ByLawyers News and Updates

Contract – Avoiding off the plan contracts 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Contracts that relate to the sale of land prior to approval of a plan of subdivision are the subject of ss 9 and 10 Sale of Land Act. Whilst not specifically defined as such, Off the Plan contracts are referred to as ‘prescribed contracts’ (s 9AA(7)).

s 9AA

This essentially relates to the deposit that is payable under a prescribed contract.

A prescribed contract must provide that the deposit be held on trust for the purchaser pending registration of the plan (s 9AA (1)(a)) and limits the deposit to a maximum of 10% of the purchaser price (s 9AA(1)(b)). For an abundance of caution s 9AA(2) provides that the deposit must in fact be paid into a trust account.

Failure by the vendor to comply with s 9AA(1) or (2) entitles the purchaser to rescind the contract at any time before the registration of the plan – s 9AE.

The LIV copyright contract includes the required conditions.

s 9AB

Creates an obligation on the vendor of a prescribed contract to disclose in the contract (s 9AB(1)) and as an ongoing obligation during the contract (s 9AB(2)) works affecting the natural surface level of the lot or adjoining land.

Breach of this obligation also justifies rescission under s 9AE. It is common in large scale land subdivision to see these ‘fill plans’ as land subdividers effectively push and pull land around to create relatively flat building allotments. Purchasers are entitled to know where large amounts of fill may be deposited as this can have a substantial effect on building costs. But it is rare to see ‘fill plans’ in sales of residential units. Everest Projects P/L v Mendoza [2008] VSC 366 accepted the argument that lots on upper floor did not have a ‘natural surface level’ for the purposes of this requirement, reserving for another day any argument about lots that may be constructed or adjoining ground level.

s 9AC

The amendment of a plan of subdivision in a prescribed contract between the date of the contract and the time of registration of the plan of subdivision may justify rescission.

The sub-section envisages the possibility of an amendment arising from the actions of one of two sources:

  1. the Registrar of Titles may ‘require’ an amendment; or
  2. the vendor may ‘request’ an amendment.

The vendor is obliged to ‘advise the purchaser in writing of the proposed amendment’ and that advice must be provided within 14 days of the Registrar’s requirement or the vendor’s request.

The purchaser’s right to end the contract pursuant to s 9AC does NOT end upon registration of the plan. It ends 14 days after sufficiently specific advice of the proposed amendment is provided to the purchaser. If the vendor has amended the plan after contract and has not provided the purchaser with any, or any sufficient, advice about the amendment then the purchaser remains entitled to end the contract within 14 days of receiving such advice. If the vendor advises the purchaser that the plan is registered the contract will generally require the purchaser to settle within a period of 7 to 14 days from advice of registration. The purchaser must at that stage satisfy itself in relation to amendments as the purchaser is contractually bound to settle unless the purchaser can rely on this statutory right to avoid, which right has survived registration of the plan.

The mere provision of an amended plan by the vendor without more might not satisfy the vendor’s advice obligation.

Once advice is given by the vendor to the purchaser, the purchaser has 14 days in which to rescind the contract, but may only do so if the amendment ‘materially effects’ the lot.

Besser v Alma Homes P/L [2012] VSC 460 held that an amendment to the entitlement and liability Schedule materially affected the purchaser’s lot and the purchaser was entitled to rescind.

Lockwood v PSP Investments P/L [2013] VSC 10 held that a change in car parking arrangements was ‘material’. The court held that the purchaser satisfied the sub-section by proving ‘material effect’ and did not have to additionally prove detriment. Other changes to the plan were held to be not “material” and reference in this regard was made to Gold Coast Carlton P/L v Wilson [1985] Qd R 182 where minor changes to anticipated Owners Corporation charges were NOT material.

These provisions put a heavy burden on purchaser’s advisors in respect of checking registered plans against contractual plans.

s 10

That we have both s 9AC and s 10 is probably a legislative quirk and there would be benefit achieved if they could be merged as they both address amendments to the proposed plan of subdivision. Importantly, s 10 is limited in its application to PRIOR to registration of the plan and if the purchaser has not exercised the s 10 rights before registration, those rights expire.

Section 10 has a ‘restriction’ focus and in fact excludes restrictions imposed by a public authority as part of the subdivisional process from justifying avoidance. However such a restriction would generally ‘materially effect’ the lot and s 9AC would apply.

s 9AE

Section 9AE(1) is the penalty provision for breach of other provisions and allows for rescission for breach of ss 9AA(1) or (2) or 9AB.

9AE(2) is a stand alone provision creating an obligation and a right to rescind for breach. The obligation is to have the plan registered within what is known as a sunset period, being 18 months from the date of the relevant contract, or such other date as is specified in the contract.

Solid Investments P/L v Clifford [2010] VSCA 59 established that whilst the vendor is free to nominate in the contract a period other than the default period of 18 months established by the sub-section, that nominated period is fixed and cannot be unilaterally extended by the vendor.

Tip Box

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

Subject to contract

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Whilst it is relatively simple to state legal principles, the application of those principles always depends upon the specific facts of the case. That is why it is not possible for a lawyer to advise a client what the outcome of any particular dispute will be. The best that we can do is weigh up the competing arguments and take our best shot – 80/20, 60/40, 50/50. It is for the client to decide whether they want to roll the dice and we then spend our time hoping to get a result.

One principle that is fairly well entrenched in the law relating to contracts for the sale of land is the need for the parties to have reached a concluded agreement and the unlikelihood of that requirement being satisfied if the negotiations between the parties include the expression ‘subject to contract’ and no formal contract is ultimately entered into.

Establishing the existence of a legally binding contract of sale is a serious matter for our courts and where one party to negotiations, let alone both parties, have included the phrase ‘subject to contract’ in their offer or acceptance it is usually concluded that the parties had not, as at that point in time, reached the point where they intend to be legally bound to proceed with the transaction. Faced with those facts, a reasonably experienced property lawyer would probably predict an 80/20 outcome in favour of NO CONTRACT.

BUT NO. The Queensland Supreme Court case of Stellard P/L v North Queensland Fuel P/L [2015] QSC 119 defied the odds and concluded that the negotiations had indeed been consummated notwithstanding the words ‘[T]his offer is of course subject to contract’ in the email containing the offer and the words ‘subject to execution of the contract provided’ being used in the subsequent email acceptance. Significantly, after acceptance of the offer, the purchaser submitted another form of contract and indicated that the purchaser was anxious ‘to exchange this contract as soon as possible’. The betting went to 90/10 at that stage but the result still went the other way.

It appeared significant that the vendor had another purchaser ‘on the line’ and appeared to be playing one off against the other, but that hardly seems sufficient to overcome what appeared to be a fairly clear case of both parties consciously delaying final commitment until the formal signing and exchange of contracts.

The case also considered the role of email communications in the exchange of contract environment. Victoria requires an enforceable contract to be signed by a party, or a person authorised in writing by the party, s 126 Instruments Act, and the Queensland provision requires signing by a party or a person authorised by a party. Both States have adopted the uniform Electronic Transactions Act.

There was no contest that the negotiators were authorised to bind the respective parties but the acceptance email made no reference to the representative character of the author. However the court was satisfied that this requirement could be satisfied by reference to surrounding circumstances, including telephone conversations and the offer email. This approach is reflective of the fairly ‘embracing’ attitude shown by courts to the adoption of the various Electronic Transactions Acts.

Tip Box

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

Avoiding off the plan contracts – Statutory rights

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Contracts that relate to the sale of land prior to approval of a plan of subdivision are the subject of ss 9 and 10 of the Sale of Land Act. Whilst not specifically defined as such, Off the Plan contracts are referred to as ‘prescribed contracts’ s 9AA(7).

Section 9AA

This essentially relates to the deposit that is payable under a prescribed contract.

A prescribed contract must provide that the deposit be held on trust for the purchaser pending registration of the plan, s 9AA (1)(a), and limits the deposit to a maximum of 10% of the purchase price, s 9AA(1)(b). For an abundance of caution s 9AA(2) provides that the deposit must in fact be paid into a trust account.

Failure by the vendor to comply with s 9AA(1) or (2) entitles the purchaser to rescind the contract at any time before the registration of the plan – s 9AE.

The Law Institute of Victoria copyright contract includes the required conditions.

Section 9AB

Creates an obligation on the vendor of a prescribed contract to disclose in the contract, s 9AB(1), and as an ongoing obligation during the contract, s 9AB(2), works affecting the natural surface level of the lot or adjoining land.

Breach of this obligation also justifies rescission under s 9AE. It is common in large scale land subdivision to see these ‘fill plans’ as land subdividers effectively push and pull land around to create relatively flat building allotments. Purchasers are entitled to know where large amounts of fill may be deposited as this can have a substantial effect on building costs. But it is rare to see ‘fill plans’ in sales of residential units. Everest Projects P/L v Mendoza [2008] VSC 366 accepted the argument that lots on upper floor did not have a ‘natural surface level’ for the purposes of this requirement, reserving for another day any argument about lots that may be constructed or adjoining ground level.

Section 9AC

The amendment of a plan of subdivision in a prescribed contract between the date of the contract and the time of registration of the plan of subdivision may justify rescission.

The sub-section envisages the possibility of an amendment arising from the actions of one of two sources:

  1. the Registrar of Titles may ’require’ an amendment; or
  2. the vendor may ‘request’ an amendment.

The vendor is obliged to ‘advise the purchaser in writing of the proposed amendment’ and that advice must be provided within 14 days of the registrar’s requirement or the vendor’s request.

The purchaser’s right to end the contract pursuant to s 9AC does NOT end upon registration of the plan. It ends 14 days after sufficiently specific advice of the proposed amendment is provided to the purchaser. If the vendor has amended the plan after contract and has not provided the purchaser with any, or any sufficient, advice about the amendment then the purchaser remains entitled to end the contract within 14 days of receiving such advice. If the vendor advises the purchaser that the plan is registered the contract will generally require the purchaser to settle within a period of 7 to 14 days from advice of registration. The purchaser must at that stage satisfy itself in relation to amendments as the purchaser is contractually bound to settle unless the purchaser can rely on this statutory right to avoid, which right has survived registration of the plan.

The mere provision of an amended plan by the vendor without more might not satisfy the vendor’s advice obligation.

Once advice is given by the vendor to the purchaser, the purchaser has 14 days in which to rescind the contract, but may only do so if the amendment ‘materially effects’ the lot Besser v Alma Homes P/L [2012] VSC 460 held that an amendment to the entitlement and liability Schedule materially affected the purchaser’s lot and the purchaser was entitled to rescind.

Lockwood v PSP Investments P/L [2013] VSC 10 held that a change in car parking arrangements was ‘material’. The Court held that the purchaser satisfied the sub-section by proving ‘material effect’ and did not have to additionally prove detriment. Other changes to the plan were held to be not ‘material’ and reference in this regard was made to Gold Coast Carlton P/L v Wilson [1985] Qd R 182 where minor changes to anticipated Owners Corporation charges were NOT material.

These provisions put a heavy burden on purchaser’s advisors in respect of checking registered plans against contractual plans.

Section 10

That we have both s 9AC and s 10 is probably a legislative quirk and there would be benefit achieved if they could be merged as they both address amendments to the proposed plan of subdivision. Importantly, s 10 is limited in its application to PRIOR to registration of the plan and if the purchaser has not exercised the s 10 rights before registration, those rights expire.

Section 10 has a ‘restriction’ focus and in fact excludes restrictions imposed by a public authority as part of the subdivisional process from justifying avoidance. However such a restriction would generally ‘materially effect’ the lot and s 9AC would apply.

Section 9AE

Section 9AE(1) is the penalty provision for breach of other provisions and allows for rescission for breach of s 9AA(1) or (2) or s 9AB.

Section 9AE(2) is a stand-alone provision creating an obligation and a right to rescind for breach. The obligation is to have the plan registered within what is known as a sunset period, being 18 months from the date of the relevant contract or such other date as is specified in the contract.

Solid Investments P/L v Clifford [2010] VSCA 59 established that whilst the vendor is free to nominate in the contract a period other than the default period of 18 months established by the sub-section, that nominated period is fixed and cannot be unilaterally extended by the vendor.

Tips

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

Avoiding off the plan contracts – Quality defects

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Quality disputes in off the plan contracts often relate to the size of the finished product

A summary of the provisions of the Sale of Land Act 1962 that allow for avoidance of off the plan contracts was published in the May 2015 Law Institute Journal. Those provisions only relate to a purchaser’s complaints with the terms of the contract, changes to the plan of subdivision or failure to complete the project within the permissible time. Those provisions do not assist a purchaser who is concerned with the end product presented by the developer at the time of settlement.

These disputes relate to the quality of the final product and generally contrast the developer’s commercial aspirations with the purchaser’s aesthetic aspirations. The purchaser was provided with architectural drawings, artist impressions, glossy brochures and perhaps even video impressions upon which the purchaser constructed a home in the sky, but the developer had a black and white construction contract with the builder and a tightly controlled budget. Inevitably, expectation comes up against the rock hard face of reality and tears are often the result.

Developers may include a self-serving ‘entire contract’ Special Condition in the contract in an attempt to quarantine these marketing tools but that is not likely to be successful – Nifsan Developments P/L v Buskey [2011] QSC 314. Thus the dissatisfied purchaser waves the marketing publications and complains that the finished product that the developer wants to be paid for ‘next week’ is nothing like the apartment that the purchaser was expecting.

Apart from the lack of panoramic views which were promised by the development (as in Nifsan), the most common complaint is size. The purchaser is often appalled when the actual size of the built apartment is substantially less than their expectations and the existence of architectural drawings can lend some weight to those complaints. The problem is that there are at least three methods of measuring the area of a building and inevitably the developer will have adopted the ‘external walls’ method and the purchaser will wish to adopt the ‘internal walls’ method. Purchaser’s financiers seem to adopt the third method which might be described as the ‘minimalist’ method, which focuses on useable space.

A purchaser was successful in avoiding a contract in such circumstances in Birch v Robek Aust P/L [2014] VCC 68. Because the vendors in these transactions will generally be engaged in trade and commerce, the provisions of the Australian Consumer Law will apply. This provides the purchaser with a whole suite of rights and remedies beyond those available in relation to a quality dispute under the common law, limited as it is by the principle of caveat emptor.

The court considered the purchaser’s claim based on the Australian Consumer Law and held that the marketing information, specifically the architectural plans with dimensions of the apartment, gave the purchaser an entitlement to expect that the final product would be reasonably consistent with those plans. That the developer might have intended the dimensions shown on those plans to be the external dimension of the building and that the purchaser expected them to represent the internal dimensions was not relevant when the court was satisfied that the actual dimensions were substantially less than the plans represented.

On one method there was a deficiency of 16%, on another 12% and on the developer’s method, 2%. The court was satisfied that the discrepancy exceeded 5% and adopted the principle in Flight v Booth (1834) 131 ER 1160 that such a discrepancy justified avoidance. The court also found a breach of the Australian Consumer Law which would justify avoidance. Arguably, such a breach might also form the basis for a claim for compensation by a purchaser who resolved to settle notwithstanding some deficiency.

This decision may be compared with Sivakriskul v Vynotes P/L [1996] VicSC 479 (unreported) that was apparently not cited to the court. The decision denied a purchaser’s claim and adopted the ‘external walls’ method, although that decision was made prior to the introduction of the Australian Consumer Law.

Tips

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

Retail repairs

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Victorian Civil and Administrative Tribunal (VCAT) has published an advisory opinion on the interaction between the obligations created in respect of essential safety measures by the Building Regulations 2006 and the landlord’s repair obligations pursuant to s 52 Retail Leases Act 2003. Whilst nominally only an advisory opinion and therefore not binding, the fact that the opinion was given by the President of VCAT, Justice Greg Garde, makes it reasonable to expect that it will carry significant weight if these matters come to be considered by VCAT or the Supreme Court in the future.

Building Regulations 2006 and preceding regulations create obligations to maintain essential safety measures in respect of various categories of premises. These regulations in turn rely on s 250 of the Building Act 1993 to allocate responsibility for the carrying out of those works on the owners of the premises and s 251 provides that if the owner does not carry out the work, the occupier may do so and recover the cost from the owner.

Section 52 Retail Leases Act 2003 creates repair obligations on the owner of the premises in respect to the structure, the fixtures, the equipment and the fittings. The obligation is to maintain the premises in a condition consistent with the condition of the premises when the lease was entered into, however if the lease was renewed the relevant comparative condition is the condition at the time of renewal Ross-Hunt P/L v. Cianjan P/L [2009]VCAT 829.

At first blush it would appear that these two obligations are entirely consistent and place those obligations firmly on the owner/landlord. However it was suggested that whilst the obligation to perform the work fell upon the landlord, the lease might nevertheless allow the landlord to recover the cost of those works from the occupier/tenant as ‘outgoings’. The Advisory Opinion decided that such a provision in a lease would be inconsistent with s 251(6) that provides that the s 251 applies ‘despite any covenant or agreement to the contrary’. This principle would apply equally to a lease that was covered by the Retail Leases Act as to one that was not covered by the Act.

Further, the Advisory Opinion concluded that s 52 Retail Leases Act 2003 strengthened the argument that the landlord was responsible for the maintenance of essential safety measures and is prohibited from seeking to pass those costs on to the tenant.

It may therefore be concluded that any attempt in a lease of commercial premises to pass to the tenant the cost of compliance with the landlord’s obligations under the Building Regulations will be void. This is because such a provision is inconsistent with s 251 Building Act and in respect of premises subject to the Retail Leases Act, is also contrary to s 52 of that Act.

Tip Box

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

Owners corporations

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law has a number of special requirements when a property that is affected by an owners corporation is going to be sold. These requirements can mean that the preparation of the obligatory Vendor’s Disclosure Statement is delayed until an Owners Corporation Certificate is obtained from the owners corporation manager and may require the vendor to pay an insurance premium that the vendor was not expecting.

Owners Corporation Certificates

Many owners corporations are well managed, either by a ‘local’ manager who is one of the owners or by a ‘professional’ manager engaged for that purpose. Generally speaking large scale apartment developments retain a professional manager who will provide an Owners Corporation Certificate for a fee and even the smaller managers usually undertake this task expeditiously. The fee is approximately $150 in respect of each owners corporation and the certificate is usually provided within 10 days of request.

However not all owners corporations have appointed managers. Smaller, two, three and four lot owners corporations may have existed for many years without an operational owners corporation. This presents a problem in relation to provision of an Owners Corporation Certificate. A common way of overcoming this problem was for the vendor’s solicitor to prepare and have the vendor sign a standard Owners Corporation Certificate revealing no meetings, no fees and no insurance and include it in the Vendor’s Statement. However, as a result of amendments in 2014, such an owners corporation has been deemed to be ‘inactive’ and no Owners Corporation Certificate is required. This has simplified the situation in relation to TWO lot owners corporations.

However this option is not available for the sale of a lot in an owners corporation of more than two lots as s 11 of the Sale of Land Act requires that a vendor of a lot affected by an owners corporation must ensure that the owners corporation has insurance in place as required by the Owners Corporation Act. In addition s 60 of the Owners Corporation Act REQUIRES the owners corporation to take out public liability insurance in respect of common property (such as a common driveway). TWO lot plans are exempt from this requirement, s 7, and may therefore be exempt from providing an Owners Corporation Certificate if otherwise ‘inactive’; that is they have not met and have no fees.

Insurance

The difficulty with an owners corporation of more than two lots that does not have a manager is that no-one will have arranged this common property insurance. Individual owners simply pay their own building insurance and no common property insurance is taken out. Indeed an individual owner will often make the point that a careful inspection of their individual building insurance policy reveals that it extends to cover the owner’s liability in relation to common property. But that is irrelevant as the Act requires the owners corporation to ‘have’ the insurance, not the individual owner. That there is likely to be ‘double insurance’ in such cases is equally irrelevant.

Many owners corporations ignore this common property insurance obligation for many years with no consequence. But the problem arises for any owner who decides to sell. Section 11 of the Sale of Land Act requires that the insurance be in place at the time of sale and gives the purchaser the right to AVOID the contract at any time up until settlement if the insurance is not in place. No vendor can afford to knowingly enter into a contract that can be avoided by the purchaser at any time; therefore compliance with s 11 is practically mandatory.

The vendor is under time pressure to organise this common property insurance quickly as the sale process has begun. Whilst it is possible for the vendor to approach other owners to contribute to this insurance, that often does not work out as the other owners may not be contactable or may have no interest in contributing to this expense which, unless they too propose to sell, holds no real benefit for them. The selling owner then generally arranges the insurance at their own expense so that the proposed sale can proceed and is very unhappy about having to incur this unexpected expense (usually around $500). Whilst the vendor is able to require the purchaser to contribute to this expense in relation to the balance of the year after settlement as part of the adjustment process, this can only be for a proportional share of the premium based on the number of lots in the plan. Only the proportion that relates to the lot sold can be adjusted and the vendor has to bear the balance of the premium if the vendor is unable to recover a contribution from other lot owners, which is unlikely.

A halfway house in this scenario is that one of the owners, whilst not acting as a manager, has arranged common property insurance and other owners have contributed to the cost. In that case the vendor can provide an informal Owners Corporation Certificate setting out the insurance particulars and a statement that for all other purposes the owners corporation has been ‘inactive’.

Practitioners are invited to photocopy this explanation and send it to clients in appropriate circumstances.

Tip Box

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

Mortgage stress

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Whilst there is considerable consistency between the property laws of Victoria and New South Wales, there are also significant differences.

Some differences in practice are:

  • nomination in New South Wales is virtually unheard of as it creates a second duty, but is common in Victoria as it does not; and
  • deposit release is prohibited in New South Wales but common in Victoria.

Some differences in the law are:

  • acquiring an easement by prescription is banned in New South Wales but still available in Victoria; and
  • there is no equivalent in New South Wales to Victoria’s statutory right to clawback fraudulent transactions s 172 Property Law Act 1958.

Perhaps the best known example of the difference was the view previously held in New South Wales that the existence of an illegal structure on land constituted a defect in title and allowed a purchaser to avoid the contract. This was in contrast with the Victorian view that such a defect was merely a quality defect and that the vendor was protected by the principle of caveat emptor. The New South Wales view was ‘corrected’ (that is; brought in line with Victoria) by the Court of Appeal in Carpenter v McGrath 40 NSWLR 39 and consistency has reigned since.

In recent years a significant difference has again occurred with New South Wales taking a ‘radical’ view of the impact of fraud in certain mortgage transactions. In both jurisdictions it is accepted that whilst fraud is an exception to indefeasibility, nevertheless registration of a fraudulent instrument by a party who was not party to the fraud will be indefeasible. Mortgagees have therefore been able to rely on mortgages that have been fraudulently signed provided that the mortgage was registered and the mortgagee was not itself a party to the fraud. However in New South Wales an argument was accepted that it was possible to look ‘behind’ the mortgage at the document that constituted the agreement to repay as it was that document that created the obligation that justified the mortgagee’s security interest and the extent of the mortgagor’s covenant to repay was to be determined by a consideration of the contractual agreement between the parties.

If that contract (loan agreement) created an obligation to repay a specific amount then the covenant to pay protected by the indefeasible mortgage was enforceable. However if the loan agreement referred to an ‘all monies’ mortgage relating to past and future advances then it was said that the mortgagor’s covenant to pay arose contractually from the ancillary documents that related to the actual advances and that if those documents were fraudulent then the covenant to repay arose outside of the protection of the indefeasible mortgage. Essentially, it was said, no money was advanced pursuant to an ‘all monies’ mortgage as the money was advanced pursuant to forged documents.

Victorian mortgagees quaked in trepidation as an army of decisions mounted on the north bank of the Murray River set to wreck havoc on Victorian all money mortgages but Pagone J. in Solak v Bank of Western Australia [2009] VSC 82 manned the ramparts and beat off the hordes by upholding an all monies mortgage and the lenders breathed a sigh of relief. However a Trojan Horse has appeared in the form of Perpetual Trustees Victoria Limited v Xiao [2015] VSC 21. Hargrave J. has adopted the New South Wales analysis of an all monies mortgage and has described the decision in Solak as ‘plainly wrong’.

The scene is now set for a definitive decision by the Victorian Court of Appeal on what is an important point of law. According to Xiao a mortgagee of a forged all monies mortgage is not able to enforce the mortgage or undertake a mortgagee’s sale. Whether confirmation of Xiao will have retrospective repercussions is a matter for the future.

The mortgagor’s victory in Xiao was somewhat pyrrhic as Hargrave J. went on to find that Xiao in fact held the property on trust for the forger (her husband) and that the lender was entitled to judgment against the husband, who had also been joined as a defendant. Hargrave J. was obliged to overcome the presumption of advancement applying to a transfer from husband to wife but did so by finding adequate evidence that it had been the intention of the husband at the time of transfer to retain the beneficial interest in the land.

The mortgagee would therefore be faced with the need to enforce this judgment by way of a Warrant of Execution rather than a mortgagee’s sale. The mortgagee’s possession of the certificate of title would aid that exercise.

Tip Box

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

Subdivision – Owners corporation repairs

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Owners corporations often face an inherent conflict of interests when determining responsibility for repairs and maintenance undertaken by the OC.

Part 3 of the Owners Corporations Act (Vic.) 2006 (the Act) is headed ‘Financial management’. Division 5 of that part has specific provisions relating to asset management and s 46 obliges the OC to repair and maintain common property. Section 47(1) obliges the OC to repair and maintain services that affect more than one lot and the common property and s 47(2) anticipates that the OC may, as a matter of practicalities, be required to repair and maintain a service that relates to a lot, rather than to the common property. Even at this simple level the OC may be faced with deciding how the cost of any such work should be apportioned, first between the OC and lot owners and then between individual lot owners.

However the issue becomes more complicated with s 48 establishing a regime whereby the OC can require a lot owner to repair and maintain the lot and undertake those repairs if the lot owner fails to do so and then recover those costs from the lot owner. Here the OC is clearly being put into a position of conflict with an individual lot owner, who is a member of the OC and entitled to expect the OC to carry out its functions in the interest of all lot owners, including the individual lot owner. Disputes about the need for the OC to perform the work and the level of benefit (and consequent liability) for the individual lot owner are clearly capable of leading to disputation. Section 49(2) adopts the policy ‘that the lot owner of the lot that benefits more pays more’. This appears to be an entirely acceptable policy from an objective point of view but involves an assessment of ‘benefit’, and this may well be in dispute in many situations. Section 28(3) concerning lot owner liability also raises this question of ‘benefit’.

These issues are not new to strata living. Simons v Body Corporate Strata Plan No 5181 [1980] VicRp 12 concerned apportionment of responsibility between an individual lot owner and the OC in respect of a defective exterior wall, which was common property. The OC argued that the repairs would be for the benefit only of the lot owner (who should therefore bear the cost) but the court determined that it was in the interests of all lot owners for the repairs to be effected and that it was therefore appropriate for the OC to bear the cost. Seiwa P/L v Owners Strata Plan 35042 [2006] NSWSC 1157 took the issue further and concluded that, when the failure of the OC to maintain the common property caused damage to a lot, that lot owner had a cause of action in negligence against the OC for damages to the lot. Seiwa concerned water penetration via a balcony – a not unusual occurrence. The court concluded that the balcony was common property and had not been adequately maintained, so the issue was not ‘who should be responsible for the repairs’ but rather ‘who was responsible for damage flowing from lack of repairs’. More recently, Liu & Anor v Owner Corporation No PS 501391P (Owners Corporation) [2010] VCAT 1441 found an OC responsible for damages suffered by a lot owner as a result of the OC’s failure to repair and maintain common air conditioning but in Circle Developments P/L v Owners Corporation PS1897 (Owners Corporation) [2012] VCAT 1941 a lot owner who sought to replace air conditioning at the cost of the OC was unsuccessful and suffered an adverse costs award.

Two 2013 Victorian cases have also considered the relationship between the OC and an individual lot owner in the context of repair and maintenance. Owners Corporation PS326519P v May (Owners Corporations) [2013] VCAT 933 also concerned air conditioning, with the lot owner replacing air conditioning in the unit, but intruding into common property in doing so. The OC successfully sought an order requiring the lot owner to remove the air conditioning and reinstate the common property.

Mashane P/L v Owners Corporation RN 328577 [2013] VSC 417 specifically considered the responsibility of a lot owner to pay a levy to partly pay for certain repairs and maintenance and whether it was appropriate for the OC to fund the balance of those works from funds held in a maintenance fund. The property consisted of 39 apartments, 5 of which did not have a balcony. The lot owner of one of those apartments argued that those 5 lots should not have to bear the cost of repairs and maintenance to the balustrades on the balconies of the other apartments as those 5 lot owner derived no benefit from the work, returning full circle to the question raised 33 years before in Simons.

Mashane was an appeal from a VCAT decision rejecting the lot owner’s objection to payment. The judge was not satisfied that the VCAT decision was wrong in law and the lot owner’s appeal was therefore dismissed, resulting in a similar conclusion to Simons that the expense was to be met from common funds. Macaulay J. did undertake a useful analysis of the machinations of OC levies and use of a maintenance fund by the OC.

Tip Box

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

Deterioration – General condition 24 has teeth

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

One of the innovations introduced by the 2008 standard contract of sale was a procedure designed to deal with the problem of deterioration of the property between the day of sale and the proposed settlement date.

Such deterioration is typically discovered by the purchaser when exercising the right given by general condition 22 to ‘inspect the property during the 7 days preceding and including the settlement day’. Consequently, the parties are ‘time poor’ when it comes to resolving such a problem and general condition 24 was introduced to provide a procedure to quarantine a dispute in relation to the condition of the property at settlement and allow the transaction to settle notwithstanding that the side issue had not been resolved.

General condition 24.1 provides the starting point by establishing that the property remains at the risk of the vendor until settlement and general condition 24.2 requires the vendor to deliver the property ‘in the same condition it was in on the day of sale’. Thus the purchaser has contractual rights if the property is in a deteriorated condition at settlement, however, general condition 24.2 includes the qualification that any such deterioration must exceed ‘fair wear and tear’. This effectively means that a purchaser must accept minor deterioration and the example of a hot water service that no longer works is a common example of ‘fair wear and tear’.

But deterioration beyond fair wear and tear would not automatically give the purchaser the right to delay settlement or make a unilateral deduction from the amount due at settlement for the estimated cost of rectification. Perpetual Trustee Company Ltd v Lindlirum Pty Ltd & Anor [2009] VSC 182 found that deterioration beyond fair wear and tear might only enable a purchaser to seek compensation after settlement. It may therefore be concluded that there are 3 levels of deterioration:

  1. fair wear and tear – that the purchaser must accept;
  2. minor deterioration – that entitles the purchaser to compensation but not to delay settlement or seek a deduction in the purchase price; and
  3. major deterioration – that will entitle the purchaser to delay settlement.

General condition 24.4 is designed to deal with the second category, minor deterioration, by establishing a process whereby the purchaser nominates an amount – not exceeding $5000 – to be deducted from the purchase price and paid to a stakeholder pending resolution of the dispute after settlement, but only if the purchaser pays an equivalent amount to the stakeholder from the purchaser’s own funds.

Thus the purchaser can be confident that funds will be available after settlement if the dispute is decided in favour of the purchaser but the vendor can equally be confident that, if the dispute is decided in favour of the vendor, the vendor will receive the full price and there will also be funds available to satisfy the vendor’s costs in defending the claim. Essentially the purchaser must ‘put his money where his mouth is’.

Patmore & Anor v Hamilton [2014] VSC 275 is the first case to consider general condition 24 and it has provided some clarification as to the meaning and effect of the new provision. The court approved the purchaser’s method of calculating the amount to be deducted as being based on a quotation for the cost of rectification. The court also approved the purchaser’s nomination of the selling agent as the stakeholder. Importantly the court held that the vendor was obliged to submit to the procedure and, once the purchaser had submitted the quotation, nominated the stakeholder and arranged for payment of the deducted amount and the purchaser’s equivalent contribution, the vendor was obliged to settle and resolve the dispute after settlement. In summary, the court concluded that general condition 24 means what it says and that the vendor is obliged to comply with the condition.

The vendor had argued that the deterioration was covered by fair wear and tear, but the court held that substantial water penetration through a tiled roof was beyond fair wear and tear. The vendor also argued that general condition 24 was not compulsory and that the vendor had not agreed to the appointment of the agent as stakeholder and that the purchaser had not in fact made the payments to the stakeholder. The court held that the purchaser had established a willingness to make the necessary payments to the nominated stakeholder and that the vendor, by refusing to accept the nomination, was the cause for non-payment. The purchaser was therefore entitled to end the contract and reclaim the deposit. Additionally, the purchaser was entitled to legal costs generally and on an indemnity basis for the trial. All this over a dispute involving $2640!

Now that general condition 24 has been confirmed as an enforceable contractual term, vendors may be more prepared to negotiate a compromise in relation to such claims. By requiring the purchaser to ‘put up or shut up’ general condition 24 sifts out frivolous claims and a vendor who is faced with a purchaser that invokes general condition 24 would do well to consider making a concession in relation to the purchaser’s claim so that the settlement can bring an end to the relationship between the parties.

Tip Box

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

Vendor statement review

by

By Russell Cocks, Solicitor

First published in the Law Institute Journal

During 2012 the Department of Justice undertook a review of vendor disclosure obligations, specifically with a view to reducing red tape. The Sale of Land Amendment Bill 2014 amends s 32 of the Sale of Land Act and will come into effect on 1 October 2014 if not proclaimed before.

Perhaps the most significant change is the total restructure of the section. Section 32 has been amended many times since its introduction in 1982 and this review has taken the opportunity to totally recast the format of the section with a view to making the section more logical in its layout by collecting together subsections that relate to topics such as financial matters, insurance, permits and title. This change will challenge practitioners to relearn the section and may, in itself, improve comprehension of the section.

The other significant change is the introduction of the concept of a due diligence checklist that is to be made available to prospective purchasers.

Section 32

This foundation section creates the obligation on a vendor to ‘give’ to a purchaser a Vendor Statement before the purchaser signs the contract. The section does not require a separate copy of the statement to be included in the contract, thus theoretically halving the number of copies required. In fact the existing obligation to have a separate Vendor Statement together with a separate copy in the contract was generally honoured in the breach, with common practice being to simply include the Vendor Statement in the contract. It is anticipated that this practice will continue and vendors will provide the Vendor Statement as an attachment to the contract, although technically this will not be necessary.

Subsequent subsections of the Sale of Land Amendment Act require disclosure of:
  • s 32A – Any mortgage that is not to be discharged, any existing charge, details of outgoings and additional terms contract information.
  • s 32B – Building insurance, but only if risk passes to the purchaser, and owner-builder insurance.
  • s 32C – Easements, et cetera, and planning information, including bushfire prone areas and road access. In relation to planning, a new requirement to disclose ‘the name of any planning overlay’ has been included.
  • s 32D – Notices ‘made’ in respect of the land. This is largely as before, but slightly changed to introduce the qualifying phrase ‘directly and currently’ affecting the land. This may be perceived as limiting the type of notice that may be encompassed by the subsection.
  • s 32E – Building permits issued within the last 7 years, if the property includes a residence. As at present, this does not require disclosure of permits that have not been issued, whether a permit was required or not.
  • s 32F – Owners corporation particulars. This is perhaps the most significant change. The owners corporation information can still be provided by a certificate obtained from the owners corporation, but it may also be provided by the owner directly. Importantly, if the owners corporation is ‘inactive’, no information is necessary. An owners corporation is ‘inactive’ if it has not met, fixed fees or held insurance in the last 15 months.
  • s 32G – Growth areas infrastructure contribution information.
  • s 32H – Services. However the vendor must now disclose services that are not connected, rather than the existing requirement to disclose services that are connected. If services are connected at the day of sale, the vendor has no disclosure obligation.
  • s 32I – Title. A copy of a register search statement and diagram (plan of subdivision) must be provided, together with proof of right to sell (if applicable). Any proposed plan of subdivision must also be included.
  • s 32J – Proof. Disclosure may be achieved by attaching relevant documents but other than title documents, no documents are required and disclosure may be made by simply providing the information.
  • s 32K – Is the avoidance provision and allows a purchaser to rescind the contract if the vendor provides false or inadequate information. As at present, the right is subject to the purchaser proving that the vendor acted unreasonably and that the purchaser has suffered detriment.
  • s 33 – Due diligence checklist. This is designed to alert a prospective purchaser to various consumer protection issues. A vendor (or agent representing the vendor) of residential property must ensure that the purchaser has access to the checklist, however failure to do so will not entitle the purchaser to rescind the contract. The checklist will be published on the website of Consumer Affairs Victoria.

Tip Box

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

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