration Act. The regulation represented an effective and appropriate method for determining disagreements regarding the determination of the revised purchase price.

The regulation in the revised standard estate agency terms is now that disagreements regarding the determination of the revised purchase price shall be subject to ordinary court proceedings. This will involve a far more elaborate and less efficient process in determining the revised purchase price. In addition, and combined with the fact that it is the Seller who presents both the estimated and revised balance sheet, the changes could potentially involve benefits in the Seller’s favour. We disagree with the changes at this point, both as a result of the fact that the previous regulation represented an effective dispute resolution mechanism and that the new regulation is suitable to give the Seller an unreasonable opportunity to speculate.

Notification of breach – deadlines for complaints

According to the standard estate agency terms of October 2015,  the Buyer lost his claim for compensation under the ordinary guarantees if the Buyer exceeded the relative claim deadline of 60 days. Furthermore, the absolute claims deadlines were respectively one year for the ordinary guarantees and three years for the fundamental guarantees.

The revised broker standard has changed the absolute claims deadlines to respectively 18 months for the ordinary guarantees, and five years for the fundamental guarantees. Furthermore, the claim deadlines are extended by one month if the Buyer discovers the breach of contract later than one month before the expiry of the deadlines.

A further significant change is that the relative claim deadline has now been narrowed to one month, while at the same time that non-fulfilment  of this deadline only result in lost claim if the non-fulfillment entails i) increased loss on the Buyer’s hand, or ii) that the Seller or the company has lost the right to claim compensation from third parties. Basically, we agree that it is not unreasonable that the Seller must expect to be liable for breach of contract where the Buyer’s losses exceed the limitations of liability during the claim period.

Thus, the changes increase the Seller’s risk exposure, both as a result of the Buyer’s individual claims being retained to a greater extent during the absolute claims deadlines, and that there will be a greater proportion of claims to come within the threshold-values in Clause 8.4 of the contract during the warranty period.

The parties’ remedies in the event of breach of contract

The revised standard estate agency terms still implies that the Seller has a strictly objective responsibility for incorrect information, regardless of whether the Seller understood or should have understood that the information was incorrect. At the same time, the regulation of the Seller’s liability is now mainly divided between the Clauses in 6, 7 (letters a) and b)), and Clause 8.

In comparison, the distribution of responsibility in the previous standard estate agency terms was presented more chronologically in line with the individual phases of the contract, and where the framework for the Seller’s liability was mainly included in Clauses 6 and 8 respectively.

In our view, the new structure is not suitable for improving reader-friendliness compared to the previous standard. This is partly due to the fact that the regulation is more comprehensive, divided into several provisions and to a greater extent contains references. For the sake of reader-friendliness, it should have been considered to collect the regulation in Clauses 6, 7 (letters a) and b)), and Clause 8, in one common clause. This is due to the fact that all of the provisions govern both «the parties’ remedies in the event of breach of contract» and the «right to compensation and limitations of the Seller’s liability«.

Does the revised standard achieve the purpose of the changes?

The material changes in the standard estate agency terms can always be discussed, and there will probably still be points that will be subject to negotiations.

However, the standard of October 2015 has until now been used in the majority of real estate transactions, and its structure is consequently well incorporated and well-known in the industry. Combined with the fact that the revised standard to a greater extent contains detail regulation, and the use of referrals that increase the complexity of the agreement, we question whether the revised broker standard achieves the purpose of increasing reader-friendliness towards non-lawyers.

A large proportion of transactions nationwide are of modest transaction size, and where the parties have limited or no experience with such sales processes. More complex agreements in such transactions may be alienating to the parties, and adversely affect the effectiveness of the transaction process.

In summary, it is our view that there was no need to make such major changes to the structure of the contract as the new standard represents. Furthermore, we have received signals from several sources that the previous standard of October 2015 will still be preferred in real estate transactions.

Feel free to contact our lawyers if you have any general or specific questions regarding the broker standards and real estate transactions.