By Russell Cocks, Solicitor

First published in the Law Institute Journal

The contract of sale of land in common use is not strictly a compulsory document. It is prescribed pursuant to the Estate Agents (Contracts) Regulations 2008, but those regulations only bind estate agents. This means that if an estate agent prepares a contract the prescribed form must be used, but if the contract is prepared by a solicitor (or conveyancer) another form of contract may be used.

However, apart from some off the plan sales situations where developers (or their advisers) seem reluctant to move from the old form, the 2008 form of contract appears to have been widely accepted. Its best attributes may be described as:

1. Table A was abandoned and all contractual terms were gathered in the one place;
2. the contract note was abandoned;
3. the right to make requisitions was replaced with contractual warranties; and
4. an attempt was made to have the general conditions operate as a standard template with any changes being made by special condition rather than (possibly imperceptible) changes within the general conditions.

For a more complete summary of the 2008 contract, see the article (2008) 82 (10) LIJ 40.

The impending application of the Personal Property Securities Act 2009 (Cth) prompted a review of the 2008 form of contract by the Justice Department, and the Law Institute has been involved in that working party. This opportunity has also been taken to ‘tweak’ the contract a little to build on the experience of three years use of the new contract.

On the front page, the principal amendment relates to the cooling off warning. This has been amended in accordance with the recent Sale of Land Act amendment to maintain the right to cool off even if the purchaser obtains independent legal advice. The proposed off the plan warning amendment has not been enacted at this stage.

The particulars of sale page has had some minor changes and the location of special conditions has been moved to be between the particulars of sale and the general conditions rather than after the latter, as had been the case.

The main changes to the general conditions are:

1. General condition (GC) 1.3 is deleted as it appears to have very little application in standard transactions.
2. GC 3.1 (the ‘identity’ condition) is slightly amended for clarity.
3. GC 7 is amended to take account of the Personal Property Securities Act 2009 (Cth).
4. GC 8 is amended to require the vendor only to provide details of building warranty insurance that are in the vendor’s possession.
5. GC 11.2(c) is deleted. The Sale of Land Act no longer allows for a deposit to be held in a vendor/purchaser joint account.
6. GC 11.6 is amended to remove the redundant reference to ‘bank’ cheques.
7. GC 12 (deposit release condition) is amended to adopt the language of the Act by substituting ‘particulars’ for ‘proof’ in 12.1(a).
8. GC 12.1(b) is amended to comply with the Act by allowing release provided that ‘28 days have elapsed since the particulars were given to the purchaser’.
9. GC 13 has a minor GST amendment.
10. GC 17.2 allows for a broader method of service.
11. GC 23.1(a) (terms contract condition) updates the reference to s 29M Sale of Land Act.
12. GC 27 is amended to specify that a default notice must be in writing and that notices are to be ‘given’ rather than ‘served’.

Various minor grammatical and style changes have also occurred.

The Law Institute of Victoria is also proposing to release a standard form of nomination to complement the contractual right to nominate established by GC 18 and to make available various standard special conditions to be used in common situations, such as the need for a building inspection or a pest inspection.

The vast majority of users of the contract have respected the intention that the general conditions remain sacrosanct and that any changes to those general conditions are to be made by separate special condition. If a vendor wishes to make a change to the general conditions, then that should be done by way of special condition that amends the relevant general condition, not by making a change to the general condition itself. The objective of this method is to improve transparency in relation to the contract, thereby assisting the purchaser to better understand the conditions and also assisting the vendor by reducing the possibility that the purchaser will cry foul in relation to such changes.

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

Regular readers of this column will note a recent contract-centric emphasis, and this column continues that focus by considering how the standard form contract can, or should, be changed.

At the risk of repeating well known law, the standard contract of sale of real estate is not a compulsory document and may therefore be changed by agreement between the parties. The authors of the contract surrendered copyright in the contract so that it could be adopted by the Estate Agents (Contracts) Regulations 2008 as a standard form available for use across the conveyancing industry. The contract includes 28 general conditions that form the basis of a contract that is capable of providing all the terms necessary to make a workable, binding contract between vendor and purchaser.

This means that special conditions ought not be necessary in a standard conveyancing transaction, although it remains permissible to supplement or change the general conditions by special condition. Unfortunately many lawyers find it very difficult to move on from time-honoured precedents and many contracts still included pages of special conditions that, if considered carefully, generally add nothing to the general conditions and indeed often contradict those general conditions. Generally this is simply a consequence of laziness, with the practitioner not bothering to determine how those ‘old’ special conditions interact with the new general conditions. The worst example of this is the special condition that refers to Table A, a provision that was repealed in 2009.

Special conditions

Some transactions do indeed require special conditions. In such cases the special conditions are added to the contract (in the newest version of the contract, before the general conditions) and those special conditions take precedence over the general conditions. It is possible for those special conditions to change the general conditions and some common examples of this are to remove general condition 24.4 or to amend the penalty interest rate.

One of the popular consequences of the new contract was to abandon the time wasting exercise of ‘requisitions’ and replace it with contractual warranties, set out in general condition 2, so that a purchaser can have certain basic expectations about the transaction confirmed. Whilst it is theoretically possible for the vendor to include a special condition amending these contractual warranties, to do so undermines the whole structure of the contract and is not recommended.

Altering general conditions

Unfortunately some practitioners have chosen to adopt a more surreptitious method of amending the contract. Rather than adding a special condition, these practitioners amend the wording of the general condition. The Legal Practitioners Liability Committee (LPLC) In Check Bulletin 53 of December 2011 alluded to this practice and warned purchaser’s practitioners of the danger of ‘missing’ such a surreptitious change. However there may well be danger for the vendor’s practitioner who adopts this practice.

George T Collings v. H F Stevenson (Aust) P/L is a 1990 unreported judgment of Nathan J. in the Supreme Court of Victoria. The case relates to the interpretation of an estate agent’s sole agency authority, specifically the period of time during which the vendor was bound to pay the agent commission in respect of a sale. The authority allowed for the inclusion of a specific period but also provided that the authority extended indefinitely, unless terminated by the vendor. The agent negotiated a sale outside the specified period and claimed commission on the basis that the vendor had not terminated the authority. Nathan J. found that the authority was unenforceable as ‘unconscionable’ on the basis that the indefinite extension of time was ‘submerged in the fine print of the contract’. He concluded that it is ‘unconscionable to imbed in a pro forma contract, a term inconsistent with its stated purpose’.

By analogy, a vendor who adopts the standard form contract of sale of land but surreptitiously amends that contract such that the amendment is ‘submerged in the fine print’ may well find that such an amendment is unenforceable as unconscionable. If that amendment were to be to the penalty interest rate, no interest would be payable. No better example of the saying ‘hoist by his own petard’ can be imagined.

Notwithstanding the High Court confirmation of the significance of contractual terms in Toll (FGCT) P/L v Alphapharm P/L [2004] HCA 52, it is submitted that, particularly in a residential sale environment, the powerful argument based on unconscionability will prevail to strike out any amendments to general conditions that are effected other than by way of a special condition. The negative consequences for a vendor in such circumstances might be the next matter of concern for the LPLC.

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 GAIC has been a political football. The government sought to establish a fund to provide for infrastructure in developing areas, not such an exceptional idea, however some bright spark hit on the idea of collecting the tax upon transfer from the ‘existing’ owner to the ‘developer’. This would have timing advantages for the government, but it hit a raw nerve with landowners.

Generally speaking, these were people who owned large tracts of undeveloped land in outlying suburbs. The extension of the Urban Growth Boundary created a windfall profit for such people, but the suggestion that the profit would be taxed upon sale was anathema. In fact what would have happened is that such vendors would have simply added the tax to the inflated value of the land and recovered it from the developers who were beating a path to their door. The developers want the land. They know the tax has to be paid. Payment upon acquisition is probably not ideal but if that is what the market dictates then that is what would have happened. However the government has now backed down and the GAIC passed by Parliament on 25 May 2010 imposes the tax on development, not first sale.

Vendors will still receive the inflated value of the land courtesy of the UGB extension and developers will still pay the GAIC, the result simply means that those funds will not be available to the government until development takes place, rather than at the time the land is first sold.

None of this has been of much interest to conveyancing practitioners, other than as a sport involving progressively rabid participants, but the legislation does have a sting in the tail for conveyancing transactions. The legislation establishes a bureaucracy (even including a Hardship Board) to collect and administer the tax and creates links to the State Revenue Office in relation to collection and the Land Titles Office in relation to administration. Rather than treating the tax in much the same way as council rates or land tax, the legislation elevates it to the position of providing for recording of the tax liability on the title to the land and prohibits registration of dealings without a certificate from the SRO.

This ‘tinkering’ with the title is philosophically objectionable to traditional Torrens title lawyers, who argue that the title to land is sacrosanct and endorsements on the title ought to be restricted to recording dealings relating to traditionally recognised interests in land. This references the debate foreshadowed some years ago relating to the possibility of a two-tiered title, the first tier for traditional transactions and the second tier for matters such as the GAIC, a debate yet to be resolved.

Importantly, the Act also amends section 32 of the Sale of Land Act, the bread and butter of the conveyancing practitioner. One would have thought that the recording of the tax liability on the title would be adequate protection for a prospective purchaser, who would at least be expected to look at the copy title required to be attached to the Vendors Statement. However s  32(2)(da) has been inserted to require the vendor to include another warning to purchasers to the effect that a transfer cannot be registered without payment of, or exemption from, the GAIC. This warning is only required where there is a GAIC recording on the title, but the result will no doubt be that standard form Vendors Statements will have this warning added as a matter of course.

Further, s 32(3) has been amended. This is the section that requires inclusion in the Vendors Statement of a copy of the title (and plan of subdivision, if applicable) and ss (f) has been added requiring the inclusion of a certificate or notice relating to release, deferral, etc. in respect of GAIC liability. If there is no such certificate, then s 32(3)(f)(iv) requires inclusion of a certificate showing the GAIC liability but the certificate, available from the SRO, will only show liability in respect of a transaction undertaken in the current financial year.

Again, this requirement only relates to land in respect of which there is a GAIC recording on title, but will no doubt lead to another half a page of irrelevant dribble being added to standard form Vendor Statements. It is also unusual that a vendor is obliged to disclose a release or exemption. Section 32 is about disclosing encumbrances or liabilities, negative aspects of land, but s 32(3)(f) requires the vendor to disclose a positive aspect – that the land is not subject to a GAIC liability notwithstanding that there is a GAIC recording.

No doubt a vendor in such circumstances would be keen to disclose this positive aspect, but to make it obligatory seems to misconceive the objective of s 32. It would also be hard to imagine how a purchaser could rely on the failure to disclose to avoid the contract pursuant to s 32(5). The purchaser would have to argue that whilst the land does enjoy a release or exemption from GAIC, the fact that the vendor did not inform the purchaser of that fact justifies the purchaser in avoiding the contract. It is hard to imagine how a purchaser in such circumstances could argue that the purchaser is not in substantially as good a position, as the land does in fact have the benefit of the release or exemption. The vendor could rely on s 32(7) to establish that the purchaser is no worst off as a result of the breach and everyone’s time will have been wasted.

The word ‘overkill’ comes to mind in relation to this legislation. Certainly the amounts involved ($95,000 per hectare) are significant, but the prostitution of the certificate of title for recording of what in the end is just another tax is unnecessary. Overkill is carried into the disclosure obligation by requiring a warning when the title itself provides a warning and disclosure of positives, rather than negatives.

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

It is a fundamental principle of contract law that any attempt to penalise a contracting party for breaching that contract will be unenforceable.

However the law also recognises a number of exceptions to this principle, notably the entitlement of a vendor of a contract of sale to forfeit the deposit paid by the purchaser if the purchaser fails to complete the contract. Such an outcome clearly operates as a penalty against the purchaser arising from breach of the contract, but such an outcome is accepted by the law as a reasonable consequence of the breach in the circumstances of the contractual relationship. The law reserves the right of the Courts to review the imposition of such a penalty in particular circumstances by allowing the penalised party (the purchaser) to apply to the Court to exercise the Court’s discretion to avoid forfeiture of the deposit where it would be just to do so.

A Court would not normally intervene to protect a purchaser from forfeiture of the deposit if the deposit is 10% of the purchase price; as such an amount is generally accepted as a reasonable pre-estimate of the vendor’s likely loss if the contract does not proceed. However, a higher deposit, such as 20%, might attract the Court’s discretion as it smacks of a penalty for breach. In such circumstances the vendor runs the risk that the Court might strike down the offending term in its entirety, in which case the purchaser would be entitled to a full refund, or the Court might, in the exercise of its discretion, order forfeiture of 10%.

A contractual term that provides that an amount of 10% shall be forfeited upon default might not be enforceable if the particulars of sale provide for a deposit of less than 10%.

Applying this principle to contractual terms that seek to impose penalty interest, one can immediately see the potential for a problem. By definition, the provision is imposing a contractual penalty for breach. Such a provision will be struck out unless the Court can be satisfied that the penalty is in fact a genuine pre-estimate of the losses likely to be suffered by the ‘offended’ party.

The 2008 contract of sale in common use in Victoria provides for interest to be paid upon default. Ordinarily this provision will be relied upon by the vendor to claim interest from the purchaser when the purchaser fails to settle on the due date. Less often, it is claimed by the vendor as a result of non-payment of the deposit. It might even be relied upon by a purchaser who is entitled to a refund of deposit upon valid termination of the contract.

In all such circumstances it is a penalty for breach of contract and therefore susceptible to the common law principle against contractual penalties. Its saving grace is that such a condition may be regarded as a genuine pre-estimate of the offended party’s likely losses arising from the breach. Failure to pay an amount due under the contract means that the offended party does not have the use of that money during the period of breach. It might reasonably be expected that the vendor would have made use of that money during that time, by investment or otherwise. Thus GC 26 provides that ‘interest at the rate of 2% per annum plus the rate for the time being fixed by section 2 of the Penalty Interest Rates Act 1983 is payable on any money owing…’. Reference to an objective measure (Penalty Interest Rates Act) might be seen as confirmation of the genuine nature of this pre-estimate.

But what of ‘renegade’ conditions that seek to amend this universally accepted standard? Conditions imposing the statutory rate plus 6% or even 4% run the risk of being held to offend the rule against penalties and not be saved by coming within the genuine pre-estimate exception. A rate of 5% per month for default has been held to be an unenforceable penalty. A higher rate of 25% per annum in a mortgage that provided for an acceptable rate of 16% was likewise unenforceable. The penalty in that case was a 56% increase on the acceptable rate. A penalty rate that added, say, 6% to a rate that would have otherwise been approximately 12% per annum (a 33% increase) certainly runs the risk of being struck out as a penalty.

And what of conditions that totally abandon reference to the objective statutory standard and unilaterally impose an arbitrary amount, such as 20% per annum? It is easy to see that a Court would find that such a condition is motivated by a desire to place the offending party ‘in terrorem’ rather than in any way being a genuine pre-estimate of likely loss. In such circumstances a Court might strike such a condition out entirely, such that no penalty interest would be payable. The drafter of such a condition would then be accountable to a very dissatisfied client.

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

Breach of contract is an unfortunate, but relatively common, event. What consequences flow from a breach of a contract of sale of land?

Most contracts are in standard form – either a contract of sale of land or a contract note. There is no effective difference between these two documents as the contract note adopts the General Conditions (GC) set out in the contract of sale. GC 7 of the contract of sale (which therefore applies to all standard form contracts) provides that a party who breaches the contract must pay to the other party (the innocent party) ‘compensation for reasonably foreseeable loss’.

Whilst either party may breach a contract in any number of ways, it is usually a breach at the business end of the contract – the time for final settlement – that attracts most attention. A purchaser who fails to pay the balance of purchase price, or a vendor who fails to be in a position to deliver the property or make title, will be in breach and therefore liable to pay ‘reasonably foreseeable loss’ to the innocent party. If it is the purchaser who is in breach then there is a separate and distinct obligation to pay penalty interest (also GC7), although a vendor will never be liable to pay interest to the purchaser as the vendor owes no money under the contract.

The first issue to determine is – at what time must the losses have been reasonably foreseeable? It may be abundantly apparent at the time of breach that an innocent party will suffer a loss, but that is not the relevant time. As the parties are agreeing at the time of contract that reasonably foreseeable losses will be compensated, the relevant time for determining foreseeability is the time when the contract was being entered into. It is for this reason that a practice has arisen recently of including conditions in the contract (or the Vendor Statement, which is a contractual document) to the effect that the parties agree that specified outcomes are reasonably foreseeable consequences of a purchaser’s failure to settle.

Such conditions seek to prescribe foreseeability and are a response to a generally restrictive view of foreseeability taken by successive Dispute Resolution Panels and the few courts that have considered the issue. However it is likely that a judicial body called upon to determine the foreseeability of a particular event will not be swayed by broad statements in the contractual documents. A guide to the attitude of courts to claims that consequences are foreseeable may be taken from current events. Traffic accidents are at least as common as contract breaches. Loss and damage from accidents are foreseeable, but to what extent? Yarra Trams has recently sought to convince Magistrates that it is reasonably foreseeable that a person who crashes into a tram will not only damage the tram, but will also cause loss to Yarra Trams in the form of a penalty imposed on Yarra Trams pursuant to the contract between Yarra Trams and the government. Accidents cause delays and delays, at least for Yarra Trams, cause penalties. However these claims have been unsuccessful, with Magistrates describing such consequential losses as ‘far fetched’. Perhaps Yarra Trams might seek to make these penalties more ‘reasonably foreseeable’ by emblazoning their trams with appropriate signs, but it is unlikely that this would change the view of sensible Magistrates. Likewise, it is suggested that including in contractual documents general protestations as to losses that a vendor might possibly incur as a result of a purchaser’s default is unlikely to convince a judicial body that losses that do actually occur were indeed ‘reasonably foreseeable’. The parties might agree in a contract that the world may come to an end, but the fact that it does is not made any more foreseeable by that agreement.

Even if the vendor suffers a loss that was reasonably foreseeable, it is still uncertain as to whether the vendor can refuse to settle unless the purchaser pays the amount claimed by the vendor for this loss in addition to the balance due at settlement under the contract. GC 7 refers to the payment of ‘compensation’ and there is authority to suggest that such a right gives the innocent party the right to sue for damages after settlement, but does not give the innocent party the right to insist upon payment at settlement or issue a Rescission Notice if payment is not made. Naturally enough the parties can agree that a defaulting party will pay an amount by way of compensation to the innocent party at settlement so as to resolve the dispute and avoid further legal action, but it would appear open to a purchaser who does not accept the vendor’s claims to seek specific performance of the contract and require the resolution of the vendor’s claim for ‘reasonably foreseeable loss’ to be resolved at a later time. The good thing for the vendor in such circumstances is that at least the vendor knows where to find the purchaser.

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

Property law has been the subject of three legislative pronouncements in 2010, although the changes have tended to tinker around the periphery rather than impose radical change.

Act 1 introduced the following changes:

1. an Owners Corporation Certificate must be sealed with the owners corporation seal. This section has not as yet been proclaimed;
2. a tenant may remove buildings and fixtures. This is not a new provision, rather a transfer of this right to the Property Law Act from the Landlord and Tenant Act, which has been substantially repealed and;
3. permitting transfer of deposit held as stakeholder between legal practitioners, conveyancers and estate agents. This is simply a rewording of an existing provision.

Act 2 proposes the following changes:

1. permitting an estate agent to purchase a property from a vendor provided that the vendor and a legal practitioner, conveyancer or accountant representing the vendor provide written consent to the transaction. This replaces the current procedure requiring prior consent from the Director, although notice of the transaction must be given to the Director;
2. increasing the maximum permissible deposit in an off-the plan contract from 10% to 20%;
3. requiring a WARNING to be added to the front page of an off-the-plan contract advising that the amount of the deposit may be negotiated and that a substantial period of time may elapse between the contract and settlement and that the value of the property may change in that time and;
4. removing the exception to the cooling off right when a purchaser has obtained independent legal advice. This last proposed amendment (not yet passed) seems inexplicable. It is true that estate agents do use the present exception to remove the cooling off right, but surely the consumer protection objective of the right is satisfied when the purchaser has had legal advice? Typically an agent will ensure that advice is obtained when a sale close to auction date (but more than 3 days before) is proposed. Removing this device will make vendors reluctant to sell prior to auction or introduce the uncertainty of ‘subject to contract’ transactions. It is consumer protection gone mad. As this proposal has not as yet been passed, common sense may prevail.

Act 3 introduced the following changes (effective 1 May 2010):

1. entitles the Registrar to NOT produce a paper title if the ‘person entitled to receive’ the title requests that no title be produced. Presumably a mortgagee could make such a request;
2. removes the ability of the Registrar to record the age of a minor;
3. removes the requirement that lost title applications be advertised;
4. removes the right to deposit a deed of trust. A trust cannot be recorded on title and the anomalous right to deposit the trust has now been removed;
5. simplifies the procedure associated with obtaining a vesting order – such as where a transferor cannot be located;
6. simplifies the procedure associated with obtaining a discharge of mortgage when the mortgagee cannot be located;
7. repeals s 48, which allowed the adoption of Table A;
8. prohibits a variation of mortgage varying the length of the term of the mortgage;
9. changes the period that the Registrar must wait before removing a caveat under s 89A from 35 days to 30 days;
10. repeals the search certificate and stay orders procedure that appear to have never been used in Victoria and;
11. amends the ‘Queens Caveat’ provisions by referring to a caveat on behalf of the Crown (rather than ‘Her Majesty’) and specifically empowering the Registrar to remove such a caveat.

Tip Box

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