ByLawyers News and Updates

Rescission – Consequences of rescission 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A recent Magistrates’ Court case SDC (Vic) Pty Ltd v. Davies and others [2010] VMC 3 has considered an issue relating to the consequences of rescission of a contract of sale of land.

Whilst such decisions are not binding on other courts, the fact that they are now reported on AustLII means that they are more available for consideration and the fact that the doyen of Victorian property law barristers (P.N. Wikrama S.C.) appeared makes the case even more significant. Additionally, the case was described as dealing with an issue on which ‘there was no direct authority’ in Victoria.

The purchaser defaulted under the contract by failing to pay the balance of purchase price on the due date. The vendor had granted a number of extensions, but eventually the contract was terminated by a Rescission Notice served by the vendor. The deposit was forfeited and the property resold at a small loss. Whilst the judgment does not provide full details of the damages suffered by the vendor, it appeared clear that the forfeited deposit was well in excess of any actual loss suffered by the vendor.

The first issue concerned a payment, in addition to the deposit, that the purchaser paid to the vendor as part of an agreement to extend the date for settlement. Regrettably for the vendor this was described at the time of payment as ‘paid towards the purchase price’. As a consequence the Court ordered that the payment was to be refunded to the purchaser after the contract was rescinded by the vendor, as the vendor ‘cannot have the land and its value too’. Forfeiture of the ten percent deposit was authorised by the contract, but not this additional amount, beyond ten per cent, which was held to be an unjust enrichment on the part of the vendor.

The lesson to be learned from this part of the case was that a vendor who agrees to extend time for performance in return for a payment must ensure that the payment is expressed to be in consideration for the extension of time, and not part payment of the purchase price. An analogy can be drawn with key-money in a retail tenancy environment. Key-money is prohibited (and must be repaid) but expressing the payment as consideration for an additional term provided by the landlord means that the character of the payment changes from key-money to a payment in consideration for a valuable right – additional time. So too a payment in excess of the deposit that is made in consideration for an extension of time for settlement may be retained, even if the contract is ultimately rescinded by the vendor.

The main point of the case, and the one that was said to have no direct Victorian authority, was the characterisation of the vendor’s claim for penalty interest. Because of the extensive (agreed) delays, this amount exceeded (by coincidence) the amount the vendor was ultimately ordered to repay to the purchaser on the first issue, and so provided a convenient counterclaim for the vendor.

The vendor argued that the entitlement to interest arose out of a specific term, Condition 4 of Table A of the Seventh Schedule of the Transfer of Land Act that was incorporated into the contract, in the contract, that this entitlement survived the rescission of the contract and that it did not form part of the vendor’s damages arising from the rescission. This argument posited that such damages might be constituted by a loss on resale, payment of additional rates, payment of an additional estate agent’s commission etc. but that the contractual right to interest stood apart from these damages and constituted a distinct legal entitlement in addition to any other losses claimed by the vendor arising out of rescission.

The purchaser, represented by Wikrama S. C., argued that the right to interest was to be characterised as part of the vendor’s right to damages arising out of Condition 6 of Table A and that once the rescission procedure is invoked, interest is subsumed into the vendor’s general right to damages pursuant to that Condition. The significance of this argument is the well accepted principle that a vendor must give credit for the forfeited deposit and is only entitled to claim damages beyond the deposit if those damages exceed the forfeited deposit – Carpenter and Anor v McGrath and Anor [1996] NSWSC 411. Whilst the vendor had suffered a small loss on resale and other losses such as additional rates etc., those losses did not exceed the forfeited deposit and so the vendor had no claim for those losses. By holding that the contractual right to interest was to be characterised as part of the vendor’s general damages under Condition 6, the Court decided that the forfeited deposit also had to be allowed against that interest and that the vendor would only have an additional claim, beyond the deposit, if the damages (including interest) exceeded the forfeited deposit.

The vendor’s right to interest arises upon default and if settlement occurs the purchaser is obliged to pay this interest in addition to the purchase price. However, if the rescission procedure is invoked and the contract is ultimately rescinded, the vendor’s right to interest is not a separate and distinct legal right, but rather is part of the vendor’s general right to damages. This decision is likely to apply to Conditions 26 & 28 of the 2008 prescribed form of contract.

Tip Box

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

Lease – Retail lease

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One for the Little Guy

By Russell Cocks, Solicitor
First published in the Law Institute Journal

The recent case of Xiao v Perpetual Trustee Company Limited and Macquarie Office Management Limited [2008] VSC 412 is a typical ‘David versus Goliath’ scenario, with the outcome complying with biblical expectations.

Xiao (the tenant) operated a café/restaurant in the ground floor of a substantial office building that was owned by Perpetual (the landlord) and managed by Macquarie (the manager), which employed an estate agent to manage tenancies (the agent). The tenant had paid $320,000 for the business in 2006, taking over a lease due to expire on 30 September 2008. Importantly the lease provided for an option of five years and the question to be decided by the Court was whether the tenant had validly exercised the option. If not, the tenant would be obliged to vacate the premises on 30 September 2008.

Jurisdiction

Most disputes involving retail premises, as these premises were, are heard in VCAT. An exception exists if the tenant is seeking relief against forfeiture and the Court was satisfied that a claim for relief against forfeiture of an option came within this exception. Once the jurisdiction of the Court is enlivened, appropriate remedies, such as a declaration or specific performance, become available.

The option

The central issue was whether the tenant had exercised the option within the applicable time limits. Certainly the tenant had exercised the option, on 19 June 2008, but the landlord argued that this was inoperative as it was outside of the applicable time limit. The provisions in the lease required the tenant to exercise the option ‘not less than six (6) months prior to the expiry of the Term’. The term was due to expire on 30 September 2008, so the lease required the tenant to exercise the option prior to 31 March 2008 and there is no doubt that the tenant’s notice on 19 June failed to comply with this time limit. However the tenant sought to rely upon the landlord’s overriding statutory obligation (s 28 Retail Leases Act) to give notice to the tenant of the need to exercise the option. The Act requires the landlord to give this notice to the tenant between 6 and 12 months before the last day for exercise of the option; in this case between 30 September 2007 (6 months before the last day) and 30 March 2007 (12 months before the last day). Failure by the landlord to give notice within these time limits results in the tenant being entitled to exercise the option at any time within 6 months of the landlord in fact giving the notice.

Notice

The landlord was ‘late’ with the option notice. The agent purported to send the option notice to the tenant on 4 December 2008, meaning that the ‘statutory extension’ gave the tenant 6 months from that date (4 June 2008) to exercise the option. On 12 June the lawyers for the landlord wrote to the tenant advising that the tenant had lost the right to exercise the option, as the tenant had failed to exercise the option within 6 months of the option notice and that the tenant was required to vacate the premises at the expiration of the term, namely 30 September 2008. The tenant gave notice of exercise of the option on 18 June and shortly after issued these proceedings seeking enforcement of the option.

At this point the judgment entered ‘the twilight zone’ as far as practising lawyers (and agents) are concerned – an intimate analysis of the minutia of service. Nobody wants to think that a document that they have served may in fact be held to have not been served, but that was the outcome in this case. The landlord’s responsibility was to ‘notify’ and the Court held that that meant that the information had to in fact come to the attention of the tenant. It was not the act of the landlord ‘serving’ the document that was the touchstone; rather it was proof of the fact that the information had reached the tenant that was necessary. The agent gave evidence that the notice had been posted to the tenant, both in the normal mail and by registered mail, on 4 December 2007. But the Court was not satisfied that the normal mail letter had been received (or indeed posted) and was satisfied that the tenant had not collected the registered mail until 31 December 2007, which was when the landlord had fulfilled the obligation to ‘notify’. This made the tenant’s exercise of the option on 19 June 2008 within the 6 months extended period for exercise and thus enforceable.

The Court drew the crucial distinction between ‘service’ and ‘notification’, placing a higher onus in respect of the latter. However it also concluded that even if the lower threshold of ‘service’ was all that was required, then ‘service’ had not been achieved as the letter referred to 3 June 2008, whereas 6 months from ‘service’ would have been 6 or 7 June, depending upon the definition of ‘service’ adopted. As Maxwell Smart would say, ‘Missed by that much!’

The outcome was a win for the little guy, who would have, perhaps unfairly, lost a business that had cost a significant amount of money. No doubt that did not influence the outcome, but nevertheless it is a pleasing happenstance.

Tip Box

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

Estate agent’s commission – Money for nothing

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Victorian estate agents might be contemplating adopting this famous Dire Straits song as their new anthem after the recent Court of Appeal decision of Icon Property P/L v Wood [2008] VSCA 123, a decision handed down on 26 June 2008.

Wood engaged Icon to sell an apartment. A purchaser signed a contract and paid a deposit by a cheque which was subsequently dishonoured. The vendor rescinded the contract and sued the purchaser for losses, but the purchaser was the typical ‘man of straw’ and the vendor recovered nothing.

In the meantime the agent sold the property to a second purchaser and that transaction settled in due course. When the agent accounted to the vendor, commission was deducted in respect of both the first (failed) sale and the second sale. The vendor issued proceedings in VCAT claiming a refund. The vendor gave evidence that the agent had agreed prior to the second sale that only one commission would be charged and the vendor appears to have been fairly convinced that that was the case as an attempt by the vendor to ‘discuss’ the question of commission with the agent resulted in an intervention order against the vendor. Nevertheless VCAT did not accept that evidence and found that the agent was entitled to commission on the first sale. However VCAT held that the agent did not hold an authority pursuant to s 49 Estate Agents Act to charge commission on the second sale and ordered a refund in respect of that commission.

Perhaps there was some justice in this result as the vendor made the sale and the agent made a commission. But when considered in the context of the first sale alone, the agent made the commission even though the vendor did not make the sale. Whilst this was the outcome, perhaps it was not the decision. Judge Bowman stated that ‘ultimately it was basically agreed between the parties’ that the agent was entitled to the first commission and although he said ‘in my view, that approach is correct’ there does not appear to have been any argument on the point, much less reference to authority.

Victorian estate agents have long been a protected species. The general common law principle of agent’s entitlement to commission requires the sale to be completed before the agent is entitled to a commission and this is the law in other States of Australia. But a long line of Victorian authority has established an agent’s entitlement to commission at an earlier point in time, generally referred to as ‘when a purchaser signs a document capable of becoming an enforceable contract’ if that document is subsequently signed by the vendor. This recognises that it is the agent’s function to find the purchaser and it is then for the vendor to complete the transaction. On this basis an agent will be entitled to commission if the vendor ‘lets a purchaser out of a contract’ or the contract falls over as a result of the action, or inaction, of the vendor, such as a defective Vendor’s Statement, resulting in the purchaser avoiding the contract. But this is not an absolute right and an agent will not be entitled to commission if the sale ‘goes off’ because a special condition (such as a loan condition) is not satisfied.

No Victorian case has considered an agent’s right to commission where effectively no deposit has been paid because the cheque bounced, but it has been considered in New Zealand where it was decided that an agent who failed to collect the deposit (or accepted a dishonoured cheque for the deposit) was not entitled to commission. This seems to be an eminently sensible result, as expecting a vendor to pay a commission when no deposit is paid seems ludicrous, and no less so if the deposit is constituted by a rubber cheque. Agent’s authorities in the past included reference to a 10% deposit. The fact that that requirement seems to have ‘fallen off’ the current authority does not reduce the implied expectation of a vendor that a purchaser will have shown an intention to be bound to the contract by paying the universally accepted deposit of 10%. In specific circumstances a vendor might agree to a lesser deposit, but the normal expectation, and an implied term of the retainer, would be payment of 10% (and not by a rubber cheque!).

The agent unsuccessfully appealed to the Court of Appeal, which confirmed the lack of authority in respect of the second commission. As such, the issue of the first commission was not a subject of the appeal, although none of the judges seemed to have a problem with the first commission and Redlich JA in brief reasons accepted the agent’s entitlement to the first commission. Virtually none of the authorities were discussed (other than in footnotes) and the case, despite first appearances, should not be regarded as authority that a rubber cheque will justify commission. The Fat Lady has not begun to sing the anthem.

Tip Box

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

Estate agent – Agent beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Estate agents have always been given a degree of ‘poetic licence’ when it comes to describing the property that they are retained to sell on behalf of a vendor. To describe a property as ‘immaculate’ Walker & Anor v Masillamani & Anor [2007] VSC 172 – or as having ‘perfect presentation’ (Mitchell v Valherie (2005) 93 SASR 76) does not mean that the property is perfect in every aspect and completely free of all defects. Such sales descriptions fall within the definition of ‘mere puffery’ and the courts expect a prospective purchaser to exercise a reasonable level of cynicism when balancing such descriptions with the physical condition of the property revealed by inspection.

However, two recent cases indicate that courts will not be so lenient and extend such licence to an agent who is describing the sales process, rather than the subject matter of the sale.

Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 concerned the sale of a caravan park for $8.6m. The agent submitted the property to two prospective purchasers and both purchasers made offers that were subject to the purchaser obtaining planning approval to redevelop the land. The agent concentrated his attention on the ultimate purchaser and evidence was given that the agent left a voice message on that purchaser’s phone to the effect that:

‘There is another purchaser’ and

‘You will have to make an unconditional higher or better offer’

The purchaser responded with a higher offer that, importantly, was not conditional upon planning approval.

The purchaser thereafter sought to avoid the contract on a number of grounds and the vendor sued for specific performance of the contract. Ultimately the issue came down to the question of whether the purchaser could characterise the conduct of the agent as ‘misleading and deceptive’ within the meaning of the Trade Practices Act (superseded by the Competition and Consumer Act – see schedule 2 item 18). The evidence as to the substance of the representations was accepted, principally because it appeared to have been confirmed in a later email by the agent to the vendor when discussing a request for an extension of time for performance. The agent wrote that he had ‘put a fair amount of pressure on them (the purchaser) to go unconditional’. The Judge relied upon this as confirmation that the agent had suggested that the existence of another purchaser meant that the purchaser would miss the property if the purchaser did not make an immediate, higher, unconditional offer and that such conduct by the agent was misleading and deceptive and justified avoidance of the contract by the purchaser.

Astvilla P/L v Director of Consumer Affairs Victoria [2006] VSC 289 concerned similar concepts under the Victorian Fair Trading Act, although the offence was committed by an in-house sales employee of the vendor rather than an external estate agent. The Court held that the creation of a false sense that the property was ‘a very popular house’ and could be sold ‘five times over’ (when in fact it had been on the market ‘for years’) and a false sense of urgency requiring immediate signing and payment of a deposit was misleading and deceptive conduct.

These representations related to both the property itself (that it was ‘popular’) and the sales process (that urgency was required). The representations relating to the property ‘went beyond mere puffery’ and those representations alone would have justified a finding of misleading and deceptive conduct, but the representations in relation to the need for urgency as the property might be sold to another purchaser were also factors in the decision.

Agents should therefore beware. Advising prospective purchasers that there are other willing purchasers competing for the property may amount to misleading and deceptive conduct unless the agent is able to prove the truthfulness of that representation. Auctions are all about exposing competing purchasers to the marketplace, as are private or boardroom auctions, but representing that there is genuine competition for a property when that is not the case may cross the line.

Other issues in bovino

Specific performance

The vendor sought specific performance of the contract. That remedy is discretionary and only granted if damages would not suffice. Whilst ordering a vendor to specifically perform a contract by transferring a particular property is a relatively common order, Abraham v Johns [2010] VSC 33, an order that a purchaser specifically perform a contract by paying the contract price is rare. Such an order ‘could require the continued supervision of the Court to ensure the fulfilment of the contract. Ibid at para 79. Damages will generally be the appropriate order against a purchaser. After all, the vendor is only interested in receiving the contract price; it is irrelevant where the money comes from.

Impecuniosity

As the purchaser successfully avoided the contract, the availability of an order for specific performance was not an issue; however judicial comment was made on the purchaser’s defence against such an order. The purchaser argued that they did not have the funds to complete the contract – that it was a typical ‘two dollar company’. That impecuniosity was shared by the guarantor (Clinton Casey) who claimed that his principal asset was an entitlement to share in distributions from a discretionary trust and therefore effectively valueless. The Judge found such arguments to be ‘without substance: Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 at para 70. They might also be of considerable concern to anyone engaging in commercial transactions with defendants.

Tip Box

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

Contract – Trust transactions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The concept of a trust has a long history in the law. Its greatest claim to fame is as a weapon by which the conscience of Equity could master the harshness of the Common Law. Whilst the Common Law might demand that T be regarded as the legal owner of Blackacre, Equity would impose a trust in favour of B, and T would be deemed to hold that bare legal interest on behalf of B, the true beneficial owner.

Modern legal theory now accepts the merger or fusion of Common Law and Equity into one seamless, but organic, set of principles, however this theory relies on the concepts developed in our legal past. The concept of the trust developed from this imposition of an amorphous relationship between trustee and beneficiary to include a variety of the strain that was in fact intentionally created and indeed recorded in written form, often in a testamentary document but equally so in a document intended to have immediate effect. Sub-groups involving multiple beneficiaries and the possibility of discretionary or changing beneficiaries evolved, but one constant remained: a trust is a vehicle, it is not a legal entity. The law recognises natural persons (in two genders) and corporations (in a variety of forms) as legal entities and a trust falls into neither category. The trustee is a legal person, the beneficiary is a legal person, but the trust itself has no legal capacity or liability.

As a consequence of this principle the Torrens system of recording ownership of land has an aversion to the trust. It is possible to register the legal ownership of the trustee on a Torrens title and it is even possible to record the interest (by way of caveat) of the beneficiary, but (in Victoria at least) it is not possible to record the trust. Section 37 Transfer of Land Act states that ‘The Registrar shall not record in the Register notice of any trust’ and the Land Victoria Lodging Book (p 1.11) states that ‘Any reference to trustees is in conflict with Section 37 … and is not acceptable’.

However trusts, with either natural persons playing the role of trustee or, more often, a corporate trustee, are common occurrences in day to day transactions, with many people employing a trust for superannuation purposes or as a tax minimisation device or in the hope of limiting legal liability. Appreciating that a trust is not a legal entity is important at two stages of a conveyancing transaction – contract and transfer.

The trustee is the legal owner of the property and will be shown as such on the certificate of title without any reference to the trust in accordance with s 37. Thus the description of the vendor in a contract of sale will usually be correct, as that description will be taken from the title. However the description of the purchaser is a more arbitrary exercise and unfortunately is often entrusted to participants in the process who do not appreciate the niceties of the law, such as estate agents, conveyancers and accountants (and, dare I say it, some lawyers). This will lead to the purchaser being (incorrectly) described as ‘The Fred Nerk Superannuation Trust” or “The Frederica Nerk Family Trust”. Is such a contract enforceable?

The purchaser does not ‘exist’ as far as the law is concerned, it is a non-entity. Only legal persons can sue and be sued, so there is no purchaser for the vendor to sue if the vendor wishes to enforce the contract against a defaulting purchaser. Equally, if the vendor does not wish to proceed, there is no legal entity capable of enforcing the rights of a purchaser – there is no-one who can sue the vendor. In the absence of an argument based on rectification (a very limited legal remedy) there is a real risk that the contract will ‘fall over’, with consequent liability for that disaster falling on those advisers who allowed the purchaser to be incorrectly described. The correct description of the purchaser is to name the trustee – perhaps ‘Fred Nerk’ or ‘Frederica Nerk Pty Ltd’. Further describing the purchaser ‘as Trustee of the Fred Nerk Superannuation Trust’ or ‘as Trustee of the Frederica Nerk Family Trust’ is superfluous, but not fatal, and sometimes placates the uninformed.

Whilst reference to the capacity of the purchaser in the contract (‘as trustee for…’) is permissible, that cannot carry over to the transfer of land. That document must name a legal person – the trustee (either natural or corporate) as the transferee and cannot include reference to the trust. Otherwise, on the basis of s 37, the Registrar will refuse to register the transfer, and we don’t want to go there.

Tip Box

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

Contract – Terms contracts 3

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Last month I discussed the recent changes to the Sale of Land Act 1962 in relation to terms contracts. I made the point that those changes appear to mean that it is no longer possible to create a terms contract by multiple payments, although it remained possible to create a terms contract by the giving of possession. This occurs where the contract provides that the purchaser is entitled to possession of the property before final payment, in contradistinction to a cash contract where possession is given upon final payment.

The recent case of Munro & Anor v Humphries [2008] VSC 600 illustrates how a cash contract can be converted into a terms contract ‘accidentally’. The vendor intended to sell vacant land for cash but the purchaser wanted an extended settlement (10 months) and also wanted the right to access the property prior to settlement to obtain planning and building permits and (probably ambitiously) to commence building. The estate agent conducting the negotiations on behalf of the vendor did not recognise the significance of such changes and a special condition was hand-written into the contract granting the purchaser ‘immediate possession’.

Sometime thereafter the purchaser would appear to have had second thoughts about the transaction and sought to avoid on the basis that the contract was a terms contract and that the vendor had failed to comply with the provisions of the Sale of Land Act. The vendor argued that the contract had been drawn as a cash contract and that the meaning of the special condition was that the purchaser was only entitled to access to the land during the contract, not to have possession of it during that time. Whether such an argument would have been successful even if accepted is uncertain, but in any event the court concluded that the condition meant what it said and the purchaser was entitled to avoid. One hopes, but doubts, that this might be a lesson to estate agents not to dabble in the learned art of drafting special conditions. Perhaps a liability for the vendor’s substantial losses might have been a more salutary lesson.

The breach relied upon by the purchaser in this case was the failure of the vendor to transfer the property to the purchaser when requested to do so and take a mortgage back. All terms purchasers have this right – see s 29H Sale of Land Act (previously s 4(1)) – but a vendor who has a substantial mortgage over the property (which is common) and is unable to offer substituted security to the vendor’s lender is caught between a rock and a hard place – the vendor must transfer the property ‘freed and discharged from all mortgages’ but does not have the resources to discharge the mortgage.

Failure by the vendor to comply with the purchaser’s request to transfer entitles the purchaser to avoid the contract: see s 29J Sale of Land Act (previously s 4(4)(a)). A purchaser might also be entitled to avoid for breach of these provisions as a result of the vendor’s failure to provide in the contract that the sale is subject to a mortgage and giving the required particulars of the mortgage or failing, if the vendor elects not to give those required particulars, to provide in the contract that the mortgage is to be discharged prior to preliminary settlement and in fact discharging that mortgage within 90 days of contract.

The standard form contracts in general use do include the necessary wording to satisfy the first requirement (although those words were deleted in Munro v Humphries as it was intended that the contract would be a cash contract), and if the mortgage is discharged within 90 days of the contract the second requirement will be satisfied. However if the vendor fails to comply with any of these requirements (as was the case in Munro v Humphries) the vendor may nevertheless be saved from avoidance if the vendor has acted honestly and reasonably and the purchaser is in no worse a position: see s 29F(2) Sale of Land Act (previously s 14).

This will often save a vendor when the purchaser is complaining that the contract became a terms contract because of variations that were agreed to during the course of the contract. In such cases the court can be satisfied that the purchaser was aware of the consequences of those variations and thus in no worse a position: see Australian Horizons (Vic) P/L v Ryan Land Co P/L and Ors [1994] VicRp 70. Byrne J. in Munro v Humphries tentatively reached the conclusion that the equivalent provision in the old Act applied to assist the vendor in relation to both a breach relating to failure to disclose information and also a breach relating to the failure, as in that case, of the vendor to comply with the purchaser’s request for a transfer and mortgage back. However he could not be satisfied that the purchaser was in ‘as good a position’ notwithstanding the vendor’s breach and therefore held that the purchaser was entitled to avoid. He concluded that the purchaser’s inability to take title prevented him from commencing construction as an owner-builder and also prevented him from seeking second mortgage funds to assist with the building project.

Terms contracts remain something of a mystery to the average property lawyer. It is not so much their proper use that creates a problem; it is their ‘improper’ use, due to a lack of understanding as to how they are created and of their consequences, that continues to mean that the occasional terms contract will reach out of the dark recesses of the filing cabinet and haunt the unsuspecting author.

Tip Box

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

Contract – Terms contracts 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Terms contracts are relatively rare, but still common enough to create difficulties. In short, they may arise in one of two ways:

  • by payment, where the contract price is spread over a number of payments, in contradistinction to a cash contract that has just two payments, being a deposit at the start and a final payment at the end; or
  • by possession, where the purchaser is entitled to possession of the property before final payment, in contradistinction to a cash contract where possession is given only upon final payment.

Many terms contracts exhibit both of these characteristics, with the typical terms contract providing for the payment of a deposit and then a number of payments over a period of time, with the purchaser taking possession shortly after initial payment and well before final payment. But a contract will be a terms contract if either of the criteria is satisfied and may thus be a terms contract on the basis of payment or possession.

Terms contracts are not intrinsically bad. They just create additional obligations that must be fulfilled at the time of contract and face the risk that, if those obligations are not fulfilled, the contract might be voidable. This may have unexpected consequences for the vendor who, in such circumstances, would be entitled to look to his or her solicitor for compensation for any loss. These additional obligations principally arise in relation to selling a property under a terms contract when the property is, at the time of contract, subject to a mortgage. It is therefore important to be able to identify a terms contract and here resort must be had to the Sale of Land Act.

Until recently the terms contract provisions were contained in ss 2 to 7 of the Act.

Inexplicably (and without any consultation with the profession) the government took upon itself the task of reviewing those provisions and last year introduced legislation (Consumer Credit (Victoria) and other Acts Amendment Act 2008) that repealed those terms contract provisions and inserted new, similar provisions at s 29A of the Act.

Most of the new sections are a simple ‘pick up and put down’ transfer from the start of the Act to the middle of the Act, but someone took the opportunity to ‘clean up’ some of the provisions. Gender neutrality has resulted in ‘he’ becoming ‘the purchaser’ or ‘a person’. The definition of terms contract has been moved from the definition section (s 2) to a substantive section (s 29A), headed ‘What is a terms contract?’

The old (s 2) definition of a terms contract was in two parts: s 2(1) and 2(4). Section 2(1)(b) related to creating a terms contract by early possession and, apart from changing ‘he’ to ‘the purchaser’ in s 29A(1)(b), nothing has changed. But s 2(1)(a), which relates to creating a terms contract by payments, relied on a further definition in s 2(4); and the new section 29A(1)(a) has taken it upon itself to merge these two parts of the definition, with perhaps unforeseen consequences.

The ‘old’ definition of a terms contract was where a contract obliged the purchaser to make two or more payments ‘after the execution of the contract and before becoming entitled to a transfer’, excluding any payment ‘on or before the execution of the contract’ and any payment upon ‘which he becomes entitled to a transfer’.

The ‘new’ definition provides that a terms contract is a contract ‘under which the purchaser is obliged to make 2 or more payments (other than a deposit or final payment) to the vendor after the execution of the contract and before the purchaser is entitled to a transfer’. The concepts of ‘deposit’ and ‘final payment’ have been incorporated directly into the definition. But what do these new terms ‘deposit’ and ‘final payment’ mean? Section 29A(2) defines ‘final payment’ (somewhat circuitously) as being ‘a payment on the making of which the purchaser becomes entitled to a …transfer’, and ‘deposit’ is defined as ‘a payment made to the vendor … before the purchaser becomes entitled to possession’. The problem is that according to this definition all payments made before the final payment are ‘deposit’, and so there can never be ‘2 or more payments (other than a deposit or final payment)’ as all payments are either deposit or final payment.

How this juggling of the terms contract provisions could have gained priority over desperately needed legislative reform, such as s 27 and owner-builders, is a mystery. That it was done without consultation with the profession and without a proper understanding of the consequences is damning.

Tip Box

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

Contract – Terms contracts 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law relating to terms contracts has been governed, principally, by the Sale of Land Act 1962 for half a century. Essentially, the Act seeks to protect consumers from unfair contracts and is an early example of consumer protection.

Traditionally, a terms contract was created if the purchaser was obliged to pay multiple payments before becoming entitled to possession of the property or became entitled to possession of the property before paying all payments due under the contract. This was in contradistinction to a cash contract, where the purchaser pays two payments – deposit and settlement – and becomes entitled to possession upon payment of the second payment. The evils that the Act sought to avoid were the possibility that the purchaser might pay a large part of the purchase price without ever becoming entitled to ownership, or that the vendor might encumber the property further notwithstanding that the purchaser was in possession. The protection offered to the purchaser was the ability to terminate the contract for breach of the Act.

The Act was ‘updated’ in 2008, and I have previously (Law Institute Journal, May and June 2009) written about what appeared to be an error in the legislation relating to the creation of terms contracts by multiple payments. The original words of the Act referred to payments ‘on or before execution of the contract’ and when the purchaser ‘becomes entitled to a transfer’. A terms contract by payments was any contract that had more than one payment between these bookends – that is, more than three payments. The 2008 amendments defined these bookends as ‘deposit’ and ‘final payment’ respectively, fairly innocuous changes in themselves, but an existing definition of deposit from another part of the Act was adopted and ‘deposit’ was defined as ‘a payment made to the vendor … before the purchaser becomes entitled to possession’. The effect of this misdescription of ‘deposit’ was to squeeze the gap between deposit and final payment to nil.

All payments before final payment are, by this definition, deposit and so it is impossible, under this definition, to have a terms contract by multiple payments.

Judicial consideration of these amendments was part of the judgment in the recent case of Ottedin Investments Pty Ltd v Portbury Developments Co Pty Ltd & Anor [2011] VSC 222. The case related to a $6.5 million land purchase. The purchaser defaulted and the vendor sought to forfeit the deposit. The purchaser purported to terminate the contract and claim a refund of the deposit on the basis of a breach of the terms contract requirements. There were, arguably, four payments due under the contract, which had undoubtedly begun as a cash contract with just two payments but which was varied to require a deposit in two parts, potentially in fact two payments, an ‘interim payment’ and, finally, the ‘balance’.

The potentially offensive payment, the interim payment, was in fact contingent upon a rezoning prior to settlement, which did not happen and so that payment became due upon settlement. The contingent obligation may well have been sufficient to constitute a breach under the ‘old’ terms contract condition; however the purchaser faced the difficulty of the ‘new’ definition of ‘deposit’ in the Act. If deposit includes all payments made ‘before the purchaser becomes entitled to possession’, then there were no payments other than the (expanded) deposit and the ‘balance’ and therefore no breach of the Act. The vendor relied upon this interpretation of the amendments to support the argument that the interim payment was either deposit or, as it happened, due at settlement and therefore not in breach of the Act.

The purchaser argued that this could not have been the intention of parliament. To so interpret the section was to accept that parliament had abandoned half a century of consumer protection on a whim, without debate. The purchaser argued that words requiring payment of the ‘deposit’ to be contemporaneous with signing of the contract (as had existed prior to the amendment) ought be implied into the contract, with the result that the interim payment did indeed offend the Act and the purchaser was entitled to terminate the contract.

Dixon J. rejected this argument and concluded that the plain words of the section were not ambiguous and the purchaser was not entitled to avoid, describing the purchaser’s arguments as ‘the desperate ex post facto search for a ground to avoid a major commercial obligation’. Be that as it may, a purchaser is nevertheless entitled to rely on any failure by the vendor to comply with its statutory obligations and the fact that the purchaser’s argument is based on a technical breach should not in any way lessen the validity of that argument.

In any event, the discussion was somewhat academic. The purchaser had purported to terminate after 4 pm on the settlement day, by which time the purchaser was in default and had thereby lost the right to terminate.

It would appear that we will have to wait for parliament to recognise and correct this obvious error.

Tip Box

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

Contract – Nominee’s rights

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

A contract of sale of land essentially involves two parties – the vendor and the purchaser. The common law undoubtedly recognises the right of the named purchaser to nominate an alternative purchaser. Additionally, most standard form contracts (including General Condition 18 of the 2008 prescribed contract of sale) include a contractual right to nominate although sometimes conditionally, such as by requiring the inclusion of the words ‘and/or nominee’ or compliance with time limitations.

Nomination often occurs in an environment where the named purchaser is ‘related’ to the nominated purchaser and little formality is associated with the nomination process. A non-prescribed form of nomination, simply reciting the essential terms of the contract and the fact of nomination, is completed and provided to the vendor, almost by way information only. In fact, the form of nomination is important to the vendor as it is the vendor’s authority to hand over a transfer of land to a person other than the contracting party. However, in all other respects, the vendor is essentially superfluous to the nomination process; almost a disinterested bystander. This is essentially because the legal consequences of the contract are not affected by the purchaser’s nomination. The vendor retains all contractual rights against the named purchaser and, correspondingly, gains no rights against the nominated purchaser.

This situation may be contrasted with the alternatives of assignment, or novation. The consequences of an assignment are that the assignee becomes a party to what is now a tripartite contract and a novation involves the original parties agreeing to replace their contract with a new contract between the vendor and a replacement purchaser. By contrast, a nomination does not bring the vendor and nominated purchaser into a contractual relationship and they remain separated by the wall established by the doctrine of privity of contract.

A vendor is therefore not overly concerned with the terms of the nomination as the vendor’s rights are not diminished. However, a nominee needs to consider how the nominee is going to enforce any rights against the vendor in the situation where the contract ‘runs off the rails’. In circumstances where the nomination is in a ‘commercial’ environment, the named purchaser (the party with the contractual and other rights arising from the contract) may be unwilling to ‘buy back’ into a contract that the purchaser had nominated itself ‘out’ of. Even in a situation where the named purchaser and nominee are ‘related’ and the named purchaser may therefore be willing to take up the cudgels on behalf of the nominee, the named purchaser may have no standing as it will generally be the nominee who is likely to suffer adverse consequences or damages, rather than the named purchaser.

The case of 428 Little Bourke Street P/L v Lonsdale Street Café P/L illustrates the problem. The named purchaser nominated the plaintiff, a company associated with interests related to the purchaser. During the course of the contract the purchaser and nominee became aware of various alleged misrepresentations. A decision was made by the representatives of the named purchaser/nominee not to pursue those issues during the course of the contract (and thereby perhaps face rescission and/or proceedings that would delay settlement). Settlement was conducted and then proceedings issued for breach of contract and breach of the Trade Practices Act and Fair Trading Act in respect of alleged misrepresentations in relation to the net lettable area of the premises.

The party who would suffer loss if these claims were successful was the transferee as subsequent owner of the property and therefore proceedings were issued by the nominee as plaintiff. These proceedings were summarily struck out as failing to disclose a cause of action. Relying on the doctrine of privity, the Court held that the nominee lacked the ability to enforce a contract that it was not a party to, thereby defeating the contractual claims. In relation to the claims based on breach of statute, the Court held that by the time the plaintiff nominee resolved to settle the contract it knew of the alleged deficiencies in the property and it chose to settle, notwithstanding the fact that as a non-party to the contract it had no obligation to do so. Thus the cause of the plaintiff’s loss was its own decision, not the alleged misrepresentations. It could have, as a mere nominee, walked away from the contract but it chose to proceed, thereby inflicting damage upon itself.

Vendors will never voluntarily agree to nominees ‘inheriting’ contractual or statutory rights, but can they be ‘conscripted’? Section 134 Property Law Act allows for the assignment of a ‘legal thing in action’ – legal rights. Could it be argued that a nomination amounts to an assignment of the purchaser’s contractual and statutory rights and that the nominee, whilst not a party to the contract, is nevertheless able to enforce it?

Tip Box

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

Contract – Nomination

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

It is relatively common for a purchaser of land to want to nominate an additional or substitute purchaser to complete the purchase. Most commonly this arises in a family situation where one spouse or family member has signed the contract and desires to add another spouse or family member or in a commercial situation where the named purchaser would prefer to complete the purchase in the name of another associated entity.

In such circumstances the nomination takes place in what might be described as ‘innocuous’ circumstances. The named purchaser is not seeking to make a gain or profit, simply adjusting the purchase to better suit its purposes. In such circumstances a vendor ought to have no concern as the purchaser remains responsible for performance of the contract and the vendor retains all contractual rights against the purchaser in the case of a default. The vendor is entitled to be provided with a written direction, signed by the named purchaser and confirmed by the nominated purchaser, authorizing the vendor to transfer the property to the nominated purchaser and thereupon the vendor fulfils its contractual obligations by handing over a Transfer of Land in favour of the nominated purchaser at settlement. It is true that this exercise does require the vendor to consider one further, relatively simple, document in the conveyancing process – the form of nomination – but the exercise hardly seems sufficient to justify a claim for additional costs when taken in the context of a conveyancing transaction generally. Such transactions do not involve the named purchaser receiving any ‘additional consideration’ and do not attract additional duty. It is for the nominated purchaser to satisfy the SRO by statutory declaration that no additional duty is payable and just as the vendor has no obligation to determine how much duty, if any, a purchaser is liable to pay, so too the vendor has no obligation to determine how much additional duty, if any, the nominated purchaser is liable to pay. The vendor need not concern itself with the duty declaration and is only obliged and entitled to be satisfied that the form of nomination has been signed and accepted.

Sometimes a nomination may take place in ‘commercial’ circumstances. A purchaser may have secured a bargain and proposes to on-sell the property to another party without completing the contract. Such transactions involve ‘additional consideration’ and are structured so that the named purchaser receives a premium or reward for nominating the new purchaser. Such transactions are truly described as ‘on-sales’ and additional duty is payable, but again it is not the responsibility of the vendor to ensure the payment of duty – this is a matter between the nominated purchaser and the SRO. Indeed the nominated purchaser may well accept that additional duty is payable and will complete the transaction on that basis. Again the vendor, despite any personal disappointment with the turn of events, is only entitled to be satisfied that the form of nomination is in order and need not be concerned with any duty issues.

The copyright contract recognises the purchaser’s right to nominate, but places two restrictions on it (GC5). The words ‘and/or nominee’ must be used and the nomination must be made at least 14 days before settlement. The new 2008 contract removes these restrictions and recognises an unrestricted right to nominate, as does the common law. A purchaser under the current copyright contract may avoid these restrictions by simply relying on the unrestricted common law right rather than the restricted contractual right and purchasers under the 2008 copyright contract will enjoy a similar unrestricted contractual right.

A practice does exist of inserting special conditions that ‘complicate’ the nomination process. Such conditions serve no useful purpose and those that require a purchaser to pay costs in respect of the nomination appear to be in breach of s 42(3) of the Property Law Act. This section states that ‘no contract of sale relating to land shall contain a clause or condition stipulating for the payment by the purchaser to the vendor or to the legal practitioner of the vendor any costs or expenses’ except certain stipulated exceptions, such as costs arising from default. A purchaser who wishes to nominate but is confronted with one of these restricting conditions ought to simply point out that the purchaser is not seeking to nominate pursuant to the contract but rather is exercising the unrestricted common law right to nominate. Further, any condition that seeks to impose a monetary penalty on nomination is in breach of s 42(3).

It is to be hoped that the arrival of the 2008 copyright contract, which gives an unrestricted right to nominate, will encourage participants in the conveyancing process to recognise that nomination can be a simple exercise and that its unnecessary complication brings the practice of conveyancing into disrepute. After all, vendors are generally totally oblivious to these issues and the whole exercise smacks of an attempt to complicate a simple process for the purposes of inflating costs.

Tip Box

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

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