By Russell Cocks, Solicitor
First published in the Law Institute Journal
There has only been one reported decision on deposit release (McEwan v. Theologedis [2004] VSC 244) and that case did not consider the “condition enuring” argument. Aurumstone P/L v Yarra Bank Developments P/L [2017] VSC 503 has now considered that argument.
Section 24 Sale of Land Act provides that the deposit is to be held in stakeholding. This was designed to protect a purchaser from the possibility of the deposit being released to the vendor prior to settlement and the vendor not being able to settle, with the consequent loss to the purchaser of the deposit. However, the Act recognised that the common law had always taken the view that the vendor was entitled to the deposit upon payment and so s.27 provided a mechanism for release of the deposit prior to settlement if certain requirements are satisfied.
One such requirement is that there are “no conditions enuring” for the benefit of the purchaser. But all contacts have “conditions” that continue from the time that the contract is signed until final settlement and if the word “conditions” refers to any condition then deposit release can never occur. Such an outcome cannot have been intended by Parliament when it specifically introduced a release mechanism and so the question to be determined is what sort of condition does the prohibition refer to?
Clearly a condition allowing the purchaser to avoid the contract if a loan is not approved would be the sort of condition that would justify objection to release until satisfied, but a condition that the vendor replace a doorbell prior to settlement would not be such a condition.
The Court approached the problem of defining which conditions in the contract would be “conditions enuring” for the benefit of the purchaser by first drawing a distinction between:
- contingent conditions; and
- promissory conditions.
A contingent condition is a condition that does not contain a promise that the condition will be satisfied but rather defines an event or an occurrence the happening of which will mean that the contract is no longer contingent. This includes a loan approval condition that does not promise that a loan will be approved but which means that if the loan is approve then the contract is no longer contingent on loan approval.
The existence of an unsatisfied contingent condition justifies refusal to release the deposit.
Promissory conditions are in turn divided into three categories:
- essential terms;
- intermediate terms; and
- warranties.
An essential term is a term that the parties intend the breach of which will lead to the right to terminate the contract.
An intermediate term gives rise to a non-essential obligation the breach of which may be sufficient to entitle termination if it goes to the root of the contract such as to deprive the injured party of such a substantial part of the benefit of the contract but will otherwise only justify a claim for damages.
A warranty, which is not an essential term, gives rise to a right to damages for breach but no right to terminate.
The relevant condition in Aurumstone was a Special Condition added to the contract by the parties to address the purchaser’s requirement that vacant possession of the property, which was subject to a lease at the time of signing the contract, would be available to the purchaser at settlement or shortly thereafter. The purchaser intended, and the vendor knew of that intention at the time of agreeing to the Special Condition, to demolish the buildings on the property and redevelop the land. The parties therefore agreed that the Special Condition was an essential term and the Court had no hesitation in rejecting the argument that s27 is limited to situations where there is no contingent condition. The existence of a promissory condition that is an essential term will justify a purchaser in refusing to consent to release of the deposit.
However, it follows that the existence of an intermediate term or a warranty may not justify refusal. An intermediate term that goes to the root of the contract may justify refusal but a lesser intermediate term or a warranty, the breach of which merely justifies damages and not avoidance, will not justify refusal to release the deposit.
The General Condition most often relied upon to justify refusal to release is GC 24, which relates to delivery of the property at settlement in the condition it was on the day of sale, fair wear and tear excepted. This is likely to be classified as an intermediate term the breach of which gives a right to damages, but not termination. The condition itself has a mechanism for calculating damages for breach and the purchaser has termination rights for substantial breach of this obligation in s.34 Sale of Land Act. It is therefore a promissory condition that is not essential and does not go to the root of the contract so it does not justify refusal to release the deposit.
It is unlikely that any other of the General Conditions that are promissory in nature justify refusal to release the deposit and so it may be concluded that it is only the contingent loan condition in GC 14, or an essential Special Condition, that justify refusal to consent to deposit release.
Tip Box
- s.27 Sale of Land Act permits release of deposits
- a contingent condition or essential term may justify refusal to release
- other than GC.14, the General Conditions do not justify refusal to release.
Whilst written for Victoria this article has interest and relevance for practitioners in all states.