The Court of Appeal in Arcadia Homes Limited (in liquidation) v More to This Life Limited and Andrew George Clark as Trustees of the Ultimate Lifestyle Trust [2013] NZCA 286 considered, for the first time in a New Zealand court, the impact of a condition in a sale and purchase agreement making the agreement conditional on the approval of the purchaser's directors. 

Arcadia entered into a sale and purchase agreement (based on the REINZ/ADLS 8th Edition 2006 form) for a house in Wanaka that was conditional upon Arcadia's directors approving the agreement.  Arcadia argued that the condition was a condition precedent and therefore no binding agreement had ever come into effect.  The Court rejected this because the agreement was expressed to be binding and contained a clause stating that all conditions would be conditions subsequent unless expressly provided otherwise, and this was not expressed.  The Court distinguished two New Zealand cases where agreements were subject to a due diligence condition and the purchaser being satisfied with the property in all respects.

The agreement containted a clause requiring the party obtaining the benefit of a condition to "do all things reasonably necessary to enable the condition to be fulfilled".  The Court held that this required the sole director to have, at least, obtained a guaranteed title search, LIM and valuation from a registered valuer in relation to the property.  None of these things were obtained so Arcadia could not avoid the agreement.  The Court said Arcadia appeared to have attempted to use the condition as a means of obtaining an option to purchase the property while looking for something better. 

The upshot is that a "subject to directors' approval" condition will not provide a company with an option whether to complete the agreement.  If a purchaser wants to have a wide discretion to avoid an agreement, it should include a due diligence condition, with satisfaction at the sole and absolute discretion of the purchaser.