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 As a consequence the Court ordered that the payment was to be refunded to the purchaser after the contract was rescinded by the vendor, as the vendor ‘cannot have the land and its value too’.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.