By Russell Cocks, Solicitor
First published in the Law Institute Journal
The case of Clifford v Solid Investments Aust P/L (Solid) has thrown a scare into Victorian developers. Off the plan sales are an important tool for a land or apartment developers. Such sales allow a developer to undertake a development sure in the knowledge that buyers are waiting to complete settlement of some (or all) of the lots being developed upon completion of the project. Indeed, for most developers, a percentage of off the plan sales is a pre-condition for approval of finance in respect of the project.
Until 1985 off the plan sales were prohibited. The Sale of Land Act required plans of subdivision to be registered at the Land Titles Office before a contract of sale could be entered into. Developers argued that this acted as a brake on development and pointed to the ‘pre-sale’ boom in places like Queensland as proof that presales encouraged development. This industry pressure secured amendments that permitted pre-sales in 1985, subject to the requirement that the plan be registered within 12 months of the contract. This was extended in 1989 to 18 months (the present default period) and in 1991 greater flexibility was granted by allowing the contract to set “another period” in lieu of the default period of 18 months.
Since those amendments pre-sales have indeed boomed and the legislation has found a compromise between protecting off the plan purchasers (particularly in respect of the deposit) and encouraging development. However, as is their want, developers have tended to ‘push the envelope’ and Solid is a timely reminder that statutory rights of purchasers cannot be whittled away by contractual terms.
The contract in Solid sought to give the developer the best of both worlds. It allowed for pre-sale by purporting to comply with s 9AE, but rather than being satisfied with the default period of 18 months, the contract nominated a period of 30 months for registration. Certainly that was authorised by the section, which allows for “another period” and theoretically that period could be any period, for instance 10 years. Market resistance might militate against such an extended period, but 5 year construction period contracts do exist.
However the contract included an additional clause purporting to give to the vendor the ability to extend the date for registration beyond 30 months if the project was subject to any of a variety of delaying factors, including inclement weather. Such clauses are indeed prevalent in pre-sale contracts and it was this clause that the purchasers attacked when the project did go beyond the specified period and the vendor sought to extend for delay.
Bongiorno J. concluded that s 9AE was designed to trade off the developer’s desire for flexibility with the purchaser’s need for certainty. The developer carries the risk of the project but pre-sales allow for risk minimisation. In return the purchaser has a degree of certainty in respect of completion and deposit protection in the meantime. As consumer protection legislation, the contract could not remove or reduce the purchaser’s right to avoid and Bongiorno J. held that the additional condition was in conflict with the fundamental purpose of the section and therefore unenforceable. The condition purported to ‘transfer the risk’ of the project to the purchaser and undermined the certainty that the section was designed to provide for the purchaser. The consequence was that the purchaser was entitled to terminate the contract when the 30 month period expired and to demand a refund of the deposit (or return of the bank guarantee), notwithstanding that the vendor had purported to extend the date for registration of the plan beyond the 30 month period.
The Solid contract altered the ‘default’ registration period from 18 months to 30 months. Most contracts adopt the default period, either by not adopting any other period or (unnecessarily) by confirming the 18 month period within the contract. The very interesting question is whether the decision applies not just to contracts that vary the default period, but also to contracts that adopt the default period (either specifically or by default).
The Solid decision was based on principle. That consumer protection principle had recently been affirmed and may, in respect of s 9AE, be described as entitling the purchaser to ‘certainty’ in respect of the completion date. A condition in a contract that allows the vendor to unilaterally extend that date destroys that certainty and offends s 14, whether the construction period is the statutory default period of 18 months or a period other than the 18 months default period (as in Solid). Otherwise a contract that was silent and thereby adopted the 18 months construction period by default could have an extension condition, but a contract that specifically adopted an 18 months construction period, could not. The offence is not what construction period has been adopted (18 months or some other period) or how it has been adopted (specifically or by statutory default) but rather whether the vendor has the ability to unilaterally extend that period, thereby destroying the purchaser’s right to certainty. Such conditions are offensive, irrespective of the construction period and irrespective of how that period was chosen.
The case was confirmed on Appeal.
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.