By Russell Cocks, Solicitor

First published in the Law Institute Journal

Disputes often arise in conveyancing transactions as the matter approaches settlement and the purchaser is dissatisfied with the condition of the property. These disputes typically arise after the purchaser has conducted the final inspection allowed by Condition 15 and discovered that the property is not in the condition that the purchaser expected, or that the vendor has not fulfilled a requirement of the contract. Three typical scenarios are complaints by the purchaser that:

1. the vendor has not removed the ubiquitous car body proudly standing in the driveway or that departing tenants have left assorted furniture and rubbish on the property ;
2. a window is broken or the air conditioner does not work; and
3. the vendor has not complied with a special condition requiring the vendor to replace a dilapidated fence or to ensure that all chattels and fixtures are in working or, in the context of a new home, has completed landscaping or touch-up painting.

Whilst these three scenarios sound similar, the results are different and careful analysis of the facts and the applicable law is necessary. General Condition 2.2 requires the vendor to deliver the property to the purchaser at settlement in the condition that it was on the day of sale, with the important exclusion for fair wear and tear. In the first scenario, the property is in an identical condition to how it was on the day of sale. The car body held pride of place in the driveway when the purchaser inspected, or the tenants were in possession in all their glory (including their sundry furniture and accoutrements).

No doubt the purchaser expected the car body to be removed or the tenants to clean up after themselves, but the contract only requires the property to be in the same condition, not a better condition. With hindsight, the purchaser should have demanded a special condition that the car body be removed (but see scenario 3 in this regard).

Scenario 2 is also governed by General Condition 2.2, but the purchaser will need to establish the threshold fact that the window was not broken at the time of contract or that the air conditioner was working at that time. The vendor may well argue that the window was broken last year or the air conditioner hasn’t worked for 2 years and the purchaser bears the heavy burden of establishing that the property is not in the same condition that it was on the day of sale. Video evidence might be conclusive, but is all too rare. Relying on recollection or worse, the evidence of an estate agent, is fraught with difficulties, but assuming that it can be established that the property is not in the same condition, what are the purchaser’s rights? There is authority for the proposition that if the deterioration in the property is of sufficient significance the purchaser may claim compensation by way of a deduction from the purchase price or require the vendor to reinstate the property and refuse to settle until the vendor does so. However most deterioration, including a broken window or non-operative fixture, would not be of sufficient significance to justify deduction or non-settlement and the purchaser would be left with the unsatisfactory remedy of having to sue the vendor for damages for breach of contract after settlement. The purchaser is not entitled to unilaterally make a deduction from the purchase price in respect of such minor matters, although the parties might agree to such a deduction by way of compromise of the purchaser’s right to sue after settlement.

The third scenario goes beyond General Condition 2.2 as the parties have specifically agreed that the vendor has an active duty in respect of the property, not just a duty to maintain it in the condition that it was. If the vendor fails to fulfil that duty, will the purchaser be entitled to make a deduction from the price or refuse to settle? The purchaser would argue that the mere fact that the parties have gone to the trouble of specifically agreeing to this condition shows that the condition must have been important to the parties and so the courts should enforce it. On the other hand, the vendor would argue that terms such as a requirement that chattels or fixtures be in an operative condition at settlement are not essential terms and that the purchaser’s remedy should be limited to an action for damages after settlement.

It is suggested that it is unnecessary to introduce this new test of ‘essentiality’ and that the test applied in scenario 2 in relation to the general condition should also be applied in relation to any special condition. A purchaser ought to be able to enforce its rights, either by way of deduction or delay, if the breach relates to a matter that is of sufficient significance in the context of the transaction. If the matter is not of sufficient significance the purchaser will be required to settle and pursue its rights against the vendor after settlement. This objective test will require subjective application and in relation to any particular case it will all be a matter of degree.

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 Vendors Statement required by the seller of real estate pursuant to s 32 of the Sale of Land Act is a fundamental document in the conveyancing process. Designed as a consumer protection mechanism, the statement requires the vendor to disclose certain items of relevant information to a prospective purchaser.

Perhaps reflective of a ‘boom market’ in real estate in the new millennium, there have not been many recent cases that have considered this section. Purchasers in such a market are less likely to complain and more likely to take a long-term view that capital growth may remedy minor blemishes. Add to this the uncertainty of legal proceedings and enormous cost consequences of failure, and it is little wonder that contested cases are rare. Nicolacopoulos v Khoury [2010] VCC 1576. The writer’s firm acted for the purchaser plaintiff), therefore comes as a rare treat for the property connoisseur.

The vendor instructed a conveyancer to prepare a Vendors Statement, which formed part of a contract of sale. The property was a lot on a plan of subdivision and it was, as a matter of law, affected by an owners corporation. This was an agreed fact at the hearing but the conveyancer had incorrectly taken the view that the property was not affected by an owners corporation as there was no ‘common ground’. This was apparently a reference to the fact that the subdivision was a two-lot subdivision with both lots having separate road access, so there was no common property. Nevertheless, there was an owners corporation, even if in name alone – the euphemistic ‘inoperative owners corporation’.

In those circumstances s 32(3A) Sale of Land Act 1962 requires the vendor to include in the Vendors Statement an Owners Corporation Certificate issued pursuant to s.151 Owners Corporations Act 2006 and accompanying documents. Failure to do so entitles the purchaser to rescind the contract pursuant to s 32(5), subject to the limitation created by s 32(7). There was no contest that there was a breach of s 32(3A) and a consequent right to rescind pursuant to s 32(5), but the vendor argued that the vendor was saved by s 32(7). To come within the protection of ss (7) the vendor had to prove:

1. that the vendor had acted “reasonably”; and
2. that the purchaser was “substantially in as good a position as if all relevant provisions had been complied with”.

The first question raised the issue of the vendor’s liability for the statements in the Vendors Statement. This issue had been the subject of conflicting authority, with Payne v Morrison [1991] V ConvR 54-428 holding a vendor vicariously responsible for the unreasonable (negligent) conduct of an adviser and Paterson v Batrouney [2000] VSC 313 suggesting that vicarious liability was not appropriate and that only personal liability was relevant. Fifty- Eighth Highwire P/L v Cohen [1996] 2 VR 64 had also considered the issue, without needing to reach a decision on the point.

Ultimately Ginnane J. adopted a similar course to Fifty-Eighth Highwire P/L v Cohen and avoided deciding whether vicarious liability was sufficient as he was satisfied that the vendor had been personally negligent and therefore had not acted reasonably. Unlike Paterson v Batrouney, where there had been total reliance on the adviser, Ginnane J. held that the vendor should have been aware of the existence of the owners corporation and therefore bore personal responsibility for ensuring adequate disclosure.

The second issue concerned the consequences of the breach on the purchaser. The vendor made two arguments on this point:

1. that the Vendors Statement had not mislead the purchaser.

The purchaser’s evidence was that she was particularly interested in the property because the sales brochure began with the words “Say good-bye to the body corporate”. She presently owned a property subject to a body corporate (owners corporation) and she was very concerned that a new property should not be affected by an owners corporation. The vendor argued that the purchaser purchased the property because of the brochure and that the absence of the Owners Corporation Certificate in the Vendors Statement had not influenced the purchaser’s decision.

Ginnane J. held that if the information required by ss (3A) had have been included in the Vendor Statement, then it was likely that the purchaser would have been made aware that the property was subject to an owners corporation and would not have purchased the property.

1. that the owners corporation was dormant.

The vendor gave evidence that the owners corporation had never met and that no levies had been struck. For all intents and purposes, the owners corporation did not exist.

This argument was not accepted. The mere existence of the owners corporation and the possibility that it could be enlived was sufficient to establish a detriment.

Whilst the issue of detriment was to be determined objectively, the purchaser’s subjective characteristics were a relevant consideration. So too was the fact that Parliament had decreed that certain information was required and, it may be presumed, such consumer protection aspirations are not to be lightly ignored.

The matter came before the Court as a Vendor-Purchaser Summons based on s.49 Property Law Act. As such, the issue for determination was limited to the issue arising from s.32 Sale of Land Act and the question of the negligence of the conveyancer or misrepresentations of the agent were not matters before the Court. Nevertheless, the purchaser was able to establish that the agreed breach of ss (3A) was not saved by ss (7).

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

A conveyancer’s perspective

An excellent summary of the operation of the Aboriginal Heritage Act 2006 (Vic) appears in the June 2008 Law Institute Journal at page 52. This column considers the operation of the Act from the point of view of conveyancing and seeks to identify how the Act might impact on conveyancing practice.

The Act imposes limitations on the use of land – something always of interest to a conveyancing practitioner, whether acting for a vendor, purchaser or lender. From the vendor’s point of view – do I have to disclose this limitation? From the purchaser/lender’s point of view – how will this limitation impact on my ability to enjoy/sell the land?

The fundamental purpose of the Act is to require an owner to prepare a Cultural Heritage Management Plan (CHMP) if the owner proposes to undertake any activity on the land that is prescribed by the Aboriginal Heritage Regulations 2007. From a vendor’s point of view, the only ‘activity’ the vendor is undertaking is selling the land. That is not a prescribed activity, so it would appear that there is no direct affect on a vendor. But what of disclosure? Section 32 Sale of Land Act requires a vendor to disclose various facts in relation to land, including zoning, restrictions and notices. The new Act is certainly in the nature of a planning Act. It does impose restrictions and might result in the service of notices.

However s 32 only requires disclosure of things that fit perfectly into the words used in the section. The requirements of the new Act do not impact on the zoning of the land (which arises from the Planning & Environment Act) and the possible restriction on enjoyment is not in the nature of the restriction referred to in s 32 (easement, covenant or other similar restriction). However a notice served under the new Act would most likely require disclosure, although the mere possibility of a notice would not. The potential for service of a notice is in the nature of a quality defect, akin to the possibility of service of a notice in respect to an illegal structure, and this possibility is usually covered by the principle of caveat emptor or ‘let the buyer beware’.

So, what of a purchaser? From the above it will be seen that a purchaser cannot expect a vendor to disclose information pursuant to s 32 in relation to the new Act, unless a notice has been served. Caveat emptor will apply in most situations in relation to the potential for a notice, but if the vendor is engaged in trade and commerce it might be argued that the Trade Practice/Fair Trading Acts might impose an additional positive obligation on the vendor to disclose the possibility of a notice and that silence in this regard might constitute misleading and deceptive conduct. However such an argument would not apply in the sale of a domestic residence and would only be available if the vendor had knowledge of a real possibility of service of a notice and so it may be concluded that it would not apply to require a vendor to make any reference to the new Act in normal circumstances.

A purchaser is therefore left to its own devices in terms of discovery of the impact of the new Act. Essentially the purpose of the Act is to protect Aboriginal Cultural Heritage by requiring the preparation of a CHMP before certain activities are conducted on land. This is not likely to impact on residential purchasers, but may impact on purchasers of broadacres or any person proposing to change the use of land. The website vic.gov.au/aboriginalvictoria/heritage includes an Aboriginal heritage planning tool that includes maps of affected areas and a description of exempt activities (basically low level residential activities). This website also provides access to the Victorian Aboriginal Heritage Register which, whilst not available for on-line searching, may be searched by way of a written application and payment of a fee (presently $33.10). Whilst a purchaser exercising an abundance of caution might add this certificate to the plethora of other certificates available in relation to a purchase of land, it is suggested that most transactions will not require such an inquiry and that a visit to the website and application of the planning tool will generally reveal that the land is not affected.

Mortgagees have a habit of requiring certificates simply because a certificate is available. It is to be hoped that mortgagees will exercise some subjective judgment before requiring these certificates, certainly in relation to domestic transactions at least. In an environment where costs are perpetually under the microscope, it is to be hoped that another unnecessary cost is not imposed on the conveyancing process.

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

Last month I wrote about owner-builders and suggested that the only issue that causes property lawyers greater concern is GST. Perfectly on cue, changes have been made to the operation of the margin scheme within the GST regime and these changes are bound to cause heartache and pain, particularly in the hip-pocket nerve.

The margin scheme is a legitimate method by which developers of land are able to minimise the impact of GST on their activities. The ATO accepts that GST is not meant to be a tax on land, but rather a tax on the proceeds of activities involving land. In its simplest form the margin scheme allows a developer (someone who is conducting a profit-making enterprise) to pay GST on the ‘profit’ or marginal increase in value of the real estate activity that the developer is conducting. Thus a developer who buys a property for $1m and sells it for $2m is able to pay GST on the ‘margin’ of $1m rather than the sale price of $2m. This applies whether the developer simply holds the land and resells it, which is an enterprise in itself, or the developer undertakes a more intensive enterprise, such as constructing homes on the land, and then selling.

Like all benefits, the margin scheme has qualifications. The rule that to rely on the margin scheme ‘the seller must have purchased on the margin scheme’ is widely known. In such circumstances the vendor will have remitted GST on its margin to the ATO and the purchaser does not receive a tax invoice and is not able to claim the GST back. The ATO has got and kept its pound of flesh and it is (momentarily) content. However this rule whilst an easily remembered mantra, is not strictly correct. In fact, the qualification is a little more generous than that and the margin scheme may be used if the purchase was on the margin scheme OR on a no-tax basis.

Thus a purchase from a vendor not liable for GST, or the purchase of a going concern or farm (both non-taxable) will entitle the purchaser to adopt the margin scheme when reselling. The ATO accepts that it is not entitled to a share of such sales, although it waits hungrily for a piece of the action from the next transaction.

The corollary of this rule is that the margin scheme is not available on re-sale if the purchase was on a full tax basis. In such cases the ATO will have received GST on the transaction but the purchaser will have received a tax invoice and claimed the GST back. Thus the ATO have gained no net benefit out of that taxable supply and eagerly awaits the next transaction to recover its entitlement. The margin scheme is available for successive transactions (with successive owners paying tax on their margin) but once someone hops off the merry-go-round and sells on a full tax basis, the music stops and the margin scheme is no longer available.

However, as often happens, some ‘smarties’ have apparently been rorting the system and so the rules have changed for everyone. One ‘rort’ was to insert a GST-free transaction (such as going concern) between a full-tax supply and a margin scheme supply, thereby ‘reopening’ the margin scheme that had been closed by the full-tax supply. A sells to B on a full tax basis (no net GST to the ATO) then B ‘converts’ the asset to a going concern and sells to C (no GST to the ATO). When C re-sells the development (now no longer a going concern as it is complete) instead of C paying GST on the sale price, the ATO only receives GST on C’s margin as C had purchased a going concern and is therefore entitled to apply the margin scheme. The value that B added to the development escapes GST. The new rules require C to ‘look back’ to the transaction through which B acquired the property (from A) and only entitles C to apply the margin scheme if A was also entitled to do so.

A second rort relates to calculation of the margin itself. Again, the modus operandi is to insert a GST-free transaction, such as a going concern, between two margin scheme transactions. The first transaction from A to B is conducted on the margin scheme and B then ‘converts’ the asset to a going concern before selling (GST free) to C. C (under the old rules) was entitled to apply the margin scheme to the subsequent sale of the completed development. The value that B added to the project escaped GST. Again the amendments adopt the ‘looking back’ obligation and require C to ‘look back’ to the first transaction (A to B) and to adopt A’s sale price in determining C’s margin. In that way the value that B added is taxed.

These amendments came into effect on 8 December 2008 and no doubt the ‘smarties’ will have already moved on to find other loopholes in the Act. Fortunately the amendments only apply to “new supplies”, being a supply (on the margin scheme) of a property that was itself acquired after 8 December 2008. However such transactions will begin to take place much quicker than anyone expects and an appropriate inquiry process must be established.

Inevitably the unprepared will unintentionally allow their clients to enter transactions that come back to bite them at tax time and the Legal Practitioners Liability Committee will no doubt have to walk along behind the elephant swinging its shovel.

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 is an inherently conservative branch of the law. The contest between strict legal principles and the application of equity seems to have occupied an inordinate portion of the last two centuries, with the common law principle of caveat emptor still being the starting point of any analysis of purchaser’s rights. When added to the equally dominant preference in favour of certainty of contract, it can be seen that a purchaser alleging a breach of contract by the vendor generally starts behind the eight ball. A defect in title might justify complaint, but these are rare. The more common defect in quality rarely justifies avoidance of the contract and claims based on implied terms founder on the rocks of certainty.

But the consumer (of encyclopedias or real estate) has found an ally in the last 25 years as Parliament has responded to the common law’s intransigence by creating rights and remedies that seek to equalize the imbalance of power between vendor and purchaser. The Trade Practices Act has been the saviour of the downtrodden consumer but, due to the Commonwealth’s limited power, this weapon was confined to disputes with corporate foe. The corresponding Fair Trading Acts in the various state jurisdictions were generally viewed as the poor cousin of the Trade Practices Act, but a recent High Court decision may have changed the landscape forever.

Houghton v Arms [2006] HCA 59 involved a commercial dispute between a consumer and a corporation based on the Trade Practices Act, but the corporation had gone into liquidation, so the claimant faced a pyrrhic victory. The claimant therefore sought to claim against two individuals who had negotiated the contract on behalf of the corporation. These individuals were not directors of the corporation but mere employees, albeit in senior positions in a relatively small organisation. This claim could not be based on the Trade Practices Act, as these defendants were individuals, and so the claim was made pursuant to the Fair Trading Act. The High Court held that the Fair Trading Act effectively mirrored the Trade Practices Act and, provided that the individual defendants had been acting in ‘trade and commerce’, that they would be equally liable (with the corporation) for the misrepresentations. The claim had been lost at first instance on the basis that mere employees were not engaged in ‘trade and commerce’ (merely engaged in their contract of employment) but the High Court took the view that the employees were indeed engaged in trade and commerce in the fulfilment of their employment duties. The extraordinary aspect of the case was that the Chief Justice delivered a unanimous judgment on behalf of all five judges (neither Kirby J. nor Callinan J. sat) and the whole judgment occupies just 9 pages and 48 paragraphs. It is a case study in judicial brevity.

The recent willingness of courts (Statewide Tobacco Services Ltd v Morley (1990) 2 ACSR 405) to lift the corporate veil has been a worrying trend for directors who have sought refuge behind this (now flimsy) artifice. Houghton v Arms means that mere employees may now ‘carry the can’ for corporations, although this liability is a personal one based on the Fair Trading Act, rather than a vicarious liability transmitted from the corporation.

In the context of common or garden variety conveyancing, not only will corporate vendors be held accountable for misleading or deceptive conduct, so too will their employees. This may be particularly significant for individual estate agents (who are undoubtedly acting in trade and commerce) and the employees of development companies who sell land and/or apartments to the public. It may have a particular significant in terms of what such participants in the conveyancing process don’t say, as much as what they do say. Misrepresentation by silence is unknown to the common law, but a usual suspect in a trade practices environment. Now, not only corporate vendors and agents will be liable for their failure to disclose, so too will their employees.

Is it too much to expect that this may lead to the mythical world of ‘truth in advertising’?

Tip Box

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