Price Reduction Due to Housing Shortage – Rules and Calculation According to the Alienation Act

Price reduction is a practically important legal remedy for home buyers. The purpose is to restore the balance in the contractual relationship when the home has a defect. This article will elaborate on the conditions for claiming a price reduction under the Norwegian Alienation Act, and how the price reduction should be calculated.

Conditions for price reduction

The legal basis for a price reduction is section 4-12 of the Alienation Act. The first paragraph states that the buyer can demand a "proportional price reduction" if the property has a "defect". What constitutes a defect is regulated in chapter 3 of the Act. The main rule follows from section 3-1, first paragraph; the property has a defect if it does not comply with the "requirements for quality, equipment, and other" as stipulated in the agreement. In addition, violations of public law requirements or deficiencies in area could be considered a defect under section 3-2, third paragraph and section 3-3, respectively. The assessment of defects is objective. There is no requirement that the seller is at fault. Even hidden defects that the seller was not aware of can provide grounds for a price reduction. The central issue is that the property actually deviates negatively from what was agreed upon.

A price reduction assumes that the defect existed at the time of risk transfer, which is the date of takeover, cf. section 2-4, second paragraph. Faults and damages that arise later must be borne by the buyer unless the seller has special liability through a warranty, etc.

Calculation of the price reduction

The price reduction should, according to section 4-12, first paragraph, be "proportional". This means that the price reduction should reflect the significance of the defect on the property's value at the time of takeover. Thus, the price reduction should mirror the value reduction caused by the defect. The calculation method takes as its starting point the market value of the property and a percentage reduction equivalent to the loss in value. The Supreme Court decision Rt. 1998 p. 1510 established that it is the market value of the property that is decisive, not the specific price agreed upon by the parties. In practice, proportionality will often be determined by an assessment based on appraisals, condition reports, and expert statements.

If the defect can be remedied, the price reduction will normally correspond to the repair costs. This follows implicitly from the Act's second paragraph. Section 4-12, second paragraph establishes a rule that the price reduction shall be set equal to "the costs of rectifying the defect", unless otherwise proven. This is an expression of a repair consideration; the buyer should be put in a position as if the defect had been remedied. The second paragraph is a presumption rule with reversed burden of proof. The seller bears the burden of proof that the reduction in value is lower than the repair costs.

The Supreme Court has established that repair costs are only the starting point for determining the amount of the price reduction, not an absolute rule. In Rt. 2000 p. 199, the price reduction was discretionarily set to NOK 75,000, despite repair costs being NOK 180,000. This was because the defect reduced the market value by NOK 75,000, and the repair costs clearly exceeded the reduction in market value. The Supreme Court decision HR-2017-1073-A established that price reductions based on repair costs should be adjusted for standard improvements. Thus, the repair costs must be reduced by the benefit the buyer gains in the form of higher standards of work compared to the original. This is necessary to prevent the buyer from achieving an unjust enrichment at the seller's expense.

Relation to other breach remedies

A price reduction can be claimed regardless of whether the buyer also asserts other breach remedies such as rectification, cancellation, or compensation. If the seller chooses to rectify the defect under section 4-10, the buyer's claim for a price reduction lapses, provided that the rectification occurs within a reasonable time and without a significant inconvenience to the buyer. A successful rectification will restore the balance in the contractual relationship, so there is no longer a basis for a price reduction.

Cancellation under section 4-13 presupposes a "material breach of contract" and is reserved for more serious defects. Upon cancellation, the services are returned, and the parties are placed as if the agreement had not been concluded. Hence, a price reduction is excluded upon cancellation. Instead, the buyer can demand to be compensated for the price difference in cover purchases.

Complaint deadlines

To assert a claim for a price reduction, the buyer must complain within the deadline set in section 4-19, first paragraph. This means within "a reasonable time" after discovering or should have discovered the defect. What constitutes a reasonable time must be assessed based on the specific circumstances of each case. Relevant factors include:

• The nature and extent of the defect.

• The need for an expert assessment.

• Whether the buyer is a consumer or a business operator.

• The time the buyer needs to assess their claims and gather documentation.

In addition, an absolute complaint deadline of five years runs from the date of takeover, cf. section 4-19, second paragraph. After the expiration of the five-year deadline, defects can no longer be asserted, either as a basis for price reductions or other claims. The statute of limitations applies alongside the complaint deadlines. This means that a claim may be time-barred under the statute of limitations even if the complaint deadline under the Alienation Act has not expired. The general statute of limitations is three years from the time of the breach, but with the possibility of an extension under section 10 of the statute of limitations when the defect is discovered later.

Summary

Price reduction is a central legal remedy in the Alienation Act. The rules are intended to ensure that the buyer receives a fair adjustment of the purchase price when the property suffers from negative deviations. At the same time, the price reduction must be proportional to the significance of the defect. The determination of a price reduction often raises complex factual and legal issues and typically requires technical and legal expertise. Generally, it can be said that the regulations are discretionary, and thus it can be challenging to predict the outcome of a price reduction dispute.

At Sterk Law Firm, we have a lot of experience with property law and price reduction cases. Our lawyers can conduct a thorough assessment of your price reduction claim and litigate the case in court if necessary.