ByLawyers News and Updates

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.

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.

Deposit release – Tough decisions?

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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.

Subdivision – Off the plan sales – Materially affects

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Many properties are sold ‘off the plan’. This is the phrase used to describe a property that is a lot on a proposed plan of subdivision, meaning that the plan of subdivision creating the lot has been drawn but it is not yet registered at the Land Titles Office.

Historically, it was not permissible to sell ‘off the plan’. Until amendments to the Sale of Land Act 1962 it was basically illegal to enter into a contract for the sale of a piece of land unless that land had its own title. Unfortunately the subdivision process can be very time consuming as the infrastructure required for the plan to get to a stage where responsible authorities are satisfied that the plan can be registered and separate titles issued is often substantial. In the case of land subdivision, this involves the provision of roads and services; and, in the case of building subdivision, it involves construction of the building. However the market consisted of vendors who were keen to secure purchasers for these separate lots and purchasers who were keen to secure their ‘little piece of heaven’ and so the restriction on sale that was a dampener on economic activity was eased.

However, in recognition that such contracts generally involve a developer and a consumer and therefore are conducted in an uneven bargaining environment, some restrictions still apply to such sales. These restrictions also recognise that there is likely to be a substantial delay between contract and settlement. Indeed, this very month, an obligation to include a conspicuous Notice to that effect in every off the plan contract has come into force. Other statutory provisions relating to such sale include limitation on the amount of the deposit and an obligation that it be held on trust, an obligation to include information about land surface works, a default period for registration (sunset clause) after which time the purchaser may avoid the contract and protection against changes to the proposed plan. These obligations require the inclusion of various provisions in the contract and these are included in the General Conditions.

Despite the fact that off the plan sales form a substantial part of the market, there have been relatively few decisions that have considered the meaning of these statutory protections. In the apartment market, there were some proceedings involving dissatisfied purchasers in the early days of the Docklands project, but those complaints tended to relate to price rather than off the plan issues. In the land subdivision market, the lack of cases probably reflects the fact that it is just too expensive for John Citizen to consider taking a land developer to Court in relation to such matters.

In recent years off the plan sales have become popular in an area that is something of a combination of the other two areas. Urban renewal and infill housing has created a market for small land subdivisions that involve the subdivider either constructing a home on the subdivided land or arranging for that construction. This scenario produced the recent case of Joseph Street P/L v Tan [2012] VSCA 113 discussed in the September 2012 column and has now produced Besser v Alma Homes P/L [2012] VSC 460.

This case involved a 4 lot plan of subdivision of a large block on a main road in Caulfield and the purchaser entered into an off the plan contract for a ‘front’ unit for $1,250,000. The contract included a copy of the proposed plan of subdivision which included a plan showing a common driveway between the two front blocks giving road access for the two rear units and revealed that an owners corporation would be created with each unit having a 25% entitlement and liability. After registration of the plan the purchaser became aware that the lot entitlement and liability had changed so that each front unit had an entitlement and liability of 1 out of 202 – less than 0.5%. This unilateral decision by the developer had apparently been made on the basis that the front units would not use the common property and, on a liability basis, could be seen to advantage the front units.

However this proposal had not been communicated to the purchaser, who took the view that the change amounted to “an amendment to the plan of subdivision which will materially affect the lot” thereby entitling the purchaser to avoid the contract pursuant to s 9AC of the Sale of Land Act 1962. The vendor argued that the change to the lot entitlement and liability schedule was not a change to the plan, but that argument was rejected. Similarly, the vendor’s argument that the amendment did not “materially affect” the lot was, not surprisingly, rejected. Pagone J. alluded to the loss of voting rights consequent upon the amendment, but the affect on insurance entitlement in the case of a combined building policy would also be a powerful reason to find material affectation.

Interestingly, the fact that the notification of the amendment and the purchaser’s avoidance was made after registration of the plan was not an issue. Section 9AC(1) does include the words ‘before the registration of the plan’ but presumably the vendor accepted that as notification came after registration of the plan, an attempt to limit the purchaser’s avoidance right to prior to registration would be doomed to fail. The interaction between s 9AC and s 10, which also creates an avoidance right but is limited to exercise prior to registration, is uncertain and legislative clarification of the purchaser’s rights in this regard is needed.

Tip Box

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

Subdivision – Off the plan sales – Best endeavours – Part 2

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The April 2011 column considered the case of Joseph Street Pty Ltd v Tan, a decision at first instance reported at [2010] VSC 586. The case has now been reversed on appeal, reported at [2012] VSCA 113.

The effect of the Court of Appeal decision would appear to make the entering into of a s 173 Planning and Environment Act 1987 Agreement compulsory for developers in all circumstances where the municipal council is prepared to enter into such an Agreement.

The case involved a ‘villa unit’ style development of 6 single storey units in Box Hill. Units were sold off the plan with settlement to be after registration of the plan in accordance with common practice. The builder that the developer had contracted to undertake construction failed to do so and the developer was forced to find another builder. As a result, construction was not completed within the time allowed by the contract for registration of the plan (the sunset period) and the developer rescinded the contract.

The purchaser refused to accept rescission and sued for specific performance of the contract on the basis that the vendor had failed to use ‘best endeavours’ to have the plan registered. It had been established at first instance that this obligation consisted of both an express contractual obligation and also as an implied obligation.

The Full Court identified that registration of the plan could only be achieved when the council had issued a Certificate of Compliance, but that there were two methods by which the developer could obtain that Certificate and thus fulfil the contractual obligation to secure registration of the plan:

  1. the developer could complete all the building works to the satisfaction of all relevant service authorities; or
  2. the developer could enter into a s 173 Agreement with Council after entering into agreements with service providers.

Evidence given on behalf of the developer suggested that the s 173 Agreement option was limited to ‘greenfield’ developments and had not been contemplated by the developer as an option. However evidence from the council suggested that s 173 Agreements were common in ‘smaller’ developments and indeed the planning permit issued in respect of the development had referred to the possibility of just such an Agreement.

The effect of the s 173 Agreement is to give the council the ability to register on the ‘parent’ title (the title to the unsubdivided land) the requirement that the development be constructed in accordance with the planning permit issued in respect of the development. If council has the benefit of such an Agreement then, subject to the satisfaction of other relevant authorities, council is able to be satisfied that the development will be built in accordance with the permit and council’s planning responsibility in relation to supervision of construction is thereby satisfied. If construction is not in accordance with the permit, council is entitled to enforce the s 173 Agreement against the developer and all subsequent registered owners.

The s 173 Agreement process appears to be a shortcut to registration of the plan, as a certificate of compliance may be issued by council well in advance of completion of all construction and infrastructure works. The requirement that the developer enter into satisfactory agreements with infrastructure providers is a pre-condition to a s 173 Agreement and such arrangements may be tedious to negotiate, but once achieved registration of the plan can quickly follow.

This might cause concern for a purchaser if the only requirement on the vendor is registration of the plan. As can be seen from the above, this could be achieved well before construction is complete, but no purchaser is going to want to pay for a half finished property. Thus a purchaser needs to be satisfied that settlement will only be due after both registration of the plan and issue of a certificate of occupancy. Whilst there is much to be said against a certificate of occupancy being a true reflection that all works have been completed, it is at least an objective confirmation that most works have been completed. A better test is a satisfactory report from the purchaser’s building consultant, but few developers are prepared to countenance such a hurdle.

Whilst the Court of Appeal in Joseph Street may have identified a shortcut that was open to the developer, it is interesting to note that the developer was not aware of that possibility and there is no suggestion that the purchaser ever suggested to the developer that such a process was available, let alone that the developer refused to follow that course. Apparently, the mere fact that the option was available and not taken was enough to satisfy the Court that the developer had failed to use his best endeavours. A true case of ignorance is no excuse.

Tip Box

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

Lawyers selling real estate

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Legal practitioners are licensed to provide legal advice. Estate agents are licensed to sell real estate. Both professions operate, in part, in the real estate industry and at times the distinction between their respective roles may become blurred. Indeed, the 1990s saw a push in Victoria for lawyers to take a more active role in the industry, along the lines of the Scottish model where lawyers are actively involved in the marketing of real estate. This desire to broaden their area of influence may well have been a response by lawyers to the perceived contraction of their work base resulting from the rise of conveyancers. The fact that an agent’s commission will usually be between 10 and 20 times the average legal bill for a transaction might also have played some part.

A lawyer wishing to gain an estate agent’s licence could reasonably expect to be able to satisfy the various formality requirements and so it is possible to hold both a licence to practice law and a licence to sell real estate. Not many lawyers choose to do so, but it is possible. Anecdotal evidence suggests that most lawyers prefer to practice in an environment that recognises the different skills associated with the provision of legal advice, as opposed to the marketing skills associated with a sales environment. This may be described as a collaborative method of practice, with the lawyer developing a working relationship with one or more estate agents designed to deliver the two separate skill sets to the client from two distinct sources. However this method of practice is susceptible to allegations of conflict of interest and the lawyer must take care to ensure that the client is aware that the lawyer’s loyalties lie with the client, notwithstanding a close working relationship between lawyer and agent. The dark side of this collaborative model is inappropriate referral by one participant to the other, sometimes involving payment for that referral, but such situations are rare.

However a lawyer might also be involved in the sale of real estate on behalf of a client without holding an estate agent’s licence. Section 5(2)(e) Estate Agents Act 1980 recognises an exception to the obligation to hold an estate agent’s licence for:

Any Australian legal practitioner (within the meaning of the Legal Profession Act 2004) for the purpose only of carrying out the ordinary functions of an Australian legal practitioner.

The breadth of this exception was tested in Noone v Mericka & Ors [2012] VSC 101.

Peter Mericka is an Australian legal practitioner and has for a number of years conducted a legal practice known as Lawyers Real Estate. This practice ‘combined’ the role of lawyer and real estate agent and offered vendors a ‘one-stop shop’ with a fixed fee for both the sale of the vendor’s property and the legal work associated with that sale. This is akin to the Scottish model and the costs for this ‘combined’ service were more than a lawyer’s standard conveyancing fee but considerably less than a standard estate agent’s commission. Mericka gained an estate agent’s licence in 2010 but had conducted his business prior to that time on the basis of the exception in s 5(2)(e). This drew the attention of Consumer Affairs Victoria, which is the regulatory authority pursuant to the Estate Agents Act, and alleged that Mericka had contravened the Act by selling real estate without holding an estate agent’s licence.

Sifris J. concluded that whilst the ordinary functions of an Australian legal practitioner might include the selling of real estate on behalf of a client ‘where it is required or is incidental to the provision of legal services to a particular client’ the activities of Mericka did not come within the exception. These activities involved ‘ongoing and systematic marketing and advertising in connection with the sale of clients’ properties’. It was the repetitive nature of the services offered which lead to the conclusion that the activities took the work outside of the ‘ordinary functions’ of a lawyer. Indeed the judge described this work as ‘engaging in the business of a real estate agent’.

The consequence was that Mericka had contravened the Estate Agents Act for that period of time during which he was unlicensed and had also engaged in misleading and deceptive conduct by advertising that he was entitled to sell real estate on behalf of clients without having an estate agent’s licence. Imposition of a penalty was adjourned to another day.

Sifris J. also decided that the exception could never apply to an incorporated legal practice as it is limited to an Australian legal practitioner and this, by definition, must be an individual, albeit an individual practising alone or in partnership. This anomaly should be addressed as there is no reason why a practitioner who has adopted the perfectly acceptable practising method of utilising an incorporated legal practice should be discriminated against. The same may be said for a practitioner practising in a multidisciplinary practice, another mode of practice recognised by the Legal Profession Act. Indeed the motivation for establishing a multidisciplinary practice is to encourage lawyers to expand their areas of practice into ‘nontraditional’ areas, and a multidisciplinary practice that involved the occasional sale of client’s property is a logical area for expansion.

Tip Box

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

Subdivision – Off the plan sales – Best endeavours – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The sale of land ‘off the plan’ is a common occurrence in the property market. Its principal virtue is that it provides certainty to both vendor (as to the sale) and purchaser (as to the eventual purchase) of the subject property. Whilst there may be some delay in relation to the eventual settlement, which cannot occur until the proposed plan of subdivision is registered at the Land Titles Office, both parties can be confident that, upon registration, the contract will proceed to settlement on the agreed terms.

Off the plan sales are common in a variety of circumstances, but the two principal scenarios are:

  1. sales of vacant land; and
  2. sales of homes.

Land sales

These sales generally fall into one of two categories:

  1. small-scale subdivisions, perhaps only creating as few as two lots; or
  2. large-scale subdivisions, including ‘greenfield’ sites, creating multiple lots.

Whilst projects in these two categories can have enormous differences in scale – from 2 lots to 1000 or more lots – the same legislative framework guides the subdivisional process (Subdivision Act 1988 (Vic)) and the same legislative framework regulates the vendor’s obligations, and purchaser’s rights, on sale (Sale of Land Act 1962 (Vic)).

Pursuant to the Subdivision Act, the vendor is required to satisfy the local council, acting in a supervisory capacity, that the proposed plan satisfies all of the subdivisional requirements of council and service authorities; and, when satisfied, council will seal the plan and provide a statement of compliance. These documents are then lodged with the Land Titles Office and, in the normal course of events, the plan is registered and settlement may take place.

The Sale of Land Act prohibits completion of the sale until registration of the plan, imposes pre-contract requirements and creates during-contract rights, which are essentially designed to protect purchasers.

The 2008 contract of sale, widely used for sales generally, adopts these broad guidelines; and it is possible to create a contract for an off the plan sale relying on the particulars of sale and general conditions alone, without the need for any special conditions or annexures. This is particularly so for small-scale developments, although larger-scale subdivisions involving substantial earthworks may require the inclusion of a plan showing ‘works affecting the natural surface level’: s 9AB Sale of Land Act.

Home sales

Again, these sales generally fall into one of two categories:

  1. small-scale subdivisions, creating just a few lots for sale; or
  2. multi-unit subdivisions, including high-rise developments.

The same subdivisional and registration processes apply to these developments, with the added complication that councils generally will not issue a statement of compliance until construction of the development is complete.

Such contracts envisage the construction of improvements on the land during the contract, and a special condition will usually be added to the effect that the contract is not a major domestic building contract and that the vendor will enter into a major domestic building contract with a registered builder. The extent of detail provided to the purchaser in respect of the improvements to be erected is not regulated and may vary from reliance by the purchaser on a glossy brochure provided by the vendor (which is not included in the contract) to a full copy of the major domestic building contract (including specification) that the vendor has or will enter into. It is fair to say that purchasers ‘take on faith’ that the vendor will ultimately deliver to the purchaser at the expiration of the contract the product, in all its glory, that was touted as being sold when the purchaser entered into the contract.

Once the contract has been signed and the project is underway, the purchaser enters purgatory – a state of perpetual waiting. Even if the project is a mere land subdivision, ages can pass before the plan is registered. If a home is being constructed, long periods of inactivity cause concern. The default period between contract and settlement (14 days after notification of registration of the plan) is 18 months, but contracts can adopt another period and contracts spanning 60 months are common.

A recent case has considered the vendor’s obligations in terms of completion of the project within the required period: Joseph Street Pty Ltd & Ors v Tan & Anor [2010] VSC 586. The project was a relatively small development by the vendor of six units. The contract completion, or sunset, period was 15 months, and the vendor had entered into a contract with a registered builder for construction of the units. Regrettably, the builder ‘went broke’ and the project was substantially delayed while the vendor put other construction arrangements in place. The sunset period expired, the vendor rescinded the contract and the purchaser sought specific performance. No doubt, given the rising housing market, the property had appreciated and both parties sought to take advantage of that situation.

To succeed, the purchaser had to establish that the vendor was in breach and thus not entitled to rescind. The purchaser sought to do so on the basis of a breach by the vendor of an express contractual obligation to use ‘best endeavours’ to complete the contract within the sunset period. It was also agreed that such an obligation was an implied term of the contract. The court concluded that the true cause of the delay was the collapse of the builder, an occurrence that was beyond the control of the vendor. The vendor had therefore fulfilled its contractual obligations to use best endeavours and was entitled to rescind, thereby retaining the (more valuable) property.

Tip Box

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

Deposit release – Why take the risk?

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Land deposits must be held in trust pending settlement or prior release: s 24 Sale of Land Act. Vendors (and particularly their agents) often seek prior release pursuant to s 27 of the Act. A recent case has raised the possibility that release of the deposit may also have some unexpected consequences for the purchaser’s legal rights against the vendor.

Pamamull v Albrizzi (Sales) Pty Ltd (No 2) [2011] VSCA 260 concerned an attempt by a purchaser to avoid a contract of sale of land on the basis that an encroachment on one boundary constituted a defect in title. The purchaser had purported to rescind the contract shortly prior to settlement, but the vendor had rejected that purported rescission, had in turn rescinded the contract, resold the property at a loss and issued proceedings against the purchaser for forfeiture of the deposit and the loss on resale.

The trial came on for hearing in the Supreme Court but the purchaser was not in a position to proceed. His solicitor applied to withdraw and the purchaser sought an adjournment, which was opposed by the vendor. The purchaser’s defence had been based on the partial encroachment onto the land sold by an adjoining property constituting an easement over the property sold which should have been disclosed in the Vendor Statement. The failure to disclose was said to justify statutory avoidance by the purchaser. The judge granted the purchaser a short adjournment but then found in favour of the vendor, however the purchaser was given the right to return in two days to show why judgment should not proceed.

The purchaser returned in the company of the inimitable Wikramanayake SC, who informed the court that the Vendor Statement argument was ‘wrong’ and ‘of no merit’ but that the purchaser had a good defence based on an argument that the partial encroachment over adjoining land by the land sold constituted a defect in the vendor’s title entitling the purchaser to rescind the contract. That argument was not accepted, essentially as the judge was not satisfied that there was any evidence before him as to this encroachment, and judgment was confirmed.

The purchaser appealed to the Court of Appeal and, in relation to the argument concerning the failure of the judge to grant a longer adjournment, was successful. The Court of Appeal held that it would have been reasonable to grant an adjournment of two weeks to allow the purchaser to retain and instruct new solicitors. However the Court of Appeal decided nevertheless that, as the purchaser’s claim had such little chance of success, it would be futile to order a retrial and judgment was confirmed.

The Court of Appeal considered the defect in title argument and the analysis followed the traditional route of starting with Flight v Booth [1834] EngR 1087 to establish that a substantial error or misdescription in title boundaries may constitute a defect in title such as to justify avoidance. This however depends upon the subject matter of the transaction, requiring reference to the contract of sale, which in turn brings into play any contractual conditions that relate to misdescription. This contract contained what might be described as a traditional ‘identity’ condition which seeks to forgive any misdescription but which will always be subject to the Flight v Booth limitation in relation to a ‘substantial’ error. The Court of Appeal concluded that the contractual terms forgave a minor error and that the error in this case was ‘not of such substantiality as to found an entitlement to avoid’.

There is nothing unusual in this analysis except that the Court of Appeal also referred to the fact that the purchaser had agreed to release of the deposit and in doing so ‘was deemed to have accepted title’ and might thereby be regarded as having ‘waived those rights or elected to proceed under the contract.’ The proposition was not considered at length but must be taken as a warning to purchasers that consent to release of the deposit may constitute an acceptance of title and thereby prevent any subsequent argument based on a substantial defect in title.

A purchaser who signs a deposit release that includes reference to accepting title will thereby lose the ability to thereafter claim a title defect. Further, signing a deposit release that does not refer to acceptance of title might arguably be deemed to be implied acceptance. Section 27(2)(b) does not provide that a purchaser who releases the deposit thereby accepts title, but it does provide that the deposit release procedure is only available ‘where the purchaser has accepted title or may be deemed to have accepted title’. Thus a purchaser who signs a release may face an argument that the purchaser has impliedly accepted that the statutory precondition to release has been satisfied. Whether some all embracing statement to the effect that the purchaser does not accept title, will save the purchaser is uncertain.

Consenting to release immediately upon sale would be outright dangerous, but consenting at any time prior to settlement would appear to expose a purchaser to an unnecessary risk. Failing to fully inform the purchaser of this risk would constitute professional negligence.

Tip Box

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

Deterioration – State of the premises

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

The law is objective – based on principles enunciated in cases and set out in legislation, but clients want subjective answers to their immediate problems. Nowhere is this more evident than the simple legal environment of the common or garden conveyancing transaction. It’s easy for the law to proclaim that the property includes fixtures, but not chattels. What the client wants to know is – is the dishwasher a fixture or a chattel?

Unfortunately clients generally cannot afford to have their subjective inquiries answered by a Court. The law is an expensive beast to engage and by and large these disputes typically involve hundreds of dollars, at best. But for the client, this is a big issue and the lawyer is expected to provide the answer.

Dishwasher

Fortunately, one client was prepared to put up the money to find out whether a dishwasher is a fixture or a chattel. Before Farley v Hawkins the generally accepted view was that a dishwasher was a chattel, much the same as a washing machine. But that case decided that when the dishwasher is built into a kitchen bench and its removal will leave a gap in the façade, then the dishwasher is a fixture.

Two recent Victorian cases have also addressed relatively minor issues relating to specific circumstances to provide us with guidance as to how a Court might determine similar disputes in the future.

Major structural defect

Contracts of sale commonly allow a purchaser to obtain a building report as to the condition of the premises and include a special condition making the contract conditional upon the report revealing that the property is not subject to a ‘major structural defect’. Simple enough to say, but what does it mean? Clarke v Mariotis considered this in a conventional house sale when the building report revealed a ‘major concern’ with dampness under the floor of the residential building. The purchaser argued that this was a ‘major structural defect’ within the meaning of the special condition and that the purchaser was therefore entitled to avoid the contract. The vendor disagreed.

The Court accepted that dampness was a matter for concern and could, if unchecked, lead to a major structural defect. Rusting of structural support and rising damp in brickwork were probable consequences. It did not matter that the full extent of those consequences had not as yet manifest or that there might be steps that could be taken in the future to avoid those consequences. The present damp state of the sub-floor was, of itself, a ‘major structural defect’. The purchaser was therefore entitled to avoid the contract on the basis of the special condition.

Deterioration

Another common area of dispute arises after the purchaser undertakes a final inspection of the property in anticipation of settlement. Any one or more of a veritable plethora of complaints can arise from this exercise: broken windows, dirty carpets, abandoned furniture, overgrown garden, a frog pond instead of a swimming pool, the list goes on. These complaints, by definition, arise in the last few days before settlement and the client needs answers. The contract usually requires the vendor to deliver the property ‘in the same condition it was on the day of sale, except for fair wear and tear’ but what does that mean in the circumstances of any particular contract?

Perpetual Trustee Co. Ltd v Lindlirum P/L may assist in answering that question. This was the sale of a commercial property and a fence at the front of the property was removed by a third party between contract and settlement. The usual condition requiring the vendor to deliver the property in the condition sold was not included in the contract, as it was a mortgagee sale; however the purchaser argued that the vendor was obliged to deliver the property in the pre-contract condition as the fence was a fixture. The Court held that the purchaser’s only ‘right was to compensation, if anything’.

Whilst the absence of the usual condition requiring the vendor to deliver the property in the pre-contract condition means that this case is not direct authority for such cases, the Court’s dismissal of the purchaser’s complaint as only giving rights to compensation is indicative that Courts are unlikely to allow a purchaser to use a minor deterioration in the property to avoid the purchaser’s contractual obligation to settle.

Tip Box

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

Solicitor – Liability for commercial advice

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Lawyers are not financial advisers but, when acting for a client in a commercial transaction, lawyers will be liable for the advice that they give, or fail to give, in relation to the commercial consequences of the client’s decisions.

Two recent Victorian cases have considered the extent of these duties in the context of two reasonably common scenarios. In both cases the lawyers were assisted in their defence by the LPLC, which presumably therefore assessed the lawyers’ conduct as blameless, however in both cases the lawyers were held liable to the client in contract and tort. Whilst both decisions may appear to be ‘harsh’, the lesson to be learned is that lawyers advising clients in commercial transactions must be alive to possible commercial consequences of those transactions and ensure that the client is adequately advised in respect of those consequences. This may not require the lawyer to give that commercial advice, but it will require the lawyer to ensure that the client is aware that the client must seek that commercial advice from experts, such as accountants.

Spiteri was a claim by a client arising from an ‘investment’ transaction whereby the client proposed to lend money to a company undertaking a residential development in the expectation of receiving a share of the profits arising from that development. The development failed and the client sued the lawyer for his losses. The key issue was the security provided to protect the investment. The lawyer’s initial advice was that the security, being shares in the development company, was inadequate. Additional security by way of shares in an associated company, said to have $4m ‘equity’ in another development was offered and an agreement, referred to as a Joint Venture Agreement, was signed. Ultimately both developments failed and the shares and personal guarantees of the directors were worthless.

Undoubtedly the best security in such situations is a mortgage over the land. That this was not available was a red light. Additionally, the loan proposal had morphed into a Joint Venture Agreement. Finally, the ‘equity’ in the other project was never investigated. In describing the retainer the Judge said ‘the solicitor is not expected, nor required, to advise the client about the financial or commercial viability of, or risks associated with, the transaction’ however ‘that advice was “inextricably intermingled” with the obligation of the defendant to exercise reasonable care to advise the plaintiff as to the adequacy of the security’ and that the client ‘should first seek expert advice’ as to the value of the security. In other words, whilst the lawyer is not obliged to give financial or commercial advice, the lawyer is obliged to warn the client that the client should seek such advice from others expert in that field. In Spiteri the lawyer had made it clear that he was not giving that advice, he simply failed to warn the client that such advice was necessary. The ‘equity’ in the second project should have been investigated to ascertain whether it did in fact provide security for the client’s ‘loan’.

Snopkowski was an even simpler fact scenario. The client instructed the solicitor to transfer a half share in a property owned by the client to the client’s wife. The practitioner, aware that such a transaction was exempt from stamp duty, did so with alacrity and rendered a nominal bill. However, as a result of the transaction, the client was obliged to pay Capital Gains Tax and claimed that ‘loss’ from the lawyer. Whilst accepting that the lawyer was not obliged to give taxation advice, the Tribunal concluded that in such circumstances ‘a legal practitioner would advise the client to seek advice from an accountant’ and that ‘[A]t the very least she should have asked whether he had obtained any advice from the accountant concerning Capital Gains Tax and if receiving a negative response should have advised him to do so’.

It is the nature of our society that the extent of a lawyer’s duty to the client, both contractual and tortious, will expand. One response might be to attempt to limit the contractual duty by entering into ‘limited retainers’ but the likely outcome of any such contractual reduction will be a judicial extension of the tortious duty – a yin & yang relationship. Indeed it may be that the duty even extends to informing the client that the tooth fairy does not exist, as a recent NSW case has concluded that ‘the solicitor nonetheless, as part of its duty of care to the client, was obliged to caution the client against the extraordinarily unrealistic rate of return which they expected on their proposed investment’. The client had been promised a return of $275,000 per annum on a capital investment of $150,000. It is not enough to tell the client that the lawyer is not giving financial or commercial advice; the lawyer must recognise situations that expose the client to loss and warn the client that the client must seek advice from other experts.

Tip Box

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

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