By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law has a number of special requirements when a property that is affected by an owners corporation is going to be sold. These requirements can mean that the preparation of the obligatory Vendor’s Disclosure Statement is delayed until an Owners Corporation Certificate is obtained from the owners corporation manager and may require the vendor to pay an insurance premium that the vendor was not expecting.

Owners Corporation Certificates

Many owners corporations are well managed, either by a ‘local’ manager who is one of the owners or by a ‘professional’ manager engaged for that purpose. Generally speaking large scale apartment developments retain a professional manager who will provide an Owners Corporation Certificate for a fee and even the smaller managers usually undertake this task expeditiously. The fee is approximately $150 in respect of each owners corporation and the certificate is usually provided within 10 days of request.

However not all owners corporations have appointed managers. Smaller, two, three and four lot owners corporations may have existed for many years without an operational owners corporation. This presents a problem in relation to provision of an Owners Corporation Certificate. A common way of overcoming this problem was for the vendor’s solicitor to prepare and have the vendor sign a standard Owners Corporation Certificate revealing no meetings, no fees and no insurance and include it in the Vendor’s Statement. However, as a result of amendments in 2014, such an owners corporation has been deemed to be ‘inactive’ and no Owners Corporation Certificate is required. This has simplified the situation in relation to TWO lot owners corporations.

However this option is not available for the sale of a lot in an owners corporation of more than two lots as s 11 of the Sale of Land Act requires that a vendor of a lot affected by an owners corporation must ensure that the owners corporation has insurance in place as required by the Owners Corporation Act. In addition s 60 of the Owners Corporation Act REQUIRES the owners corporation to take out public liability insurance in respect of common property (such as a common driveway). TWO lot plans are exempt from this requirement, s 7, and may therefore be exempt from providing an Owners Corporation Certificate if otherwise ‘inactive’; that is they have not met and have no fees.

Insurance

The difficulty with an owners corporation of more than two lots that does not have a manager is that no-one will have arranged this common property insurance. Individual owners simply pay their own building insurance and no common property insurance is taken out. Indeed an individual owner will often make the point that a careful inspection of their individual building insurance policy reveals that it extends to cover the owner’s liability in relation to common property. But that is irrelevant as the Act requires the owners corporation to ‘have’ the insurance, not the individual owner. That there is likely to be ‘double insurance’ in such cases is equally irrelevant.

Many owners corporations ignore this common property insurance obligation for many years with no consequence. But the problem arises for any owner who decides to sell. Section 11 of the Sale of Land Act requires that the insurance be in place at the time of sale and gives the purchaser the right to AVOID the contract at any time up until settlement if the insurance is not in place. No vendor can afford to knowingly enter into a contract that can be avoided by the purchaser at any time; therefore compliance with s 11 is practically mandatory.

The vendor is under time pressure to organise this common property insurance quickly as the sale process has begun. Whilst it is possible for the vendor to approach other owners to contribute to this insurance, that often does not work out as the other owners may not be contactable or may have no interest in contributing to this expense which, unless they too propose to sell, holds no real benefit for them. The selling owner then generally arranges the insurance at their own expense so that the proposed sale can proceed and is very unhappy about having to incur this unexpected expense (usually around $500). Whilst the vendor is able to require the purchaser to contribute to this expense in relation to the balance of the year after settlement as part of the adjustment process, this can only be for a proportional share of the premium based on the number of lots in the plan. Only the proportion that relates to the lot sold can be adjusted and the vendor has to bear the balance of the premium if the vendor is unable to recover a contribution from other lot owners, which is unlikely.

A halfway house in this scenario is that one of the owners, whilst not acting as a manager, has arranged common property insurance and other owners have contributed to the cost. In that case the vendor can provide an informal Owners Corporation Certificate setting out the insurance particulars and a statement that for all other purposes the owners corporation has been ‘inactive’.

Practitioners are invited to photocopy this explanation and send it to clients in appropriate circumstances.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

During 2012 the Department of Justice undertook a review of vendor disclosure obligations, specifically with a view to reducing red tape. The Sale of Land Amendment Bill 2014 amends s 32 of the Sale of Land Act and will come into effect on 1 October 2014 if not proclaimed before.

Perhaps the most significant change is the total restructure of the section. Section 32 has been amended many times since its introduction in 1982 and this review has taken the opportunity to totally recast the format of the section with a view to making the section more logical in its layout by collecting together subsections that relate to topics such as financial matters, insurance, permits and title. This change will challenge practitioners to relearn the section and may, in itself, improve comprehension of the section.

The other significant change is the introduction of the concept of a due diligence checklist that is to be made available to prospective purchasers.

Section 32

This foundation section creates the obligation on a vendor to ‘give’ to a purchaser a Vendor Statement before the purchaser signs the contract. The section does not require a separate copy of the statement to be included in the contract, thus theoretically halving the number of copies required. In fact the existing obligation to have a separate Vendor Statement together with a separate copy in the contract was generally honoured in the breach, with common practice being to simply include the Vendor Statement in the contract. It is anticipated that this practice will continue and vendors will provide the Vendor Statement as an attachment to the contract, although technically this will not be necessary.

Subsequent subsections of the Sale of Land Amendment Act require disclosure of:

• s 32A – Any mortgage that is not to be discharged, any existing charge, details of outgoings and additional terms contract information.
• s 32B – Building insurance, but only if risk passes to the purchaser, and owner-builder insurance.
• s 32C – Easements, et cetera, and planning information, including bushfire prone areas and road access. In relation to planning, a new requirement to disclose ‘the name of any planning overlay’ has been included.
• s 32D – Notices ‘made’ in respect of the land. This is largely as before, but slightly changed to introduce the qualifying phrase ‘directly and currently’ affecting the land. This may be perceived as limiting the type of notice that may be encompassed by the subsection.
• s 32E – Building permits issued within the last 7 years, if the property includes a residence. As at present, this does not require disclosure of permits that have not been issued, whether a permit was required or not.
• s 32F – Owners corporation particulars. This is perhaps the most significant change. The owners corporation information can still be provided by a certificate obtained from the owners corporation, but it may also be provided by the owner directly. Importantly, if the owners corporation is ‘inactive’, no information is necessary. An owners corporation is ‘inactive’ if it has not met, fixed fees or held insurance in the last 15 months.
• s 32G – Growth areas infrastructure contribution information.
• s 32H – Services. However the vendor must now disclose services that are not connected, rather than the existing requirement to disclose services that are connected. If services are connected at the day of sale, the vendor has no disclosure obligation.
• s 32I – Title. A copy of a register search statement and diagram (plan of subdivision) must be provided, together with proof of right to sell (if applicable). Any proposed plan of subdivision must also be included.
• s 32J – Proof. Disclosure may be achieved by attaching relevant documents but other than title documents, no documents are required and disclosure may be made by simply providing the information.
• s 32K – Is the avoidance provision and allows a purchaser to rescind the contract if the vendor provides false or inadequate information. As at present, the right is subject to the purchaser proving that the vendor acted unreasonably and that the purchaser has suffered detriment.
• s 33 – Due diligence checklist. This is designed to alert a prospective purchaser to various consumer protection issues. A vendor (or agent representing the vendor) of residential property must ensure that the purchaser has access to the checklist, however failure to do so will not entitle the purchaser to rescind the contract. The checklist will be published on the website of Consumer Affairs Victoria.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Section 32 Sale of Land Act 1962 requires a vendor of land to provide a proposed purchaser with certain information about the land prior to the signing of a contract as a means of consumer protection and an equalization of the bargaining position between the parties.

However s 32 does not specifically refer to an obligation to provide a copy, or particulars of, any lease affecting the land and it has been common practice for vendors not to provide a copy of a lease in the Vendor Statement. Whilst it was relatively common for particulars of the lease to be included in the contract, there was no strict obligation to do so and the vendor’s alternate rights of providing vacant possession or receipt of rents and profits could sometimes create difficulties.

Indeed there was authority for the proposition that s 32 did not require disclosure of a lease. Thai, Hoa v Cinta P/L [1997] VicSC 526 specifically considered the question and decided that s 32 did not require disclosure of a lease in the Vendor Statement. This case referred to two previous Supreme Court decisions that had reached the same conclusion: George G. Collings (Aust) P/L v Stevenson [1990] VicSC 620 and Krakowski v Eurolynx Properties Ltd [1992] VicSC 62.

That decision was made in the context of a contract that did include particulars of the lease within the contract but the tenant was in substantial breach of the lease as at the date of the contract, which was not disclosed, and the purchaser sought to rely on the s 32 obligation to disclose the lease and, more importantly, to disclose the tenant’s failure to comply with the terms of lease. Byrne J. decided that s 32 did not require disclosure of the lease and therefore failure to disclose the tenant’s failure to comply with the lease could not constitute grounds for avoidance pursuant to s 32(5).

In passing it may be noted that the purchaser really was ‘barking up the wrong tree’ when it sought to avoid the contract for breach of s 32. The better course of action, and one most likely to be pursued today, would have been to rely on the vendor’s misleading and deceptive conduct in representing in the advertising that the tenant had been in occupation for 6 years and was a ‘good’ tenant. In fact, it appears that a new tenant had recently taken over the lease and was nearly 6 months in arrears at the time of sale!

Whilst the collective authority of those cases was against any obligation to disclose lease particulars in the Vendor Statement, the previously generally accepted practice of disclosing a lease, or particulars thereof, in the contract was confirmed in the 2008 form of contract that, for the first time, required the vendor to specifically nominate whether the sale was subject to a lease and include particulars thereof, by adopting the default position that vacant possession was required unless the words ‘subject to lease’ were included ‘in the box’. In this manner a prospective purchaser does have access to the terms of the lease, although the contractual disclosure obligation does not specifically extend to an obligation to disclose tenant’s breaches. Such a situation might call into play issues of misrepresentation by silence and similar principles.

It therefore came as something of a surprise when Macauley J. in Vouzas v Bleake House P/L [2013] VSC 534 concluded, without deciding, that s 32 does require disclosure of a lease. This decision was in the context of a claim by the purchaser that the vendor should have disclosed a proposed assignment of the lease and, by failing to do so, had not fulfilled the obligation to disclose ‘restrictions’ pursuant to s 32(2)(b). Krakowski was noted as contrary authority to this proposition but Macauley J. took solace in a comment by Nettle J. in IGA Distribution P/L v King & Taylor P/L [2002] VSC 440 doubting Krakowski. Thai and Collings were not cited.

The issue will fall to be resolved the next time the issue comes before the Supreme Court, although given that the current situation is merely a conflict of opinion, a binding decision will not come until the Court of Appeal makes a pronouncement. Given that leases are now disclosed by virtue of the contractual mechanism, the issue really is not whether leases are to be disclosed pursuant to s 32 but rather whether changes or non-compliance are to be disclosed. With respect, such issues are better dealt with in the context of principles developed over time to deal with misleading and deceptive conduct, as indeed was the case in both IGA and Vouzas.

Section 32 has been the subject of a statutory overhaul with changes due to take effect in the near future. A later column will consider these changes in detail, suffice to say that the changes do not introduce further obligations that are likely to burden a vendor and in fact some changes will ease the load without undermining the consumer protection aspirations of the section.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

New rules are being considered that will change the present r 27.2 offence of giving a conditional undertaking to an offence of asking for a conditional undertaking.

Legal practitioners are under stringent obligations to comply with undertakings that they may give. Specifically rule 27.1 Professional Practice and Conduct Rules 2005 requires practitioners to honour undertakings given to third parties.

Further rule 27.2 makes it an offence for a practitioner to give an undertaking that requires the cooperation of a third party. It can be seen that the logic behind such a prohibition is to prevent the practitioner from defending a charge of failing to honour an undertaking by blaming the failure on the actions of a third party. Simply giving such an undertaking is itself a breach of r 27.2, although one would imagine that it would be the failure to honour the undertaking that might trigger disciplinary proceedings.

The Supreme Court in Simon v Legal Services Commissioner[2014] VSC 185 considered an appeal from a Victorian Civil and Administrative Tribunal (VCAT) finding that Simon had been guilty of professional misconduct by failing to honour an undertaking. The facts concerned litigation funding finance. Simon introduced his client to a lender who had the client sign an Irrevocable Authority to Simon to direct repayment of the litigation funding to the lender from the anticipated proceeds of litigation. Simon had no direct obligations pursuant to that order but accepted the order by way of a separate document referred to as a ‘response’ whereby Simon acknowledged the order and agreed to account to the lender.

Simon was unable to ‘account’ to the lender as he did not receive the funds. The Commissioner charged Simon with misconduct in giving an undertaking ‘which required the actions of a third party’ and Simon was found guilty of misconduct. However VCAT’s decision was based on the fact that Simon had undertaken to pay the money to the third party and failure to do so was a breach of r 27.1. Simon appealed to the Supreme Court and the decision was set aside on the basis that Simon had been charged with giving an undertaking that required the ‘actions of a third party’ (r 27.2) but was found guilty of failing to ‘honour an undertaking’ (r 27.1). The charge was referred back to VCAT.

Simon argued before VCAT that the response, which is the document that was either an undertaking that he did not honour contrary to r 27.1 or an undertaking requiring the action of a third party contrary to r 27.2, was not an undertaking at all but merely an acknowledgement by Simon that provided that he received the funds he would account to the lender. Certainly it would have been possible for Simon to ensure that the response, which was drafted by the lender, was worded in that way and he failed to do so, but it appears to read too much into the document to interpret it as an unequivocal promise by Simon to pay funds to the lender. It is more in the nature of a conditional promise. With respect, there is no breach of r 27.1.

In relation to r 27.2, had Simon taken more care to ensure the response was worded in a way that made it clear that provided Simon received the funds he would account to the lender, then it is suggested that the response would not have been in breach of r 27.2.

Rule 27.2 should not prevent a practitioner giving an undertaking that involves the actions of a third party provided that the undertaking is expressed as being conditional on those preliminary actions. It is for the beneficiary of the undertaking to then decide whether the beneficiary is prepared to accept those terms. Rule 29.2 ought to be restricted to prohibiting undertakings that are dependent on undisclosed actions of third parties.

VCAT in Simon found that by signing the response Simon had promised the lender that settlement would occur and that the money would be paid. But the response does not say that and, with respect, it is difficult to imagine a litigation lawyer making such a promise or a lender expecting a document drafted as a ‘response’ to constitute an unconditional guarantee. Simon’s failing was to not take more care before signing the document that was put to him by the lender.

New rules are being considered by the Commissioner that will change the present r 27.2 offence of giving a conditional undertaking to an offence of asking for a conditional undertaking. However, such a rule should not prevent a person who requests an undertaking acknowledging that the beneficiary accepts that preconditions may exist before the undertaking is honoured. In the Simon situation, requesting an undertaking from Simon that, upon receipt of the funds, he account to the lender would not be in breach of the rule.

However, on balance, it appears preferable to maintain the offence as the giving, rather than the requesting, as this will cover all such inappropriate undertakings rather than just those sought by practitioners.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

The 2008 Contract of Sale of Real Estate was amended in 2012, principally in response to the Personal Property Securities Act 2009 (Cth) (the Act). As an indication of the complexity of the Act, it has been decided to make further amendments to the standard contract that again largely address the requirements of the Act, although the opportunity has been taken to make some amendments that can largely be described as housekeeping.

Rather than going through the process of arranging for a new contract to be adopted by regulations, these amendments have been achieved by adding a set of special conditions to be made available to all users of the standard contract. The contract has always accepted that changes can be made by special condition and the new format merely means that all standard contracts will have both general conditions and special conditions. Further special conditions can be added to these standard special conditions (numbered 1-5) as required. The changes may be summarised as follows.

Special condition 1

Replaces general condition 7 with a new general condition 7 that amends the requirements associated with the Act in the light of experience gained from dealing with the Act in recent years.

General condition 7 remains unwieldy, but that is really a function of the Act as this general condition attempts to fully deal with issues arising from personal property registration. It must be noted that this general condition is not applicable to the great majority of real estate contracts, as such contracts rarely include the transfer of personal property that is subject to the Act. Nevertheless, the general condition is available for those transactions that do trigger the operation of the Act.

Special condition 2.1

Replaces general condition 13.1(b)

AND

Special condition 2.2

Replaces general condition 13.4

These two changes relate to the GST farming business exemption. Neither change is intended to change the substance of the general condition and merely reflects some expert feedback that has been received in relation to the general condition.

Special condition 3.1

Replaces general condition 17.1

AND

Special condition 3.2

Replaces general condition 17.2

These two changes allow for email service and provide that email service is effected when the email is received.

Special condition 4

Replaces General Condition 18

This change corrects reference to the role of the nominee from ‘purchaser’ to ‘transferee’.

A nomination does not substitute the nominee as a ‘purchaser’ but rather allows the nominee to be an additional or replacement ‘transferee’.

Special condition 5

Adds general condition 12.4 in relation to stakeholding

Section 27(7) Sale of Land Act provides that, if a purchaser fails to respond to a request for release of deposit within 28 days, the purchaser will be deemed to be satisfied with the particulars and deemed to have given consent. This amendment deems the purchaser to have also accepted title in such cases.

Tip Box

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

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Determining whether negotiations between a vendor and a prospective purchaser have reached the stage where it can be said that a legally binding contract of sale of land has come into existence is a question that often occupies the attention of courts. The legal principles to be applied are rarely in dispute; it is the application of those well established principles to the particular facts of the case that causes contention and requires judicial determination.

In summary, a legally enforceable contract requires:

• writing;
• signing;
• offer;
• acceptance; and
• communication of acceptance

in an environment where it is possible to determine the:

• parties;
• property; and
• price.

Given the number of elements that comprise contract formation it is perhaps not surprising that the question comes before courts on a regular basis. Recently, Victorian courts at the opposite end of the legal spectrum have considered the application of these legal principles and reached opposite opinions as to whether a contract existed in particular circumstances.

Austlii has made the judgments of the County Court available for consideration and, whilst those judgments are of limited judicial significance, consideration of those decisions adds to an understanding of the underlying principles. Robles & Moser v Pigg [2014] VCC 1127 was an application for specific performance of a contract of sale of land by the purchaser. The essential issue was whether there was a contract that could be enforced, the vendor arguing that the negotiations between the parties fell short of the threshold requirements of a contract. There is no doubt that the factual circumstances had certainly reached the very tipping point of enforceability as the written document setting out all of the required information was in the hands of the vendor. The contract, signed by the purchaser, was emailed to the vendor. She responded to the agent by email stating, ‘I will accept the offer but I am having difficulty scanning the contract’. The agent advised the vendor that he would communicate the vendor’s acceptance to the purchaser and requested that the vendor return the signed contract by fax if scanning was a problem. The next day the vendor emailed the agent to say that she would not accept the offer and thereafter refused to proceed with the contract.

The vendor’s evidence was that she had not signed the contract and that her email was an indication of her future intention. If accepted, that meant that the crucial element of signing was absent and no contract existed. The judge rejected the vendor’s evidence and preferred to infer from the vendor’s email that the vendor had printed the contract, had signed it and then discovered the difficulty in relation to scanning the signed document. That being the case, all elements of a contract were satisfied and the purchaser was entitled to specific performance.

Alternately, the judge accepted that the vendor’s ‘signature’ on the email of ‘Jessica’ constituted sufficient signing of the contract for the purposes of s 126 Instruments Act 1958. It is well accepted that the ‘signature’ that needs to be found can be found in a document ‘outside’ of the formal contract document and s 9 Electronic Transactions (Victoria) Act 2000 now means that the signature can be ‘found’ in a document created and transmitted digitally. Over 500 years we have moved from a wax seal, through a formal signature to the present position of acceptance of an informal digital signature.

At the opposite end of the legal spectrum, the Victorian Court of Appeal also considered the question of the requirement of a signature on a contract of sale of land in Update P/L v. Commissioner of State Revenue [2014] VSCA 218. Imposition of liability to pay a tax is often referrable to an event that takes place between taxpayers, sometimes determining which of those taxpayers will be liable to pay the tax or whether tax will be payable at all. Therefore the principles relating to contract formation are relevant to determining tax liability.

One such example is the imposition of liability to pay growth areas infrastructure contribution (GAIC). This case concerned an appeal by a purchaser of land against the imposition of GAIC as a consequence of the purchase. GAIC was only payable if the contract came into existence after a certain date. The purchaser sought to argue that the contract was in existence prior to that date but faced the difficulty of establishing that a binding contract existed notwithstanding that the vendor had not signed. With respect, it can only be the fact that the tax approached $1 million that enticed the purchaser to argue that an unsigned contract could be enforceable. The purchaser sought to rely on months of negotiations and ultimate acceptance by the purchaser of the vendors’ longstanding terms to establish the contract, but nevertheless fell at the signature hurdle as the vendors had not signed the contract prior to the relevant date. No surprise there.

Tip Box

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