ByLawyers News and Updates

Notice of action

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By Russell Cocks, Solicitor

Published April 2018, First published in the Law Institute Journal

I have used Donald Rumsfeld’s phrase ‘unknown unknowns’ once before, to describe the obligations of owner-builders, and it seemed appropriate at the time. But perhaps the epitome of ‘unknown unknowns’ is the Notice of Action.

This is a document that the Registrar of Titles registers on a certificate of title if the Registrar is concerned that some inappropriate action has, or might, occur in relation to the certificate of title. The legislative basis for the Notice is said to be s 106(1)(f) Transfer of Land Act which provides that the Registrar ‘may take any other step necessary to protect the operation, effectiveness and integrity of the Register, including, but not limited to, the making of a notation on a folio of the Register’.

Very little is known about these Notices and the Registrar does not appear to have published any guidelines relating to when a Notice will be registered and, perhaps more importantly, when it will be removed. The same can be said for a Registrar’s caveat (formerly known as a Queen’s caveat) authorised under s 106(1)(a)(iii) that authorises such a caveat ‘for the prevention of any fraud or improper dealing’.

The case of Lee Nyong Pty Ltd & Anor v Di Blasi & Anor [2018] VSC 5 considered a Notice of Action in the context of a dispute between parties relating to which party should pay the costs of the proceedings, on what basis those costs should be calculated and whether the Registrar might have a liability in relation to those costs. There had been an allegation made that a withdrawal of caveat that had been recorded on the Register was a forgery and this allegation was apparently the basis for the Registrar’s concern. The possibility of a forged document tainting the Register would justifiably cause the Registrar concern but the case highlights that the consequence of a Notice of Action in practical terms is that ‘all bets are off’.

In the course of the judgment the court stated that ‘A Notice of Action has no statutory force. It is not a creature of statute and simply indicates that the Registrar has concerns about a particular transaction’. The Registrar ‘described a Notice of Action as an “administrative dealing” that allows [the Registrar] to monitor dealings affecting land to ensure that only those dealings which are appropriate are registered’. Further, he stated that such a notice ‘does not prevent the lodgement or registration of any dealings’.

However, it is hard to imagine that a person expecting to obtain registration of ownership or security in a title will proceed in the face of a Notice of Action or Registrar’s caveat. Unfortunately, there does not appear to be any procedure for ascertaining when, if ever, the Registrar will remove a Notice of Action or a Registrar’s caveat. Indeed, the Registrar advised the court that the Notice of Action ‘is removed at a time I consider appropriate’. It is this uncertainty and lack of direction that causes difficulties for practitioners at the coalface seeking to explain to clients, who are generally innocent third parties, that no guidance can be given in relation to when the dispute may be resolved, if ever.

It appears that the Registrar takes the view that a party who needs to lodge a dealing for registration after a Notice of Action or Registrar’s caveat has been registered on title should simply do so and hope that the Notice of Action or Registrar’s caveat will be withdrawn. This is akin to a risk management protocol of crossing your fingers. The Registrar needs to develop guidelines that establish a procedure that allows these innocent third parties to have some guidance as to when the Notice or caveat will be withdrawn and on what terms. If this requires the Registrar to participate in the settlement process and even attend a settlement so that some certainty can be given to incoming registered interests then that should be a cost that the Registrar bears in exercising vigilance over the Register and avoiding claims on the Assurance Fund.

How such scenarios will be handled in the electronic environment is a mystery for another day. Expecting the Registrar to become a party to a PEXA settlement, and pay the PEXA fee, seems like a bridge too far.

Tips:

  • Notice of Action and Registrar’s caveats are mysteries.
  • Both are authorised by s 106(1) Transfer of Land Act.
  • Guidance should be provided by the Registrar.

 

Vendor statement – Honest and reasonable

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By Russell Cocks, Solicitor

Published May 2018, First published in the Law Institute Journal

Section 32 Sale of Land Act requires a vendor to provide a purchaser with a Vendors Statement disclosing certain specified information in relation to the property. The purchaser may avoid the contract if there is a breach of s 32, but the vendor has an ‘escape hatch’ in s 32K.

 

Last year McHutchison v Asli [2017] VSC 258 considered whether a vendor could rely on s 32K in circumstances where a planning permit for a septic sewerage system was not disclosed. Downing v Lau [2018] VCC 33 is a County Court decision considering s 32K in the context of non-disclosure of a planning permit relating to future development of the property.

Unlike in McHutchison, where the obligation to disclose the notices was contested by the vendor, Downing proceeded on the concession by the vendor that the planning permit was a ‘notice’ affecting the land within the meaning of s 32D(a). This is consistent with the decision in McHutchinson and must now be beyond doubt. The question in Downing therefore became – could the vendor rely on s 32K?

The two elements to s 32K are:

  • that the vendor acted honestly and reasonably and ought to be excused; and
  • that the purchaser is substantially in as good a position.

The vendor’s failure to disclose related to a current planning permit that had been obtained some time before the sale and which permitted the construction of four units on the land. Unlike the permit in McHutchinson, which imposed conditions on the use of the property and was therefore restrictive, the permit in Downing did not require construction of the units, it was simply a permissive notice. Nevertheless, it should have been disclosed. That it was not disclosed was a decision of the vendor’s conveyancer, who (mistakenly) was of the view that it did not need to be disclosed.

A vendor who has been personally negligent is not likely to qualify as ‘honest and reasonable’, so the question was whether the vendor would be vicariously liable for the vendor’s representative’s negligence. This had previously been considered by the Supreme Court in Paterson v Batrouney & Anor [2000] VSC 313 where elderly vendors were found not to be responsible for their representative’s negligence. Downing considered the question in the context of the law of agency and decided that the representative was retained by the vendor as an expert and was not the vendor’s agent, at least not for the purpose of preparing the Vendor Statement. Whilst the representative might be the vendor’s agent for other parts of the transaction, that agency did not extend to preparation of the Vendor’s Statement and the vendor was therefore not vicariously liable for the expert’s negligence.

Downing, in adopting Paterson v Batrouney, chose not to follow other authority and it may be that the matter will be reconsidered by the Supreme Court in the future.

Having found that the vendor satisfied the first leg of s 32K, the inquiry then turned to whether the ‘purchaser is in substantially as good a position’. The purchaser felt aggrieved because the purchaser had intended to seek a permit to construct eight (or perhaps seven) units and took the view that the existence of the permit for four units substantially affected the purchaser’s ability to get a permit for 7-8 units, notwithstanding that expiry of the four unit permit was imminent. Alternatively, the purchaser argued that a property with a disclosed four unit permit was worth less than a property without such a permit, as this property had been represented.

No valuation evidence was tendered to prove the second point and the court was not satisfied that the existence of the almost expired four unit permit meant that the purchaser could not achieve its desired outcome of a permit for 7-8 units. The court appeared to take the view that the purchaser regarded the property as ‘tainted’ by the four unit permit without being able to prove in any meaningful way that the purchaser was not substantially in as good a position.

The vendor was therefore held to have been entitled to accept the purchaser’s purported termination of the contract for breach of s 32 as a repudiation of the contract and thereby entitled to judgment for the amount of the unpaid deposit and interest at penalty rates.

Tip: Whilst written for Victoria this article has interest and relevance for practitioners in all states.

 

Conveyancing – GST withholding – additional commentary, amendments to contracts and precedents

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The requirement for purchasers to withhold and remit GST on taxable supplies of certain real property under subdivision 14-E Schedule 1 Taxation Administration Act 1953 comes into force on 1 July 2018. This applies to all contracts that settle after 1 July. The transitional arrangements are that contracts entered into prior to 1 July 2018 and settle before 1 July 2020 are exempt from the withholding regime.

The sale and purchase commentaries in all states have been updated, the By Lawyers contracts in NSW and VIC have appropriate new provisions and precedent letters are being updated.

Vendor statement – Honest and reasonable

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Section 32 Sale of Land Act requires a vendor to provide a purchaser with a Vendors Statement disclosing certain specified information in relation to the property. The purchaser may avoid the contract if there is a breach of s 32,
but the vendor has an ‘escape hatch’ in s 32K.

Last year McHutchison v Asli [2017] VSC 258 considered whether a vendor could rely on s 32K in circumstances where a planning permit for a septic sewerage system was not disclosed. Downing v Lau [2018] VCC 33 is a County Court decision considering s 32K in the context of non-disclosure of a planning permit relating to future development of the property.

Unlike in McHutchison, where the obligation to disclose the notices was contested by the vendor, Downing proceeded on the concession by the vendor that the planning permit was a ‘notice’ affecting the land within the meaning of s 32D(a). This is consistent with the decision in McHutchinson and must now be beyond doubt. The question in Downing therefore became – could the vendor rely on s 32K?

The two elements to s 32K are:

  • that the vendor acted honestly and reasonably and ought to be excused; and
  • that the purchaser is substantially in as good a position.

The vendor’s failure to disclose related to a current planning permit that had been obtained some time before the sale and which permitted the construction of four units on the land. Unlike the permit in McHutchinson, which imposed conditions on the use of the property and was therefore restrictive, the permit in Downing did not require construction of the units, it was simply a permissive notice. Nevertheless, it should have been disclosed. That it was not disclosed was a decision of the vendor’s conveyancer, who (mistakenly) was of the view that it did not need to be disclosed.

A vendor who has been personally negligent is not likely to qualify as ‘honest and reasonable’, so the question was whether the vendor would be vicariously liable for the vendor’s representative’s negligence. This had previously been considered by the Supreme Court in Paterson v Batrouney & Anor [2000] VSC 313 where elderly vendors were found not to be responsible for their representative’s negligence. Downing considered the question in the context of the law of agency and decided that the representative was retained by the vendor as an expert and was not the vendor’s agent, at least not for the purpose of preparing the Vendor Statement. Whilst the representative might be the vendor’s agent for other parts of the transaction, that agency did not extend to preparation of the Vendor’s Statement and the vendor was therefore not vicariously liable for the expert’s negligence.

Downing, in adopting Paterson v Batrouney, chose not to follow other authority and it may be that the matter will be reconsidered by the Supreme Court in the future.

Having found that the vendor satisfied the first leg of s 32K, the inquiry then turned to whether the ‘purchaser is in substantially as good a position’. The purchaser felt aggrieved because the purchaser had intended to seek a permit to construct eight (or perhaps seven) units and took the view that the existence of the permit for four units substantially affected the purchaser’s ability to get a permit for 7-8 units, notwithstanding that expiry of the four unit permit was imminent. Alternatively, the purchaser argued that a property with a disclosed four unit permit was worth less than a property without such a permit, as this property had been represented.

No valuation evidence was tendered to prove the second point and the court was not satisfied that the existence of the almost expired four unit permit meant that the purchaser could not achieve its desired outcome of a permit for 7-8 units. The court appeared to take the view that the purchaser regarded the property as ‘tainted’ by the four unit permit without being able to prove in any meaningful way that the purchaser was not substantially in as good a position.

The vendor was therefore held to have been entitled to accept the purchaser’s purported termination of the contract for breach of s 32 as a repudiation of the contract and thereby entitled to judgment for the amount of the unpaid deposit and interest at penalty rates.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

  • s.32K allows a vendor to avoid termination for breach of s.32.
  • a vendor will not be responsible for the negligence of an expert.
  • purchaser cannot avoid if in as good a position.

By Lawyers Contract of Sale of Land – Victoria

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A new form of contract, co-authored by Russell Cocks, providing a vendor’s statement and contract in one document.

The contract is specifically designed for residential conveyancing transactions and seeks to smooth some of the traditional road blocks that arise in these transactions.

The By Lawyers Contract of Sale of Land is located in the Contract folder in the Sale of Real Property Guide.

Seven reasons to use the By Lawyers contract

  1. The Contract and Vendor’s Statement are combined into ONE document, with the Vendor’s Statement, logically, coming FIRST. The Vendor’s Statement is formatted in such a way as to deal with the obligatory fields first and then group the optional fields in way that makes removal of those fields simple if they are not required.
  2. Particulars of Sale in the Contract includes a “sunset date” for off the plan approval. No more searching through mountains of Special Conditions.
  3. Non-derogation warranty. General Conditions can be amended by Special Conditions BUT not such as to reduce the rights created by the General Conditions. No more contracts that say one thing on page 1 and reverse that on page 15. This Contract is fair to both parties; if someone wants to create an unfair contract they cannot hide it within this contract.
  4. General Condition 12 – deposit release. Establishes a clear protocol for release by requiring timely objection to title.
  5. General Condition 14 – loan condition. Extends time for approval to 21 days and allows for automatic extension, subject to vendor’s ability to end the extension by notice.
  6. General Condition 25 – losses. Removes disputes relating to default losses from the settlement process and allows the parties to resolve these issues after settlement.
  7. General Conditions 27 & 28 – default and rescission notices. Divides the process into two steps with specified legal cost in respect of notices.

There are also other improvements, such as simple off the plan and electronic conveyancing conditions, a requirement that a vendor produce a copy lease at settlement and a clause passing ownership of abandoned goods to the purchaser. This Contract continues the quest commenced by the 2008 Contract (remember Requisitions?) to simplify conveyancing by ironing out the speedhumps.

Deposit – Forfeiture of deposit

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A vendor may forfeit a deposit if the contract is ended but there are some circumstances where relief against forfeiture may be granted.

There are two basic principles in property law that generally co-exist but are capable of coming into conflict:

  • a deposit is an earnest paid to secure the performance of the contract; and
  • the law will not enforce a penalty imposed for breach of contract.

These two principles are usually able to co-exist as a result of the law recognising that a payment that constitutes a genuine pre-estimate of a vendor’s losses upon default by the purchaser is not a penalty and that a deposit of 10% of the price is an acceptable pre-estimate of such losses.

It is therefore fair to say that, in circumstances where the purchaser has paid a 10% deposit, a vendor who seeks to forfeit that deposit as a result of the purchaser’s breach of contract will be on safe ground. Section 49 Property Law Act confers on the court a discretion to grant the purchaser relief against forfeiture but it is generally accepted that the purchaser must show exceptional circumstances to justify the exercise of that discretion in circumstances where the deposit is 10%.

An example of such exceptional circumstances may be where the purchaser has taken possession of the property with the agreement of the vendor and has expended money on the property such as to have increased the value of the property. A court might find that the vendor is not entitled to retain the benefit of the funds expended as well as the deposit. But, as a general rule, the vendor can forfeit a deposit of 10% that has been paid by the purchaser. Equally, it will be rare for a vendor to be entitled to retain a deposit of more than 10%, as such a payment exceeds a reasonable pre-estimate of the vendor’s losses and amounts to a penalty.

Often, the deposit is expressed as being ‘10% payable as to $X on signing the contract and balance in 7 days’. Such a formula recognises that a purchaser might not always have a full 10% deposit available at the point of signing the contract and may require a short period of time to arrange for the balance to be available. If the purchaser breaches the contract the vendor needs to call upon the assistance of the court to recover the unpaid deposit and the spectre of a penalty arises. However, it has long been accepted that a vendor is entitled to recover any unpaid part of a 10% deposit notwithstanding that the contract has been ended – Bot v Ristevski [1981] VicRp 13 adopted as recently as Melegant & Sundrum P/L v Zhong [2017] VCC 1868.

However, where the deposit is expressed as some amount less than 10%, the court will not assist the vendor to recover 10%. This has been the situation in NSW for some time and now also applies in Victoria following Simcevski v Dixon (No 2) [2017] VSC 531 were the contract provided for a deposit of 5% and the court rejected a claim by the vendor for a further 5%.

In that case the vendor sought to rely upon a condition in the contract that provided that, if the contract was ended by the vendor, 10% of the price was to be forfeited to the vendor, whether it had been paid or not. Whilst the amount (10%) bore a resemblance to a deposit, the contract provided that the deposit was 5%, so the court had no hesitation in finding that any amount beyond the specified deposit was a penalty and thereby unenforceable, whether supported by a contractual right or not. It may therefore be concluded that any attempt to impose a liability beyond the specified deposit will be an unenforceable penalty.

One formula that has not as yet been scrutinised by a court is ‘deposit of 10% payable as to 5% on signing and the balance of 5% at settlement’. The 10% deposit will not be a penalty and the delay in payment should mean that the vendor is able to recover the full 10% in accordance with Bot v Ristevski.

Tip Box

  • the law will not enforce a penalty for breach of contract
  • a 10% deposit is not a penalty
  • a vendor cannot recover more than the specified deposit

Whilst written for Victoria this article has interest and relevance for practitioners in all states

Vendor’s duty to co-operate

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Contracts often impose specific obligations on purchasers but these may be accompanied by implied obligations on vendors to co-operate with the purchaser to allow the purchaser to fulfil those obligations.

Contracts of sale of land often include conditions that require a purchaser to undertake some action that will put the purchaser in a position to complete the contract. Such conditions are known as ‘contingent conditions’ in that the purchaser does not promise that the condition will be satisfied but acknowledges that if the condition is satisfied, the contract will no longer be conditional on that condition being satisfied.

A common example is a finance condition whereby the contract is conditional (contingent) upon the purchaser obtaining finance to assist the purchaser to complete the contract, or at least to make application for such finance and notify the vendor of the outcome. The purchaser does not promise that finance will be obtained, but obtaining finance will mean that the contract will proceed. The failure of a contingent condition will generally give a right to terminate a contract.

Contingent conditions may be in contrasted to promissory conditions whereby one, or both, of the contracting parties promise to do something; such as to adjust outgoings, or provide documents, or settle the transaction in a particular way. Generally, the failure of a promissory condition will not give a right of termination unless the condition is essential, or goes to the root of the contract.

Conditions may be both contingent and promissory, as indeed is the finance condition in GC14 of the standard contract. The contract is contingent upon the purchaser obtaining finance, but the purchaser also promises to apply for finance and advise of the outcome of that application. If the purchaser fails to comply with the requirements of the condition, the contingency is deemed to have been satisfied and the contract proceeds unconditionally in respect of finance.

Such conditions specifically impose obligations on the purchaser but also impliedly impose obligations on the vendor. Grubb v Toomey [2003] TASSC 131 and Grieve v Enge [2006] QCA 213 are authority for the proposition that a vendor who agrees to a finance condition in a contract impliedly agrees to make the property available to the purchaser for the purpose of a valuation required by a prospective lender and that a vendor who fails to comply with this obligation will be in breach of contract.

Simcevski v Dixon [2017] VSC 197 concerned the sale of a commercial property that had previously been used as a petrol station and that the purchaser wished to redevelop. The purchaser required finance for the purchase and the financier required a valuation to include an assessment of the likely contamination of the site. However, the contract was not conditional upon finance so it was not open to the purchaser to argue that the implied obligation to make the land available for valuation extended to an obligation to allow investigations.

The purchaser sought to rely on a Special Condition in the contract that stated that the vendor gave no warranty in respect of contamination, that the purchaser had inspected the property and that the purchaser released the vendor from any liability in relation to contamination. The condition also referred to the purchaser conducting investigations in relation to contamination and the purchaser sought to argue that this created an express or implied obligation on the purchaser to conduct those investigations and a consequent implied obligation on the vendor to make the property available for the purpose of conducting those investigations.

In the context of the contract this seemed an ambitious argument, as the purpose of the Special Condition appeared to be to protect the vendor and the court concluded as much. Thus, the court held that the Special Condition did not create an express or implied obligation on the purchaser to conduct investigations. Whilst the court did recognise that a vendor does have an implied general duty to co-operate with the purchaser to allow the purchaser to gain the benefits anticipated to flow from the contract, that duty did not extend to making the property available for the proposed investigations in this case as the purchaser had no obligation to conduct those investigations.

A final argument of the purchaser was that the refusal by the vendor to allow the investigations to be conducted prevented the purchaser from completing the contract and that a vendor in such circumstances should not be entitled to terminate the contract, as to do so would allow the vendor to benefit from its wrongdoing. The court, whilst acknowledging the Prevention Principle, held that, on the facts of this case, the Principle did not apply.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

GST withholding

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Six months after the ATO introduced new GST Withholding obligations on purchasers of real estate, those changes are starting to have an effect.

In an attempt to reduce avoidance of GST obligations by vendors arising from the practice of illegal phoenix activity, the ATO introduced a GST Withholding obligation on 1 July 2018. The intent of these changes is to require purchasers of certain types of real estate to withhold a portion of the purchase price from the vendor and pay that money to the ATO, to be applied as a credit towards the vendor’s GST liability. This is not a new tax, just a new method of collecting an existing tax. However, as is usually the case when the ATO seeks to transfer responsibility for tax collection, unintended consequences may result in the ‘innocent’ tax collector facing unexpected consequences.

Notice

Unfortunately, the introduction of the Withholding obligation has been complicated by the introduction of a parallel NOTICE obligation on vendors. It is logical in a transaction that generates a purchaser Withholding obligation to require the vendor to notify the purchaser that the obligation exists, but the vendor NOTICE obligation does not mirror the Withholding obligation and applies to a wider set of transactions than the Withholding obligation applies to. By way of example, one of the categories where the purchaser must Withhold is the sale of NEW residential premises but ALL vendors of ALL residential premises are obliged to give a NOTICE. In the case of not-new residential premises, the NOTICE states that the purchaser is NOT obliged to Withhold and given that the vast majority of residential sales are of existing (as opposed to new) properties the effect of the legislation is to require a vast number of vendors to advise the purchaser that no Withholding is required. This obligation appears to be counter-intuitive and has resulted in considerable misunderstanding in relation to the application of the Withholding obligation. It is difficult to glean the motivation behind this wider NOTICE obligation and perhaps this anomaly might be rectified in any review of the legislation.

The most efficient way to deal with the NOTICE obligation when no Withholding is required is to include the NOTICE in the contract with the statement that no Withholding is required. If Withholding is required, the NOTICE must provide the vendor’s name, vendor’s ABN, specify the Withholding amount and when it is payable (at settlement) and may be provided in the contract, or subsequently.

Obligation

In summary, the purchaser must Withhold if the contract relates to:

  1. new residential premises.

This category can be seen to apply to apartment and townhouse sales where there was a perception of illegal phoenix activity.

  1. potential residential land.

This category applies to greenfield subdivision sales, again a potential phoenix scenario.

However, this category is wider than lots on a proposed plan. It applies to potential residential land that is included in a (registered) plan of subdivision. It therefore applies to sales of residential lots off-the-plan (because the plan is registered prior to settlement) but also applies to the sale of ANY residential land that is a lot on a plan of subdivision – effectively ALL vacant residential land.

However, Withholding is only required where the vendor makes a taxable supply. Off-the-plan sales by land developers will be in the course of an enterprise and therefore taxable supplies attracting Withholding, but most sales of one-off vacant residential lots will NOT be in the course of an enterprise and therefore will not be a taxable supply and will not attract Withholding. Notwithstanding that no Withholding is required, the vendor must still give the purchaser NOTICE that Withholding does not apply.

Again, this seems counter-intuitive and restricting the obligation to off-the-plan sales might be a future improvement.

Payment

If the vendor gives NOTICE that Withholding applies the purchaser must lodge a form of Withholding notification with the ATO and will then receive a lodgement reference number (LRN) acknowledging the notification and a payment reference number (PRN) to be used when lodging a settlement date confirmation form at the time of payment to the ATO.

Tip Box

•GST Withholding applies to new residential premises and vacant residential land.

•Withholding NOTICE must be given with ALL residential sales.

QLD conveyancing – Priority notices

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From 1 January 2018 priority notices will replace settlement notices.

Settlement notices will not be accepted at the titles Registry after 4.30 pm on 22 December 2017. If lodgement is anticipated after this date prepare a priority notice. Priority notices may be signed prior to 1 January 2018.

The publication has been updated to include precedents and commentary on priority notices.

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