By Russell Cocks, Solicitor

First published in the Law Institute Journal

Does a vendor of real estate have an obligation to disclose that a death occurred on the property in the past?

The underlying principle governing the relationship at common law between a vendor and a purchaser is caveat emptor – let the purchaser beware. The application of that principle would mean that a purchaser should conduct its own inquiries in relation to the antecedents of the property and that the vendor has no obligation to voluntarily disclose the circumstances of any deaths and, indeed, whether such deaths occurred.

The vendor could not actively mislead the purchaser, as misrepresentation is an exception to caveat emptor, but only in the limited circumstances of a positive misrepresentation. Misrepresentation by silence is not known to the common law in this regard and a vendor who avoided making any positive misrepresentations was safe.

However the vendor’s common law disclosure obligations have been substantially supplemented by the statutory obligations set out in s 32 Sale of Land Act 1962. These include the obligation to disclose title restrictions, planning obligations and the service of any notices affecting the land, but none of the many obligations imposed by s 32 appear to extend to an obligation to disclose that a death occurred on the property.

There is much to be said for the argument that a vendor should not have any obligation in this regard. There are many practical difficulties of deciding which deaths attract the obligation. A sensational murder immediately prior to sale might attract the obligation, but what of the natural death of a long term owner? There are infinite possibilities between these two situations and striking a fair balance would be difficult. And would the obligation be limited to death? What about other crimes like drug production or paedophilia? The law must not shy away from difficult tasks, but these practical considerations highlight the potential difficulties.

Some American States, which also apply caveat emptor, have created specific disclosure obligations for what are known as ‘stigmatised properties’, which cover not only death but also other criminal activity and, perhaps only in America, paranormal activity. An arbitrary period of 3 years prior to sale (or leasing) provides some recognition that death is a natural event.

Estate Agents

Agents are subject to regulation designed to protect both vendor and purchaser. Thus, whilst the vendor might not owe a duty to the purchaser, the agent does.

A NSW case involving the sale of a home in which two sons had murdered their parents led to an outcry and the vendors voluntarily terminated the contract, preventing a Court determination of the issue. However the agent was found guilty of disciplinary charges for failing to inform the prospective purchaser and NSW agents are now subject to a specific rule requiring them to bring such matters to the attention of the purchaser. New Zealand has similar requirements in relation to suicide.

No such specific ethical obligation exists for Victorian agents but there is a general duty of honesty and best practice that might be used as a basis for a claim by a purchaser. Agents are also subject to the general duties not to mislead or deceive, positively or by silence, created by the Australian Consumer Law and this is likely to be the direction of attack from a disaffected purchaser.

Charles Lloyd Property Group Pty Ltd v Buchanan [2013] VSC 148

This case provides some hope that the Walls of Jericho will not crumble in the face of the trumpets playing the ACL tune. The purchaser sought to avoid a contract based on post-contract discovery that a suicide had occurred on the land. There were many factors against the purchaser, not least of which was a confirmation of the contract by the purchaser AFTER the knowledge of the suicide had been acquired, that resulted in the failure of the complaint but it was somewhat re-assuring that the Court found that the complaint should be dismissed as it ‘had no reasonable prospect of success’.

Tip Box

• Whilst written for Victoria this article has interest and relevance for practitioners in all states.
• Properties may be stigmatised by criminal activity.
• Vendors presently probably have no disclosure obligations.
• Estate agents may be obliged to disclose as a result of their duty to purchaser.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

Not many s 32 cases make it to the Supreme Court. McHutchison v Asli [2017] VSC 258 is an exception and it provides an authoritative answer to a reasonably common scenario.

The vendor was selling a property that was sewered by means of a septic tank system. That sentence sounds somewhat contradictory as the word ‘sewered’ implies that the property is connected to a system that removes waste from the property entirely, rather than collecting the effluent in an on-site tank for treatment and dispersal within the property. The property was a large property in an outlying suburb of Melbourne and, for people familiar with the local conditions, a septic system was perhaps the norm. However, the purchaser had no experience of local conditions and sought to avoid the contract on the basis of a breach of the vendor’s disclosure obligations pursuant to s 32 Sale of Land Act 1962.

The purchaser’s primary argument was that the vendor had breached s 32H in relation to disclosure of services. That section requires a vendor to disclose if particular services, including sewerage, are NOT connected to the property. In error, the vendor’s conveyancer deleted reference to sewerage in this part of the Vendors Statement which was conceded by the vendor to be incorrect and accepted by the Court as constituting a false statement that sewerage WAS connected. The vendor sought to excuse this false disclosure as a clerical error and relied upon the fact that a certificate from Yarra Valley Water indicated that sewerage was not connected. However provision of this certificate, which was described by the Judge as ‘opaque in the extreme’ in relation to sewerage service, could not overcome the false representation in the Statement itself that sewerage was connected. In this regard it was assumed throughout the judgment that reference to ‘connected’ meant that the property must be connected to an external sewerage system and a septic system could never satisfy the need to have sewerage ‘connected’.

The purchaser argued a second basis for avoiding the contract based on s 32D, the sub-section requiring disclosure of ‘notices’ affecting the land. Approximately 10 years before the subject sale and prior to the vendor becoming the owner of the property the Council had issued a permit for the installation of a septic system. The permit contained a number of conditions in relation to the ongoing inspection, maintenance and cleansing of the septic tank and was therefore claimed by the purchaser to be a ‘notice affecting the land’ that required disclosure pursuant to s 32D. Whilst there is no specific finding that these circumstances constituted a breach of s 32H at that point in the judgment where s 32H is discussed, the conclusion of the judgment refers to ‘contravention of the requirements of s 32(1), s 32D and s 32H’and so it may be concluded that failure to include the Planning Permit did in fact constitute failure to include a relevant ‘notice’.

The vendor argued that despite the conceded breach of s 32H and the contended breach of s 32D, the vendor ought to be allowed to rely on the ‘escape clause’ of s 32K and much of the judgment considers the applicability of this sub-section. The vendor bore the burden of establishing that the vendor had acted:

• honestly; and
• reasonably; and
• ought fairly be excused; and
• that the purchaser is substantially in as good a position notwithstanding the breaches.

The Court did not accept that the breach of s 32H had been caused by a ‘clerical error’ and was concerned that the vendor had not adduced evidence relating to the s 32 disclosure at the time the vendor had purchased the property some years before. Thus the ‘honestly’ burden was not satisfied.

Similar considerations militated against a conclusion that the vendor had satisfied the burden in relation to reasonableness and in the absence of honest and reasonable findings the Court was unable to conclude that the vendor ought fairly be excused.

It seemed fairly clear on the facts that a purchaser expecting a sewered property would not be in as good a position with a septic sewerage system, particularly one that carried obligations imposed by the Planning Permit.

For these reasons, the vendor’s defence failed.

The purchaser was entitled to end the contract, reclaim the deposit and claim legal costs.

Tip Box

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

Failure to correctly disclose services entitles avoidance.

A Planning Permit may constitute a notice under s 32D.

Proving all the elements of s 32K is difficult.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

There has only been one reported decision on deposit release (McEwan v. Theologedis [2004] VSC 244) and that case did not consider the “condition enuring” argument. Aurumstone P/L v Yarra Bank Developments P/L [2017] VSC 503 has now considered that argument.

Section 24 Sale of Land Act provides that the deposit is to be held in stakeholding. This was designed to protect a purchaser from the possibility of the deposit being released to the vendor prior to settlement and the vendor not being able to settle, with the consequent loss to the purchaser of the deposit. However, the Act recognised that the common law had always taken the view that the vendor was entitled to the deposit upon payment and so s.27 provided a mechanism for release of the deposit prior to settlement if certain requirements are satisfied.

One such requirement is that there are “no conditions enuring” for the benefit of the purchaser. But all contacts have “conditions” that continue from the time that the contract is signed until final settlement and if the word “conditions” refers to any condition then deposit release can never occur. Such an outcome cannot have been intended by Parliament when it specifically introduced a release mechanism and so the question to be determined is what sort of condition does the prohibition refer to?

Clearly a condition allowing the purchaser to avoid the contract if a loan is not approved would be the sort of condition that would justify objection to release until satisfied, but a condition that the vendor replace a doorbell prior to settlement would not be such a condition.

The Court approached the problem of defining which conditions in the contract would be “conditions enuring” for the benefit of the purchaser by first drawing a distinction between:

• contingent conditions; and
• promissory conditions.

A contingent condition is a condition that does not contain a promise that the condition will be satisfied but rather defines an event or an occurrence the happening of which will mean that the contract is no longer contingent. This includes a loan approval condition that does not promise that a loan will be approved but which means that if the loan is approve then the contract is no longer contingent on loan approval.

The existence of an unsatisfied contingent condition justifies refusal to release the deposit.

Promissory conditions are in turn divided into three categories:

• essential terms;
• intermediate terms; and
• warranties.

An essential term is a term that the parties intend the breach of which will lead to the right to terminate the contract.

An intermediate term gives rise to a non-essential obligation the breach of which may be sufficient to entitle termination if it goes to the root of the contract such as to deprive the injured party of such a substantial part of the benefit of the contract but will otherwise only justify a claim for damages.

A warranty, which is not an essential term, gives rise to a right to damages for breach but no right to terminate.

The relevant condition in Aurumstone was a Special Condition added to the contract by the parties to address the purchaser’s requirement that vacant possession of the property, which was subject to a lease at the time of signing the contract, would be available to the purchaser at settlement or shortly thereafter. The purchaser intended, and the vendor knew of that intention at the time of agreeing to the Special Condition, to demolish the buildings on the property and redevelop the land. The parties therefore agreed that the Special Condition was an essential term and the Court had no hesitation in rejecting the argument that s27 is limited to situations where there is no contingent condition. The existence of a promissory condition that is an essential term will justify a purchaser in refusing to consent to release of the deposit.

However, it follows that the existence of an intermediate term or a warranty may not justify refusal. An intermediate term that goes to the root of the contract may justify refusal but a lesser intermediate term or a warranty, the breach of which merely justifies damages and not avoidance, will not justify refusal to release the deposit.

The General Condition most often relied upon to justify refusal to release is GC 24, which relates to delivery of the property at settlement in the condition it was on the day of sale, fair wear and tear excepted. This is likely to be classified as an intermediate term the breach of which gives a right to damages, but not termination. The condition itself has a mechanism for calculating damages for breach and the purchaser has termination rights for substantial breach of this obligation in s.34 Sale of Land Act. It is therefore a promissory condition that is not essential and does not go to the root of the contract so it does not justify refusal to release the deposit.

It is unlikely that any other of the General Conditions that are promissory in nature justify refusal to release the deposit and so it may be concluded that it is only the contingent loan condition in GC 14, or an essential Special Condition, that justify refusal to consent to deposit release.

Tip Box

• s.27 Sale of Land Act permits release of deposits
• a contingent condition or essential term may justify refusal to release
• other than GC.14, the General Conditions do not justify refusal to release.

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

 

By Russell Cocks, Solicitor

First published in the Law Institute Journal

An estate agent is not an agent for the purpose of receiving a cooling off notice.

Tan v Russell [2016] VSC 93 will come as a surprise to most property lawyers. It concluded that the vendor’s estate agent is NOT an agent for the purposes of receiving a cooling off notice pursuant to s 31 Sale of Land Act.

The right to cool off from a residential contract is a statutory right created in 1982. It is reflective of the Age of the Consumer that has prevailed since the Trade Practices Act of the 1970s and is a watershed in the transition from caveat emptor and caveat vendor. It says to a purchaser ‘beware, or at least think about your decision quickly’. Consumer protection legislation is generally interpreted in such a way as to protect the consumer, but this case has taken what might be described as a literal view and has relied on authority, certainly High authority, but authority that is from a different age – the white picket fence view of the 1950s.

Section 31 Sale of Land Act permits service of the cooling off notice on ‘the vendor or his agent’. The purchaser served the notice by email on the vendor’s estate agent named in the contract, being the estate agent who had been negotiating with the purchaser on behalf of the vendor. The vendor argued that the estate agent was not an ‘agent’ within the meaning of s 31.

Peterson v Maloney [1951] HCA 57 was cited as authority for the proposition that an estate agent’s authority is limited to finding a buyer and, in the absence of specific authority, does not extend to an ability to bind the vendor. In short; an estate agent is NOT an agent in the common law sense of agency. This, and similar cases were concerned with the actions of the estate agent and whether the vendor was bound by those actions. However the role of the estate agent in the cooling off scenario is not to take action that might bind the vendor but rather to be a recipient of a notice, a conduit to the vendor. Hence it is possible to distinguish such cases as there is no need to find that the vendor’s estate agent in the cooling off scenario needs to do anything on behalf of the vendor, it just needs to receive the notice and, presumably, bring that notice to the attention of the vendor.

Even if the estate agent is not an agent in the strict common law sense, the purchaser argued that s 31 established a statutory agency whereby the vendor’s estate agent was authorised to receive delivery of the cooling off notice. This argument was rejected on the basis that the Act referred to estate agents in other sections and so could have, but did not, refer to the estate agent in this provision. To do so would have required s 31 to read ‘the vendor, his agent or his estate agent’ which, with respect, would appear to most readers to be a tautology. Again, rejection of this argument appeared to focus on the potential for action by the estate agent affecting the rights of the vendor, whereas it is the action of the purchaser in serving the cooling off notice which affects the vendor, not the passive receipt of that notice by the agent.

The purchaser had three days to act. There was no address for the vendor in the contract. There was a conveyancer listed but perhaps the same argument would apply to the conveyancer. This makes a nonsense of the section. With respect, the decision is wrong.

The REIV authority is being amended. The LIV contract will be amended. In the meantime, exercise care when cooling off.

Tip Box

• Cooling off notices cannot be served on estate agents
• Whilst written for Victoria this article has interest and relevance for practitioners in all states

By Russell Cocks, Solicitor

First published in the Law Institute Journal

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.

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.

By Russell Cocks, Solicitor

First published in the Law Institute Journal

A Supreme Court ruling makes claiming a return of deposits difficult

The Supreme Court has made another decision that, from the point of view of purchasers at least, might be described as tough. Certainly vendors might view the result favourably, but it is suggested that, on balance, the decision places too high a duty on purchasers before they are entitled to claim a return of the deposit in a situation when finance approval has not been obtained.

Umbers v Kelson & Anor [2008] VSC 348 denied a purchaser a refund of deposit in a sale of business contract when the purchaser wrote to advise the vendor within the time prescribed by the finance condition that finance approval had not been obtained and sought an extension of time for approval, concluding that: ‘In the event that an extension is not agreed to, you may treat this letter as written notice ending the contract’.

Applying a strict interpretation of the condition, the court concluded that the word ‘may’ failed to sufficiently explicitly express the purchaser’s intention to end the contract if the extension was not granted and refused to order a return of the deposit. This outcome came as a shock to the vendor as much as the purchaser, as the vendor had not even made that argument and it was entirely a construct of the court. It may be explained by reference to the context of the dispute between the parties where the purchaser had adopted an ‘off handed, on again, off again’ approach over an extended period and justice appeared to favour the vendor, who had been substantially inconvenienced by the purchaser.

Putt & Anor v Perfect Builders Pty Ltd [2013] VSC 442 concerned a 10 per cent deposit of $59,500 paid pursuant to a contract relating to an ‘off the plan’ owner-occupier apartment valued at $595,000, with the purchaser contributing $155,000 and borrowing $475,000 (including acquisition costs) and appears to be the perfect consumer transaction involving John and Betty Citizen who had saved for years to buy their first home.

Some, probably unnecessary, controversy arose between the purchaser and the vendor in relation to relatively minor matters during the finance period with the vendor failing to respond to some requests made by the purchaser in relation to the property and documentation. This perhaps soured the relationship and affected the vendor’s response to the purchaser’s request for a refund of the deposit when the loan had not been approved within the approval period. That request was supported by a relatively informal, but unchallenged, advice that the lender had refused the loan on the basis that ‘valuation confirms the property is unacceptable’.

The vendor refused to refund the deposit on the basis that the purchaser had applied for a loan of $476,000 and therefore had failed to strictly comply with the finance condition, which called for a loan of $475,000. It should be noted that $476,000 is 80 per cent of the purchase price and it is entirely likely that this amount was applied for as a result of the broker describing the loan as an 80 per cent LVR (loan to valuation ratio).

The purchaser argued that ‘commercial reality’ predicated that a refusal for $476,000 meant that there would have been a refusal for $475,000, but Williams J stated that, even if that were the case, there was no evidence upon which the court could be satisfied that the purchaser had done ‘everything reasonably required to obtain approval’. There was no evidence of the requirements of the lender referred to in the correspondence between the parties and the valuation referred to in the refusal and this meant that the court was unable to be satisfied that the precondition for a refund had been satisfied.

This lack of evidence was a direct result of the judicial course that the purchaser chose to follow to force a refund. The application was made pursuant to s 49 of the Property Law Act (Vic), informally known as a Vendor-Purchaser Summons. The virtue of this procedure is speed (the hearing was within two months of the dispute arising) but the evil is the lack of evidence that the parties can put to the court, as only affidavit evidence is permitted. If a procedure in a lower court or tribunal had been adopted it may have been possible to adduce more evidence, but the ‘evil’ in that option was the inevitable time delay.

Section 49 does give the court discretion to ‘do justice between the parties’ and, with respect, it is suggested that ‘justice’ in this case required a refund of the deposit to the purchaser, rather than a windfall profit to the vendor. However the exercise of this discretion has previously been interpreted in a quite limited way and Williams J was not prepared to exercise the discretion in this case.

Tip Box

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