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More secure house purchases? New legislation proposed by the Government to the Alienation Act

News | 06.05.19

Real Estate
The Government has by Prop. 44 L (2018-2019) proposed major changes to the Alienation Act. The proposed changes have been controversial and the outcome is connected with great excitement.

The Alienation Act Chapter 3 contains provisions to determine whether the property has a defect (pursuant to the property`s condition) which may give the buyer the right to claim repairs, price reduction or compensation. These proposed amendments to these rules imposes a bigger liability on sellers than under the current legislation. The purpose is to create a more secure transaction with regard to openness, transparency and the possibility for pulverizing risk.

Shift in the risk of errors and defects
The biggest material change of the bill is that the shall seller no longer have the opportunity to sell a property "as is" or with other similar reservations when the property is sold to a consumer.

Pursuant to the Alienation Act in force the main rule is that the seller excludes liability for errors and defects by making such reservations. This means that the property in principle only has an error or a defect if the property is in a substantially worse condition other than what the buyer could expect, or if the seller has given insufficient or incorrect information.

The proposed changes entails that the seller shall, as a main rule, be responsible for errors and defects (beyond trivial conditions), which implies a material shift in risk for errors and defects.

Other changes
When the seller no longer has the opportunity to exclude liability by making reservations, this entails that it is more important that errors and defects are brought to light prior to the parties signing the contract. The Government has therefore proposed

  • to codify that the buyer shall be deemed to have knowledge about conditions that are clearly described in a condition report or other sales documents that the buyer has been given the opportunity to check, and
  • to regulate both the requirements of a condition report and the qualifications of the experts that provides such condition reports.

The above-mentioned rules shall underline the importance of the seller giving the byer supplementary information about the property and of the buyer reading the condition report.

In addition, the Government has proposed to enter into provisions about

  • zero tolerance as regards area deviations – stipulating that all deviations from the described area shall be considered as a defect,
  • a fault has to amount to NOK 10 000 in order to be considered as a defect – in order to prevent conflicts concerning trivial matters, and
  • the property has a defect provided that it does not correspond with what the buyer could expect based on inter alia the property`s type, age and visual condition (codifying the abstract concept of defects).

Assessments
The Government underlines that purchase and sale of property is a transaction which has great economic importance for the parties, and that it is important that the parties, as little as possible, experience unpleasant surprises after the transaction is completed in the form of unexpected defects.

However, the proposed change of removing the seller's right to make reservations appears to favor the buyer too much by imposing on the seller an unreasonable responsibility for hidden errors and defects that are revealed after the transaction has been made.

By removing the possibility to make reservations when selling a property, it is necessary that the seller has provided the buyer with a thorough condition report in order to avoid being held responsible for errors and defects after the transaction is completed. There is no doubt that stringent requirements to the condition reports is an important part of the work to reduce the number of property disputes. However, it is difficult to imagine that it is possible to reveal all hidden errors and defects when making such condition reports.

For what obvious reasons should the seller be considered liable for hidden errors and defects? Most of home purchases taking place are agreed between two equal parties where neither of them should be considered as a professional party.

It appears unreasonable to shift this liability solely to the seller. The proposed change appears to emphasize, to an extent, that the seller has the opportunity to take out a transfer of ownership insurance that covers such defects and errors. However, it is not certain whether the seller will have such insurance in the future and if the insurance companies will offer insurances with such a high risk profile. These questions seems to be insufficiently discussed or examined by the Government.

Establishing minimum requirements for defects (NOK 10 000) combined with an additional requirement concerning that the buyer could not foresee such negative condition due to the property`s type, age and visual condition, could in addition trigger further conflicts than what is the situation pursuant to today`s determined guidelines.

The way forward
The Alienation Act has during the past years been criticized for bringing insecurity to property transactions and for providing a breeding ground for disputes. Pursuant to the high amount of disputes in recent years, there is no doubt that the Alienation Act should be changed in some way.

Such changes should however be done by making the act predictable for all of the parties involved in a property transaction. Stringent requirements to condition reports should be considered as a correct step towards decreasing the high amounts of disputes. Lower thresholds for defects, zero tolerance for area deviations and shifting the risk for hidden errors and defects to the seller, could however be considered as two steps back.