By Russell Cocks, Solicitor

First published in the Law Institute Journal

A vendor may forfeit a deposit if the contract is ended but there are some circumstances where relief against forfeiture may be granted.

There are two basic principles in property law that generally co-exist but are capable of coming into conflict:

• a deposit is an earnest paid to secure the performance of the contract; and
• the law will not enforce a penalty imposed for breach of contract.

These two principles are usually able to co-exist as a result of the law recognising that a payment that constitutes a genuine pre-estimate of a vendor’s losses upon default by the purchaser is not a penalty and that a deposit of 10% of the price is an acceptable pre-estimate of such losses.

It is therefore fair to say that, in circumstances where the purchaser has paid a 10% deposit, a vendor who seeks to forfeit that deposit as a result of the purchaser’s breach of contract will be on safe ground. Section 49 Property Law Act confers on the court a discretion to grant the purchaser relief against forfeiture but it is generally accepted that the purchaser must show exceptional circumstances to justify the exercise of that discretion in circumstances where the deposit is 10%.

An example of such exceptional circumstances may be where the purchaser has taken possession of the property with the agreement of the vendor and has expended money on the property such as to have increased the value of the property. A court might find that the vendor is not entitled to retain the benefit of the funds expended as well as the deposit. But, as a general rule, the vendor can forfeit a deposit of 10% that has been paid by the purchaser. Equally, it will be rare for a vendor to be entitled to retain a deposit of more than 10%, as such a payment exceeds a reasonable pre-estimate of the vendor’s losses and amounts to a penalty.

Often, the deposit is expressed as being ‘10% payable as to $X on signing the contract and balance in 7 days’. Such a formula recognises that a purchaser might not always have a full 10% deposit available at the point of signing the contract and may require a short period of time to arrange for the balance to be available. If the purchaser breaches the contract the vendor needs to call upon the assistance of the court to recover the unpaid deposit and the spectre of a penalty arises. However, it has long been accepted that a vendor is entitled to recover any unpaid part of a 10% deposit notwithstanding that the contract has been ended – Bot v Ristevski [1981] VicRp 13 adopted as recently as Melegant & Sundrum P/L v Zhong [2017] VCC 1868.

However, where the deposit is expressed as some amount less than 10%, the court will not assist the vendor to recover 10%. This has been the situation in NSW for some time and now also applies in Victoria following Simcevski v Dixon (No 2) [2017] VSC 531 were the contract provided for a deposit of 5% and the court rejected a claim by the vendor for a further 5%.

In that case the vendor sought to rely upon a condition in the contract that provided that, if the contract was ended by the vendor, 10% of the price was to be forfeited to the vendor, whether it had been paid or not. Whilst the amount (10%) bore a resemblance to a deposit, the contract provided that the deposit was 5%, so the court had no hesitation in finding that any amount beyond the specified deposit was a penalty and thereby unenforceable, whether supported by a contractual right or not. It may therefore be concluded that any attempt to impose a liability beyond the specified deposit will be an unenforceable penalty.

One formula that has not as yet been scrutinised by a court is ‘deposit of 10% payable as to 5% on signing and the balance of 5% at settlement’. The 10% deposit will not be a penalty and the delay in payment should mean that the vendor is able to recover the full 10% in accordance with Bot v Ristevski.

Tip Box

• the law will not enforce a penalty for breach of contract
• a 10% deposit is not a penalty
• a vendor cannot recover more than the specified deposit

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

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