ByLawyers News and Updates

Compensation for loss

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

What are the consequences of a breach of a contract of sale of land? Is it compensation or damages? Is there a difference?

This is a significant question in the context of the standard contract of sale of land when dealing with the consequences of a breach of that contract by one of the parties to the contract. General Condition 25(a) provides that a party in breach must pay to the other party “compensation for any reasonably foreseeable loss”. This article is not concerned with calculating the quantum of any such claim, but rather determining when such a payment must be made. Specifically, can the innocent party seek to adjust the balance payable at settlement on the basis of an entitlement to “compensation”?

It is common for a vendor to claim that the purchaser’s breach has caused the vendor to suffer significant “loss”. Putting aside for the moment whether the loss is reasonably foreseeable and, indeed, was reasonably foreseeable as at the date of the contract, can the vendor demand that the purchaser pay those losses at settlement? Likewise, can a purchaser who establishes loss flowing from the vendor’s breach, difficult though that may be, demand that the vendor compensates the purchaser by way of a reduction in the amount payable at settlement?

It is fair to say that many vendors, and some purchasers, do seek to adjust the amount payable at settlement by a party in breach, however the suggestion that one party may unilaterally adjust the amount payable pursuant to the contract at settlement to recover alleged loss is not supported by the contract. The contract allows the innocent party to claim “compensation”; it does not support a claim for “damages” which is a common law remedy for breach of contract that may be pursued AFTER completion of the contract.

A right to compensation has traditionally been distinguished from a right to damages – King v Poggioli [1923] HCA 11. Compensation is a remedy that entitles a purchaser to abate the purchase price where the vendor breaches the contract by failing to deliver the whole of the property contracted to be sold, either as a result of a defect in the physical attributes of the property or the vendor’s interest in, or title to, the property. (Voumard: The Sale of Land [7320])

General Condition 25(a) therefore creates a very limited contractual remedy for breach of contract. It is a remedy limited to a claim by the purchaser seeking to abate the purchase price consequent upon a significant physical or legal defect in the property. It does not justify a claim for consequential loss, although the purchaser might pursue such a claim for damages for consequential loss after settlement. General Condition 25(a) does not support a contractual claim for “compensation” by the vendor at all, although the vendor, like the purchaser, might pursue a claim for damages for consequential loss flowing from the purchaser’s breach of contract after settlement.

General Condition 25(b) gives the vendor a contractual right to claim interest as a result of a breach of the contract and General Condition 26 sets out how that interest is to be calculated. As interest is payable “on any money owing under this contract” this contractual right to claim interest is limited to the vendor, as only the vendor is owed money under the contract.

In summary, the purchaser’s contractual right following a breach by the vendor is to compensation pursuant to GC.25(a) and the vendor contractual right following a breach by the purchaser is to interest pursuant to GC. 25(b). Both parties have additional common law rights for consequential losses flowing from a breach of contract, but those common law rights must be pursued after settlement and do not justify an adjustment of the amount payable at settlement.

The contractual right of the parties to a contract for the sale of land that adopts the standard General Conditions to claim an adjustment of the amount due at settlement consequent on a breach of the contract by the other party is limited as set out above. However, a party in default faces the possibility of proceedings after settlement to recover damages for breach of contract and therefore it is sensible for the parties to seek to compromise any such claim at settlement. Whether the breach is by the vendor or the purchaser, the innocent party should provide details of losses suffered by the innocent party as a result of the breach and which were reasonably foreseeable to the parties as at the date of the contract. The party in default might then agree to compromise the claim on the basis that a claim for consequential loss after settlement will involve both parties in significant additional expenditure and ought to be avoided. However, the innocent party cannot seek an adjustment of the amount payable at settlement or seek to delay settlement until the dispute is resolved. The show must go on.

Sunset clause – Vendor ending a contract – Purchaser’s consent or court order required

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Retrospective amendments to the Sale of Land Act will substantially limit a vendor’s ability to end a residential off-the-plan contract.

The Sale of Land Amendment Bill 2018 was expected to pass Parliament in late 2018 but was delayed by the Victorian State election. It is expected to be passed early in 2019 and will require vendors who wish to end residential off-the-plan contracts pursuant to sunset clauses to either obtain the purchasers consent, or an order from the Supreme Court.

The changes do not affect the purchaser’s current statutory right to end the contract if the plan of subdivision is not approved by the sunset date. This purchaser right is created by s.9AF (2) Sale of Land Act and allows the purchaser to end what is currently known as a “prescribed contract” (but which will be known as a residential off-the-plan contract when the amending Act is passed) if the plan of subdivision is not approved within 18 months of the contract date. The contract may specify another period, but if no other period is specified, the default period is 18 months.

It is common for vendors to also include a contractual right for the vendor to terminate the contract if approval is not obtained by the sunset date. There has been a perception that vendors were seeking to use this contractual right to unfairly end contracts in a rising market and these changes are designed to prevent such outcomes.

Rescission in accordance with the Act

By s.12(1) of the Amendment Act, new s.10A Sale of Land Act provides that if a sunset clause in a contract allows the vendor to rescind the contract, then rescission must be in accordance with the Act and s.10C overcomes any inconsistent contractual provision. Section 2(1) of the Amendment Act provides that s.12(1) is taken to have come into effect on 23 August 2018.

Purchaser’s consent

Section 12(1) also introduces s.10B Sale of Land Act which prohibits a vendor from relying on a sunset clause unless the vendor obtains the purchaser’s written consent to any such rescission. By virtue of new s.54(1), s.10B applies to all residential off-the-plan contracts entered into and in force before commencement of s.12(1) (23 August 2018) unless proceedings concerning the sunset clause had been commenced before that date.

A vendor seeking to obtain the purchaser’s consent must give the purchaser 28 days notice setting out the reason that the vendor proposes to rescind, the reason for the delay in registration of the plan and advice that the purchaser is not obliged to consent to the proposed rescission.

Court order

By s.12(2) of the Amending Act, new s.10D Sale of Land Act provides that the vendor may apply to the Supreme Court for an order permitting the vendor to rescind a contract pursuant to a sunset clause. By s.2(2) of the Amending Act, s.12(2) comes into operation on the day after the day on which the Amending Act receives Royal Assent. By virtue of new s.54(3), s.10D applies to all residential off-the-plan contracts entered into and in force on the day after the day that the Act receives Royal Assent, unless proceedings concerning the sunset clause had been commenced before that date.

The Court must consider a wide variety of matters relating to the contract and the property, including increase in value and, if an Order is made, may include compensation to the purchaser. The vendor is liable for the purchaser’s costs.

Notice

New s.10E requires residential off-the-plan contracts that include a sunset clause to include a Notice setting out that the:

    • vendor may give a notice proposing to rescind the contract;
    • purchaser may consent to rescission, but is not obliged to consent;
    • vendor may apply to the Court for an order permitting rescission;
    • Court may make such an order.

This requirement applies to all contracts entered into after the day that the Act receives Royal Assent.

Tip Box

•Sunset clauses must be exercised in accordance with the Act.

•Purchaser’s consent or a court order is required.

•Residential off-the-plan contracts need additional disclosure.

Sale of land amendments

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By Russell Cocks, Solicitor

 First published in the Law Institute Journal

The Bill, soon to be an Act, that amended SUNSET CLAUSES also introduces other amendments to

Terms Contracts

Terms contracts were an important method of funding property acquisition in the mid-twentieth century when mortgage funding was not as available as it is in the current de-regulated finance market. Many working people were unable to obtain traditional finance and many a family home can be traced to a terms contract paid off over a number of years. The Sale of Land Act was in fact introduced in 1962 to regulate this method of sale, as it always had the potential to facilitate sharp practices.

Essentially, a terms contract allows a purchaser to take possession of the property and pay the purchase price over an extended period of time, such that the property provides both a home and an investment. However, in recent years various sharp operators have been using terms contracts to lure unsuspecting, and generally under-funded, purchasers in outer metropolitan and regional areas into entering into terms contracts that were doomed to fail and cause those purchasers extensive losses. A report by the Consumer Law Action Centre highlighted these dangers and has resulted in s.29EA and subsequent sections prohibiting terms contracts of residential land at a sale price of less than a prescribed amount (expected to be $400,000). Section 55 gives VCAT jurisdiction to review existing terms contracts on fairness grounds.

Rent-to-Buy

A variation on the unfair terms contract is a rent-to-buy arrangement whereby the purchaser takes possession of the property on a rental basis with an option to purchase the property at a future time. Again, these schemes invariably fail as a result of the inability of the purchaser to manage the financial obligations imposed by these arrangements, with the result being substantial loss for the purchaser. Section 29WA prohibits rent-to-buy arrangements, with limited exceptions, and s.56 gives VCAT jurisdiction to review existing arrangements on fairness grounds.

Land Banking

A third scheme that has involved substantial losses for unsuspecting consumers have been land banking schemes, which involve consumers buying a small interest in a large parcel of land purchased by developers with the hope that the land will become suitable for development at some time in the, often distant, future. When sold to the purchaser via an option arrangement the purchaser’s deposit is not protected and there have been many examples of the arrangements collapsing and purchasers losing their investment.

Section 29WH prohibits the sale of options in land banking schemes unless the scheme is a registered scheme or the deposit is held in a trust account and provides that the deposit must be returned to the purchaser if the event triggering the option does not occur within 5 years.

There is no provision for review of current schemes.

Past Use

From time to time a purchaser will complain that the property that has been purchased has “prior history”, such as a sensational death or inappropriate use, such as a drug lab. Such history is in the nature of a quality defect and subject to the principle of caveat emptor, meaning that in the absence of fraud or common law misrepresentation, the purchaser is obliged to proceed with the contract.

Section 12 Sale of Land Act presently creates an offence (but not a purchaser’s right) in relation to false, misleading or deceptive representations and prohibits fraudulent concealment of “material facts”. Section 14 of the amending Act substitutes “knowingly” for “fraudulently” in s.12(d), thereby reducing the onus of proof and making it an offence to knowingly conceal material facts. New section 12A allows the Director of Consumer Affairs Victoria to publish guidelines designed to assist vendors and agents to understand what is meant by “material facts” and presumably such matters as sensational deaths and drug lab use will be included in such guidelines.

However, making non-disclosure by an owner or agent of such matters an offence will not, of itself, give a purchaser a right to rescission or damages. The basic principle of caveat emptor will still apply.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states the Sale of Land Act, notably in relation to terms contracts.

Adjustment for cladding agreements

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Recent amendments to the Local Government Act mean that solicitors acting for buyers and sellers of real estate will need to take into account any charges recorded against the property relating to funding for cladding rectification.

Recent concern about defective cladding used in the construction of high-rise residential buildings has resulted in the government adopting a legislative solution that may provide some solace to the unfortunate unit owners who are faced with massive rectification costs, but it also has an impact on third-party purchasers of such properties. After a lengthy inquiry in relation to the cause and consequences of the defective cladding material it became clear that any solution that depended upon allocation of blame would involve years of legal proceedings and an immediate solution had to be found to allow the owners of units affected by the defective cladding to move on with their lives.

Responsibility for administration of the solution has been allocated to municipal Councils, with a new Part 8B inserted into the Local Government Act. This authorises Councils to enter into a ‘cladding rectification agreement’ with the owner of rateable land (or an Owners Corporation) and a lending body, presumably a conventional financier. Council may also be the lending body, but it is difficult to imagine, in the short term at least, that Councils will assume this entrepreneurial role. Thus, the standard agreement will be tripartite, between the owner (or Owners Corporation), the Council and a lender.

The agreement will provide that the lender will advance the funds to pay the rectification works and Council will levy a charge on the land to recover the loan advance, interest and fees associated with the levy by instalment over a period of not less than 10 years. Thus, in a perfect world, the owner (or Owners Corporation) will be happy as the cladding will have been rectified, the lender will be happy as the loan, plus interest will have been repaid and Council will be happy as it will have charged an administrative fee. But we do not live in a perfect world.

Owners will still feel aggrieved by being required to bear the cost of rectifying a building defect, lenders will inevitably face some bad debt scenarios and Councils will be regarded as the bad guys by all other parties simply because Councils put the deals together. How dissatisfied owners relate to each other in an Owners Corporation environment is another can of worms and time may reveal that the solution turns out to be worse than the problem.

Given that Councils must be satisfied about the amounts due pursuant to any rates, taxes or levies and any mortgage relating to the land before entering into an agreement, it is difficult to see, particularly in an Owners Corporation environment that requires 75%-member approval, these agreements being particularly easy to set up, let alone administer for 10 years. The Act is silent as to whom the loan amount is paid and when repayments are to be made to the lender, presumably leaving it to each particular agreement to deal with these ‘site specific’ details.

However, the property lawyers concern is not so much as to how the agreements will work between the original parties, but how they will affect departing and incoming owners. Presuming that a 10-year levy has been struck, with quarterly instalments link to normal rates, what are the duties of the vendor and expectation of the purchaser in relation to the treatment of the amounts due under the levy?

The Act (s.185L) treats the cladding rectification levy as a “service charge”. Section 162 authorises the imposition of a service charge and s.185L(6) requires a cladding rectification charge to be paid by instalments. A vendor is obliged to disclose statutory charges pursuant to s.32A(b) Sale of Land Act and also charges “for which the purchaser will become liable in consequence of the sale” pursuant to s.32A(c). Disclosure of current charges (and any arrears) may be achieved by annexing a rate notice, a land information certificate or giving a not-more-than estimate, but the vendor is also obliged to disclose future liabilities due under the cladding rectification charge and information provided by Council may be crucial in this regard.

Any arrears under the levy will be the vendor’s responsibility, the current instalment will be adjusted between the parties at settlement and the outstanding levy will become the responsibility of the purchaser as a charge on the land (s.156(6)).

By s.175, a purchaser may continue to pay charges by instalments. A purchaser will therefore need to adjust the price that the purchaser is prepared to pay for the property to take account of the outstanding cladding rectification levy that the purchaser will become liable for and full disclosure in this regard is essential so as to allow the purchaser to set its price.

Tips

  • cladding rectification charges may apply to multi-storey units
  • cladding rectification charges must be disclosed by vendors
  • purchaser will be liable for charges due after settlement

Scary short-stays

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

One of the innovations adopted by property law principles during the Twentieth Century was the ability to divide real estate into stratas. Previously, ownership of land had traditionally given to the owner of that land the right to that land ‘from heaven to hell’. All the way up and all the way down. An owner was entitled to prevent anyone from burrowing under or building above their land. There were some exceptions, generally in aid of government endorsed enterprises such as mining companies, but the gender specific saying “every man’s home is his castle” was endorsed to the fullest extent by the law.

However, the pressures of living in large metropolises demanded that the law recognise a way that land could be divided not only on a horizontal plane, but also vertically into stratas, so that the teeming masses could be accommodated in as small an area as possible. In Victoria, this led to the Strata Titles Act in 1967 formalising ad hoc ‘company share’ ownership schemes that has festered in preceding decades. The process culminated in the Owners Corporation Act in the early years of the new millennium that sought to bring a structure not only to ownership, but also to the difficulties of cohabitation, in a broad sense.

Indeed, the Owners Corporation Act is primarily concerned with the rights and obligations of the various owners of the land, collectively the Owners Corporation, leaving it to the Subdivision Act to regulate where the lines are drawn, both on the ground and between the various stratas. Regulating Body Corporates under the Strata Title Act proved to be a training ground for the sort of issues that can arise when large cohorts of people occupy a small area of land and VCAT is now the forum for those issues to be aired.

It would be fair to say that the traditional demographic of strata ownership in the second half of the twentieth century were elderly people looking to downsize, a relatively stable and non-litigious group. But the advent of large-scale developments in inner city locations designed to appeal to a younger and more mobile demographic caused a seismic shift in the profile of residents in buildings subject to the Owners Corporation Act.

Nowhere is this more apparent than in the short-stay environment. Inner city apartments, often with in-house facilities such a gyms and swimming pools, are attractive to people who are looking to visit a city for a short time, but the lifestyle of such people is often likely to clash with long term residents more interested in a quiet, stable lifestyle. Complaints by and to Owners Corporation Managers have, by and large, been unsuccessful as the Courts have tended to put the proprietary right of the owner (including the right to lease) above the concerns of other residents. Thus, attempts to pass Rules preventing Short Stays have been held to be beyond the power of Owners Corporations and various other attempts to rely on building regulations have been equally unsuccessful.

This has resulted in legislative intervention, but the solution recognises that not all short-stays are toxic. From 1 February 2019 the Owners Corporation Act will proscribe certain behaviour in the short-stay environment and establish a process whereby complaints relating to breaches of those behaviour standards will be dealt with, initially at least, by the Owners Corporation. After receiving a written complaint, or at its own instigation, the Owners Corporation must give the owner notice of the complaint and require the breach to be rectified and may also refer the breach to VCAT.

VCAT has power to hear and determine short-stay disputes and may issue prohibition orders, award compensation and impose a civil penalty. Prohibition orders may be made when a notice has been served on 3 separate occasions in 24 months but ceases if the property is sold. Compensation may be awarded to an occupier who has suffered loss of amenity, to a maximum of $2,000, and the short-stay occupier AND short-stay provider are jointly and severally liable to satisfy a compensation order and to pay any civil penalty.

This measured approach to a growing problem may be sufficient to ensure that short-stay providers make a greater effort to control the potentially anti-social behaviour of some short-stay users.

De-regulated Contract of Sale of Land

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

What are the consequences of the sunsetting of the regulations prescribing the standard Contract of Sale of Land?

The Estate Agents (Contracts) Regulations 2008 reached their sunset date on 11 August 2018, pursuant to the Subordinate Legislation Act 1994. As a consequence, those regulations, and amending regulations in 2011 and 2014, are revoked. The standard form contract almost universally used in Victoria for the sale of land is described in those now revoked regulations as the ‘prescribed’ contract and the thought that the prescribed contract has now lost its regulatory basis would appear, at first glance at least, to be a worrying development.

However, fear not. The ‘prescription’ only relates to the form of contract to be used by a licenced real estate agent. It does not prescribe the form of contract that may be prepared by a legal practitioner or conveyancer.

Section 91 Estate Agents Act 1980 authorises the making of regulations specifying the form of contracts to be used by estate agents. For many years the Law Institute of Victoria developed a standard form contract that was adopted as the prescribed contract and printed in the Regulations for use by estate agents. In fact, estate agents, in real estate sales at least, rarely prepare their own contract and usually request a contract from the vendor’s legal practitioner or conveyancer. As the ‘prescribed’ form is acknowledged as a universally accepted form and is available without charge as a public document, it is the form in common use. Proprietary conveyancing programs are permitted to replicate the form prescribed in the regulations and the LIV and REIV sell their version of the form (with appropriate logos) to their members in print or digital form.

The revocation of the Regulations notionally leaves that minority of estate agents who choose to prepare contracts, rather than requesting them from legal practitioners or conveyancers, without a prescribed form of contract. But s 53A Estate Agents Act 1980 authorises agents to use contracts that are approved by a professional association within the meaning of the Legal Profession Act 2004 and the prescribed contract was so approved by the LIV before being prescribed in the Regulations and the revocation of the Regulation does not affect that approval, at least at present.

The short answer for estate agents concerned by this development is to stop preparing contracts and request contracts from the vendor’s legal practitioner or conveyancer. This, with respect, is simply good practice in any event.

The de-regulation has no effect on legal practitioners, who are free to adopt any form of contract, subject to other statutory constraints such as the Australian Consumer Law and Fair Trading Act 2012. Whilst the current contract does include a warranty in GC2 1 that the general conditions of the contract are identical with the general conditions prescribed in the Regulations, that warranty would appear to be unaffected by the revocation of the Regulations as proof of the form of the de-regulated contract will remain possible from parliamentary records. Thus, we can expect that the ‘prescribed’ contract will continue in general use into the near future.

Allowing the Regulations to sunset appears to have been a deliberate choice by the government. This may be due to a desire by the government to undertake wide ranging reform of the property law sector as a result of the Consumer Property Law Review 2016. That Review investigated a proposal to prescribe a form of contract of sale of land that would be obligatory for ALL sales, or at least to prescribe certain minimum terms that would be obligatory in all contracts. Whilst those proposals have not as yet seen the light of day, the decision to allow the Regulations to sunset without replacement indicates that changes might not be far away. Indeed, the government could have chosen to extend the Regulation for a further 12 months, but apparently decided not to do so.

It would be fair to say that recent changes, including CGT and GST Withholding, have resulted in unwieldy Special Conditions being introduced into the LIV contract. Whether the deregulation of the contract and the other changes that may flow from the Review will result in other forms of contract becoming common is yet to be seen but the life of a property lawyer, despite widely held expectations to the contrary, is never dull.

Tip Box

  • ‘Prescribed’ contract regulations revoked.
  • Only affects estate agents.
  • Does not affect legal practitioners or conveyancers.

Lost trust deeds

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Many properties are held in the name of Trustees. Having access to the original Trust Deeds can present problems.

Property lawyers often have to deal with properties owned by trustees, either corporate or individuals, and this adds another layer of complication to what is regarded by the public as the ‘simple’ process of conveyancing. Often the client is not even aware that the property is owned by a trustee, or at best has a minimal understanding of the consequences of such ownership. The process is complicated even further when the transactions involves a financier, which is often the case.

The concept of a trust has been around for centuries, but its impact on day to day transactions greatly increased in the 1970s and 80s when accountants decided that the trust concept provided substantial advantages for the average taxpayer, partly as an asset protection mechanism but principally as a tax-saving device by distribution of income within the family. Hence the prevalence of the ubiquitous Family Trust that seemed to push its way between the Average Joe (or Josephine) and their assets. In fact, the asset protection motivation was quickly dissipated by financiers requiring personal guarantees in respect of trust borrowings and the tax benefits were whittled away by the imposition of maximum tax rates on income directed to infants. But like a runaway horse, once mounted, it is difficult to get off a Family Trust.

The Family Discretionary Trust typically consists of a trust deed with extensive Trustee powers recited in standard form and then a Schedule setting out the particulars relevant to the particular trust. Such documents were often purchased ‘off the shelf’, much the same as company incorporation documents, and as they were a mechanism designed principally for tax minimisation, little regard was had to the niceties of trust law. Four copies of the Trust Deed would usually be executed, with the accountant, lawyer and client having a copy each and the fourth copy generally staying with either the lawyer or the accountant. It would be fair to say that the execution process might not always be carefully undertaken and some of the four copies might remain unsigned. From time to time financiers might seek copies of the Deed and a prudent lawyer, accountant or client would hopefully ensure that the original Deeds were held in safekeeping but, as is fitting for a document that was designed to record a fantasy, that was often not the case.

Forty or fifty years after these structures were put in place, problems are arising when the original documents cannot be found. The purpose of the documents were to record the Trustee as the legal owner of assets, both real estate and personal property such as bank accounts and shares, and when it comes time to deal with these assets the Trust Deed establishing the Trustees right to deal may need to be produced. This situation was considered by the Supreme Court in Application by South Melbourne Continental P/L 2018 [VSC] 398.

This was a typical situation of a small business established by a patriarch thirty-five years previously that had been conducted successfully over those years, held substantial assets and was now ‘operated’ by a son on behalf of the family. But the Trust Deed could not be found and this presented problems in dealing with the assets and the business generally. The Supreme Court has a number of powers relating to trust property, including Order 54 Supreme Court (General Civil Procedure) Rules 2015 and an ability to make orders under the Trustee Act 1958. However, the Application was unsuccessful as the McMillan J. was not satisfied that all possible attempts to locate the Trust Deeds had been carried out and it may be concluded from the judgment that the powers vested in the Court will not be made available without extensive evidence relating to the original terms of the Trust Deed and the attempts to locate the documents.

This outcome may be contrasted with the successful Application in D.R.McKendry Nominees P/L 2015 [VSC] 560 where an argument based on the presumption of regularity, that does not appear to have been argued in South Melbourne Continental, was successful. A similar argument found favour with McMillan J. in a case concerning a lost Superannuation Deed in Re Thomson 2015 [VSC] 370.

Sheriff – Enforcement procedure

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The Sheriff for the State of Victoria performs an important function within the Court system, providing an ultimate enforcement procedure for judgments obtain in the Courts.

The Sheriff has been around for a long time. Fans of Robin Hood generally disparage his work but without an ultimate enforcer, Court judgments risk becoming pyrrhic. As an arm of the judicial process, the Sheriff has considerable power to influence the lives of citizens and is liable to review by the Courts. It would be fair to say that the traditional sale process adopted by the Sheriff gave the impression of a preference to the rights of the judgment creditor over the rights of the judgment debtor and appeared to be based on a policy of realising the judgment debtor’s property at all costs, indeed often at great cost to the judgment debtor.

Cases in 2011 and 2012 in the Supreme Court critically analysed the role of the Sheriff and promoted a more proactive role for the Sheriff in analysing the sale process to ensure a fairer outcome for the judgment creditor. This, on at least one occasion, led to the Sheriff’s auction being conducted on-site, rather than at the Sheriff’s Office and an enthusiastic crowd making multiple bids. (see LIJ columns in September 2011 & June 2013) Reform of the sales process had been called for as long ago as 1982, recognising a need for the process to become more transparent by adopting a more commercial focus and perhaps contracting out the auctions to a panel of licenced estate agents.

But Sheriff’s auctions labour under some unique difficulties:

  • the Sheriff has no right to access the property during the sales process to allow for inspection;
  • indeed, the Sheriff has no right to access the property on the day of the auction and cannot guarantee possession to the purchaser after the auction;

Additionally, the Sheriff only sells the interest of the judgment debtor, meaning that the purchaser takes the property subject to any encumbrances, and the Sheriff is not obliged to hand over the duplicate Certificate of Title (or its electronic equivalent). Given that the purchaser must secure registration of the Transfer from the Sheriff before the writ for possession expires, it can be seen that a purchaser from the Sheriff takes a considerable risk and the Sheriff has developed a formula to take account of this risk.

Hoskin v Griffin (The Sheriff) [2018] VSC 216 revealed that the Sheriff’s process involves a 25% discount being applied to the value of the subject property to take account of these difficulties. The problem with that case is that the starting point, the valuation obtained by the Sheriff, was too low to begin with and the application of the 25% discount to this low value meant that the sale was defective.

The judgment debt arose as a result of failure to repay a mortgage of $165,000 in 2015. By the time the judgment debtor had unsuccessfully sought to contest the judgment, costs and interest had more than doubled the debt to $380,000 in 2017. The Sheriff had obtained a valuation from the Valuer-General in 2015 of $450,000 and a fresh valuation in 2017 of $475,000. The Sheriff then calculated the reserve for the auction by applying the 25% discount, to achieve a figure of $340,000, but increased it to $380,000 in view of the judgment debt. The purchaser at the Sheriff’s auction, held in the Sheriff’s Office, made one bid, equal to the reserve and purchased the property. Evidence before the Court established that the true value of the property was at least $700,000. This meant that the purchaser had acquired the judgment debtor’s equity of around $300,000 for free. The Court concluded that the sale process had failed to obtain a fair price and was therefore in breach of the Sheriff’s duty to the judgment debtor. Unravelling the consequences of that finding was left to another day.

There is little doubt that the judgment debtor made some poor decisions during this unhappy episode. A simple debt more than doubled, opportunities to resolve the dispute were ignored and multiple representatives were engaged. The Sheriff faces a difficult task of balancing the rights of the debtor and creditor and it appears that in this case he was dealt a bad hand by the valuation. But if the Sheriff had have accepted the judgment debtor’s valuation of $700,000, the 25% discount would have resulted in a reserve of $525,000 and it is likely that a prospective purchaser, facing all the problems associated with buying from the Sheriff, would have been reluctant to take the risk. This would have resulted in a second Sheriff’s auction without reserve, an evil criticised in the 2011 & 2012 cases.

The call for meaningful reform, now 35 years unanswered, remains.

Tip Box

•Sheriff’s sales are a necessary evil

•Sheriff’s sales involve risks for purchasers

•Reform is overdue

GST withholding – how does it work?

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The new GST withholding obligations are discussed in detail in the By Lawyers Purchase commentaries for each state, under the heading ‘Withholding payment of GST on purchase of certain real property’.

By way of summary, from 1 July 2018 purchasers of new residential premises or potential residential land are required to withhold an amount of the contract price and pay this directly to the ATO as part of the settlement process.

This does not affect the sales of existing residential properties, or the sales of new or existing commercial properties. However, for all residential premises or potential residential land, if the the vendor is registered, or required to be registered, for GST then they must notify the purchaser as to whether or not GST withholding applies – even if it does not apply.

Where withholding applies, purchasers need to:

  • split the amount of GST from the total purchase price;
  • pay the GST component directly to the ATO as a disbursement at settlement;
  • pay the GST exclusive purchase price to the vendor.

The liability for the GST remains with the vendor and there are no changes to how vendors lodge their business activity statements.

Subdivision – Off the plan sales – Sunset conditions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Off-the-plan sales are a common feature of Victorian conveyancing. The fact that the contract cannot be settled until the plan of subdivision is registered at Land Victoria means that the settlement date is uncertain. Sunset conditions in off-the-plan contracts are meant to bring some certainty to the settlement date.

Section 9AE(2) Sale of Land Act allows a purchaser to end an off-the-plan contract if the plan of subdivision is not registered within 18 months of the date of the contract. This is consumer protection legislation designed to allow a purchaser to end a contract which may have, objectively, gone too long. A purchaser may not, 18 months after signing a contract, still wish to proceed with the purchase. However, it is important to recognise that this is a right, not an obligation so the purchaser may choose to continue with the contract, and that the statutory right is limited to the purchaser and does not extend to the vendor.

The Act recognises that the 18-month sunset period is a statutory default period and allows the parties to agree to a different period, however it has been held that the vendor cannot unilaterally alter that sunset period (Solid Investments Aust. P/L v. Clifford [2010] VSCA 59). Contracts often provide a longer sunset period, sometimes up to 60 months, and regularly give to the vendor the contractual right to end the contract, in addition to the purchaser’s statutory right, which cannot be removed.

The purchaser has very little control over the plan approval process and must adopt a largely passive role, awaiting the happy news (hopefully) from the vendor that the plan has been approved and that settlement is due 7,10, 14 or 21 days after approval, depending upon the formula adopted in the contract. On the other hand, responsibility for obtaining approval of the plan falls almost entirely upon the vendor and this, by default, means that the vendor is able to influence the timing of registration and hence the time for settlement. If only the purchaser had the right to terminate if the plan is not registered within the sunset period, then the conduct of the vendor would be less likely to be particularly significant, but the practice of granting the vendor the contractual right to terminate if the sunset date passes opens up the possibility that the vendor can affect the outcome of the contract by action, or more particularly, inaction.

By definition, there will be a delay between contract and settlement, sometimes a considerable delay. As a consequence, market forces may have had an effect on the value of the property and in a rising market, as we have enjoyed for two decades or more, this means that the property is likely to be worth more, sometimes remarkedly more, when the sunset period expires. The temptation for the vendor to allow the sunset date to pass and then terminate the contract may in such circumstances be strong as the vendor will then remain the owner of a property which is much more valuable than the contract price. The flip side is that the purchaser misses out on a property that they have long waited for.

New South Wales has recently responded to a number of examples of vendors ending contracts in these circumstances by requiring the vendor to seek consent, either from the purchaser or the Court, before ending such a contract. Victoria, on the other hand, has relied on a firmly recognised obligation of “best endeavours” on the part of the vendor to ensure that vendors are not able to unscrupulously take advantage of the unexpected delay in obtaining approval of the plan of subdivision beyond the sunset date. This obligation was firmly established in Etna v. Arif [1999] VSCA 99 where, upon it being proven that the vendor had effectively stopped trying to get the plan approved during the sunset period, the Court order specific performance of the contract notwithstanding that the sunset period had expired when the vendor finally did obtain approval.

This view was confirmed in Jessup v. Fremder [2001] VSC 100 where a purchaser was able to obtain an order for specific performance even where no particular sunset date was referred to in the contract, the Court finding that a ‘reasonable period’ was to be implied. Joseph Street P/L v. Tan [2012] VSCA 113 held that a vendor might even be required to enter into a s.173 Agreement to secure registration of the plan so that the sunset period could be satisfied, notwithstanding that construction (if applicable) had not been completed. In an unreported interlocutory judgment in April 2018 the Supreme Court imposed an injunction on a vendor who sought to terminate upon the expiration of the sunset period where the purchaser alleged that the vendor had failed to use best endeavours to obtain approval of the plan.

These decisions do not mean that a vendor will never be able to rely on the expiration of the sunset period to terminate, but they do indicate that the vendor bears a heavy burden to prove to the Court that the vendor has used best endeavours and that the sunset period has expired notwithstanding those best endeavours.

Tip Box

•purchasers have a statutory right to avoid if the sunset period expires

•vendors may have a contractual right to avoid, but must use best endeavours to achieve registration

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