By Russell Cocks, Solicitor
First published in the Law Institute Journal
A Supreme Court ruling makes claiming a return of deposits difficult
The Supreme Court has made another decision that, from the point of view of purchasers at least, might be described as tough. Certainly vendors might view the result favourably, but it is suggested that, on balance, the decision places too high a duty on purchasers before they are entitled to claim a return of the deposit in a situation when finance approval has not been obtained.
Umbers v Kelson & Anor [2008] VSC 348 denied a purchaser a refund of deposit in a sale of business contract when the purchaser wrote to advise the vendor within the time prescribed by the finance condition that finance approval had not been obtained and sought an extension of time for approval, concluding that: ‘In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract’.
Applying a strict interpretation of the condition, the court concluded that the word ‘may’ failed to sufficiently explicitly express the purchaser’s intention to end the contract if the extension was not granted and refused to order a return of the deposit. This outcome came as a shock to the vendor as much as the purchaser, as the vendor had not even made that argument and it was entirely a construct of the court. It may be explained by reference to the context of the dispute between the parties where the purchaser had adopted an ‘off handed, on again, off again’ approach over an extended period and justice appeared to favour the vendor, who had been substantially inconvenienced by the purchaser.
Putt & Anor v Perfect Builders Pty Ltd [2013] VSC 442 concerned a 10 per cent deposit of $59,500 paid pursuant to a contract relating to an ‘off the plan’ owner-occupier apartment valued at $595,000, with the purchaser contributing $155,000 and borrowing $475,000 (including acquisition costs) and appears to be the perfect consumer transaction involving John and Betty Citizen who had saved for years to buy their first home.
Some, probably unnecessary, controversy arose between the purchaser and the vendor in relation to relatively minor matters during the finance period with the vendor failing to respond to some requests made by the purchaser in relation to the property and documentation. This perhaps soured the relationship and affected the vendor’s response to the purchaser’s request for a refund of the deposit when the loan had not been approved within the approval period. That request was supported by a relatively informal, but unchallenged, advice that the lender had refused the loan on the basis that ‘valuation confirms the property is unacceptable’.
The vendor refused to refund the deposit on the basis that the purchaser had applied for a loan of $476,000 and therefore had failed to strictly comply with the finance condition, which called for a loan of $475,000. It should be noted that $476,000 is 80 per cent of the purchase price and it is entirely likely that this amount was applied for as a result of the broker describing the loan as an 80 per cent LVR (loan to valuation ratio).
The purchaser argued that ‘commercial reality’ predicated that a refusal for $476,000 meant that there would have been a refusal for $475,000, but Williams J stated that, even if that were the case, there was no evidence upon which the court could be satisfied that the purchaser had done ‘everything reasonably required to obtain approval’. There was no evidence of the requirements of the lender referred to in the correspondence between the parties and the valuation referred to in the refusal and this meant that the court was unable to be satisfied that the precondition for a refund had been satisfied.
This lack of evidence was a direct result of the judicial course that the purchaser chose to follow to force a refund. The application was made pursuant to s 49 of the Property Law Act (Vic), informally known as a Vendor-Purchaser Summons. The virtue of this procedure is speed (the hearing was within two months of the dispute arising) but the evil is the lack of evidence that the parties can put to the court, as only affidavit evidence is permitted. If a procedure in a lower court or tribunal had been adopted it may have been possible to adduce more evidence, but the ‘evil’ in that option was the inevitable time delay.
Section 49 does give the court discretion to ‘do justice between the parties’ and, with respect, it is suggested that ‘justice’ in this case required a refund of the deposit to the purchaser, rather than a windfall profit to the vendor. However the exercise of this discretion has previously been interpreted in a quite limited way and Williams J was not prepared to exercise the discretion in this case.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.