ByLawyers News and Updates

Deposit release – A solution?

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Conveyancing has traditionally been haunted by three systemic inefficiencies:

  1. requisitions and the answers thereto;
  2. deposit release; and
  3. bank settlement procedures.

Bank settlement procedures, involving inordinate telephone waiting times and lack of accountability, are beyond the scope of this article; and requisitions have been solved by replacing requisitions with contractual warranties, a simple but effective solution.

Deposit release remains a significant inefficiency, particularly for the purchaser’s representative. At common law a vendor was entitled to the benefit of the deposit immediately upon payment, whilst remaining responsible to account to the purchaser for the deposit if the contract did not proceed. As part of the consumer protection push of the 1980s, section 25 of the Sale of Land Act was introduced to require deposits to be held in stakeholding, meaning that the deposit was to be held on trust for the vendor and purchaser and did not become available to the vendor until settlement. Acknowledging that vendors might, on occasion, have a need for the deposit prior to settlement, s 27 provides a release mechanism that the vendor may implement to gain access to the deposit prior to settlement.

Much has been written about this release mechanism. This article considers not so much the mechanism itself, but rather who should be responsible for the cost of implementing that mechanism. Essentially the protection is designed to ensure that a vendor will be in a position to discharge mortgages affecting the property at settlement and therefore a vendor may seek release of the deposit by satisfying the purchaser as to the amount owing pursuant to such mortgages. To do so the vendor would ordinarily obtain evidence in writing from the mortgagee as to the amount outstanding and provide that evidence to the purchaser with a request to release the deposit. Undoubtedly, the work associated with this part of the exercise falls to be performed by the vendor’s representative and the cost of that work will be borne by the vendor. Whether this charge is part of the representative’s overall fee or a separate charge will depend entirely on the contract between the vendor and the representative and will be influenced by market forces.

Next in the process is the consideration of the information provided and the response thereto. This falls upon the purchaser’s representative and has to date been regarded as within the ambit of the purchaser’s representative’s retainer and therefore a cost to be borne by the purchaser. But deposit release is of absolutely no benefit to the purchaser and may, in unusual circumstances such as the property being destroyed prior to settlement, be an actual detriment. It may well be asked: why would a purchaser ever consent to deposit release?

Recently a practitioner has been responding to requests for deposit release by advising the vendor’s representative that the practitioner’s retainer does not extend to advising the purchaser in relation to deposit release and that the practitioner is prepared to submit the information provided to support deposit release to the purchaser and obtain instructions in relation thereto provided that the vendor is prepared to pay the purchaser’s representative’s costs to do so. This suggestion has been met with shock and horror but, on careful reflection, it appears to be perfectly reasonable.

The terms of a retainer between purchaser and representative are negotiable. When costs were dictated by scale there may have been a standard level of performance, but scales have been dispatched to the dustbin of history. A purchaser’s representative is entitled to limit the retainer to matters that are necessary to diligently perform the work necessary to ensure that the purchaser becomes the registered proprietor. Performance of any additional work is not necessary and if a third party, such as the vendor, asks the purchaser’s representative to perform additional work then it is perfectly appropriate that the party making that request bear the costs associated with performing that work.

By submitting a request for release of the deposit the vendor is requesting the purchaser’s representative to consider the legitimacy of the information and the adequacy of the disclosure, and to advise the purchaser as to the virtue of consenting to release. Given that there is no benefit in the purchaser consenting to release, the vendor is asking the purchaser’s representative to assume a substantial burden and it is reasonable that the vendor bear the cost of that. The vendor is not obliged to pay for this service but if the vendor wants the deposit released then the costs associated with complying with the legislative requirements should fall on the party who will receive the benefit – the vendor.

A reasonable charge for the work involved might be $200 plus GST, which might be paid by way of authorised deduction at settlement.

Tip Box

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

Defects – ­Essential safety measures – Part 1

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Regulation is the life-blood of lawyers, but it is also the bane of their life and that is particularly so when it impacts on common or garden transactions such as conveyancing and leasing. A recent example is the introduction of further Regulations relating to essential safety measures.

Essentially, these regulations require the owners of all properties (other than homes) to establish certain minimum standards in respect of safety at the premises and to also establish a maintenance program in respect of those safety measures, including an annual inspection and reporting regime. Exclusion of domestic dwellings from the requirements at least means that the Regulations are not relevant to common or garden conveyancing, but they are relevant to the sale of commercial buildings, such as shops & offices and also industrial buildings, such as factories.

Some safety requirements have been mandatory since 1994, notably the obligation to have adequate exit lighting and fire prevention equipment, but the obligations were ramped up by the 2006 Regulations and now include a wide array of safety matters set out in the Building Code of Australia. To ensure that the owner is aware of these requirements the occupancy permit issued in respect of any new property must include a list of all essential safety measures pertaining to the building. The Regulations also require an owner to prepare an annual essential safety measures report and have that report available for inspection at the premises.

Further, the Regulations now address premises that were built prior to 1994. Such premises will not have essential safety measures specified in the occupancy certificate however, from 13 June 2009 the owner of such premises is obliged to prepare an essential safety measures report in a form ‘approved by the Commission’.

Lawyers are not usually involved in the process that leads to the issuing of an occupancy permit. However consideration must be given to the question of whether a lawyer should take an interest in the occupancy permit and/or the mandatory essential safety measures report when the property is the subject of a transaction, either by way of sale or lease.

Sale

A vendor has statutory disclosure obligations and common law and statutory obligations in relation to misleading and deceptive conduct. Whilst there does not appear to be any authority to date supporting the proposition that an occupancy certificate (or an essential safety matters report) falls within any of the obligations created by s 32, an argument could be mounted on the basis of the obligation to disclose ‘restrictions’ or ‘notices’. Equally, no case has decided that a vendor acting in trade and commerce (as will be the case in relation to such properties) has an obligation to disclose an occupancy certificate (or an essential safety matters report) however an argument based on misrepresentation by silence at least appears to be open. It might therefore be concluded that it may be prudent to exhibit an occupancy certificate or report that set out the essential safety requirements when selling a commercial property, although it is by no means compulsory.

It might also be prudent when advising a purchaser of commercial properties to suggest that a copy of an occupancy certificate or report should be sought, particularly if advice is sought before contract.

The failure of a vendor to have an essential safety matters report would not appear to constitute a defect in title, but is rather a defect in quality, similar to the failure to have adequate smoke alarms or pool fencing. Whilst such a deficiency may expose the vendor to penalties, it does not create any rights for the purchaser and it is therefore unlikely that a purchaser can require the vendor to obtain such a report prior to settlement, even though the purchaser will ‘inherit’ the obligation to do so upon settlement.

Leased premises

These essential safety measures obligations fall on ‘the owner’. Section 251 of the Building Act prohibits the passing on of the compliance obligations to the tenant, including the obligation to obtain an annual report. It would therefore be prudent for a purchaser to inquire as to compliance with those obligations by either the vendor or the tenant but, in the absence of a specific term in the contract, the purchaser could not demand compliance with those obligations prior to settlement.

Tip Box

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

Estate agent’s commission – Money for nothing

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Victorian estate agents might be contemplating adopting this famous Dire Straits song as their new anthem after the recent Court of Appeal decision of Icon Property P/L v Wood [2008] VSCA 123, a decision handed down on 26 June 2008.

Wood engaged Icon to sell an apartment. A purchaser signed a contract and paid a deposit by a cheque which was subsequently dishonoured. The vendor rescinded the contract and sued the purchaser for losses, but the purchaser was the typical ‘man of straw’ and the vendor recovered nothing.

In the meantime the agent sold the property to a second purchaser and that transaction settled in due course. When the agent accounted to the vendor, commission was deducted in respect of both the first (failed) sale and the second sale. The vendor issued proceedings in VCAT claiming a refund. The vendor gave evidence that the agent had agreed prior to the second sale that only one commission would be charged and the vendor appears to have been fairly convinced that that was the case as an attempt by the vendor to ‘discuss’ the question of commission with the agent resulted in an intervention order against the vendor. Nevertheless VCAT did not accept that evidence and found that the agent was entitled to commission on the first sale. However VCAT held that the agent did not hold an authority pursuant to s 49 Estate Agents Act to charge commission on the second sale and ordered a refund in respect of that commission.

Perhaps there was some justice in this result as the vendor made the sale and the agent made a commission. But when considered in the context of the first sale alone, the agent made the commission even though the vendor did not make the sale. Whilst this was the outcome, perhaps it was not the decision. Judge Bowman stated that ‘ultimately it was basically agreed between the parties’ that the agent was entitled to the first commission and although he said ‘in my view, that approach is correct’ there does not appear to have been any argument on the point, much less reference to authority.

Victorian estate agents have long been a protected species. The general common law principle of agent’s entitlement to commission requires the sale to be completed before the agent is entitled to a commission and this is the law in other States of Australia. But a long line of Victorian authority has established an agent’s entitlement to commission at an earlier point in time, generally referred to as ‘when a purchaser signs a document capable of becoming an enforceable contract’ if that document is subsequently signed by the vendor. This recognises that it is the agent’s function to find the purchaser and it is then for the vendor to complete the transaction. On this basis an agent will be entitled to commission if the vendor ‘lets a purchaser out of a contract’ or the contract falls over as a result of the action, or inaction, of the vendor, such as a defective Vendor’s Statement, resulting in the purchaser avoiding the contract. But this is not an absolute right and an agent will not be entitled to commission if the sale ‘goes off’ because a special condition (such as a loan condition) is not satisfied.

No Victorian case has considered an agent’s right to commission where effectively no deposit has been paid because the cheque bounced, but it has been considered in New Zealand where it was decided that an agent who failed to collect the deposit (or accepted a dishonoured cheque for the deposit) was not entitled to commission. This seems to be an eminently sensible result, as expecting a vendor to pay a commission when no deposit is paid seems ludicrous, and no less so if the deposit is constituted by a rubber cheque. Agent’s authorities in the past included reference to a 10% deposit. The fact that that requirement seems to have ‘fallen off’ the current authority does not reduce the implied expectation of a vendor that a purchaser will have shown an intention to be bound to the contract by paying the universally accepted deposit of 10%. In specific circumstances a vendor might agree to a lesser deposit, but the normal expectation, and an implied term of the retainer, would be payment of 10% (and not by a rubber cheque!).

The agent unsuccessfully appealed to the Court of Appeal, which confirmed the lack of authority in respect of the second commission. As such, the issue of the first commission was not a subject of the appeal, although none of the judges seemed to have a problem with the first commission and Redlich JA in brief reasons accepted the agent’s entitlement to the first commission. Virtually none of the authorities were discussed (other than in footnotes) and the case, despite first appearances, should not be regarded as authority that a rubber cheque will justify commission. The Fat Lady has not begun to sing the anthem.

Tip Box

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

Estate agent – Agent beware

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Estate agents have always been given a degree of ‘poetic licence’ when it comes to describing the property that they are retained to sell on behalf of a vendor. To describe a property as ‘immaculate’ Walker & Anor v Masillamani & Anor [2007] VSC 172 – or as having ‘perfect presentation’ (Mitchell v Valherie (2005) 93 SASR 76) does not mean that the property is perfect in every aspect and completely free of all defects. Such sales descriptions fall within the definition of ‘mere puffery’ and the courts expect a prospective purchaser to exercise a reasonable level of cynicism when balancing such descriptions with the physical condition of the property revealed by inspection.

However, two recent cases indicate that courts will not be so lenient and extend such licence to an agent who is describing the sales process, rather than the subject matter of the sale.

Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 concerned the sale of a caravan park for $8.6m. The agent submitted the property to two prospective purchasers and both purchasers made offers that were subject to the purchaser obtaining planning approval to redevelop the land. The agent concentrated his attention on the ultimate purchaser and evidence was given that the agent left a voice message on that purchaser’s phone to the effect that:

‘There is another purchaser’ and

‘You will have to make an unconditional higher or better offer’

The purchaser responded with a higher offer that, importantly, was not conditional upon planning approval.

The purchaser thereafter sought to avoid the contract on a number of grounds and the vendor sued for specific performance of the contract. Ultimately the issue came down to the question of whether the purchaser could characterise the conduct of the agent as ‘misleading and deceptive’ within the meaning of the Trade Practices Act (superseded by the Competition and Consumer Act – see schedule 2 item 18). The evidence as to the substance of the representations was accepted, principally because it appeared to have been confirmed in a later email by the agent to the vendor when discussing a request for an extension of time for performance. The agent wrote that he had ‘put a fair amount of pressure on them (the purchaser) to go unconditional’. The Judge relied upon this as confirmation that the agent had suggested that the existence of another purchaser meant that the purchaser would miss the property if the purchaser did not make an immediate, higher, unconditional offer and that such conduct by the agent was misleading and deceptive and justified avoidance of the contract by the purchaser.

Astvilla P/L v Director of Consumer Affairs Victoria [2006] VSC 289 concerned similar concepts under the Victorian Fair Trading Act, although the offence was committed by an in-house sales employee of the vendor rather than an external estate agent. The Court held that the creation of a false sense that the property was ‘a very popular house’ and could be sold ‘five times over’ (when in fact it had been on the market ‘for years’) and a false sense of urgency requiring immediate signing and payment of a deposit was misleading and deceptive conduct.

These representations related to both the property itself (that it was ‘popular’) and the sales process (that urgency was required). The representations relating to the property ‘went beyond mere puffery’ and those representations alone would have justified a finding of misleading and deceptive conduct, but the representations in relation to the need for urgency as the property might be sold to another purchaser were also factors in the decision.

Agents should therefore beware. Advising prospective purchasers that there are other willing purchasers competing for the property may amount to misleading and deceptive conduct unless the agent is able to prove the truthfulness of that representation. Auctions are all about exposing competing purchasers to the marketplace, as are private or boardroom auctions, but representing that there is genuine competition for a property when that is not the case may cross the line.

Other issues in bovino

Specific performance

The vendor sought specific performance of the contract. That remedy is discretionary and only granted if damages would not suffice. Whilst ordering a vendor to specifically perform a contract by transferring a particular property is a relatively common order, Abraham v Johns [2010] VSC 33, an order that a purchaser specifically perform a contract by paying the contract price is rare. Such an order ‘could require the continued supervision of the Court to ensure the fulfilment of the contract. Ibid at para 79. Damages will generally be the appropriate order against a purchaser. After all, the vendor is only interested in receiving the contract price; it is irrelevant where the money comes from.

Impecuniosity

As the purchaser successfully avoided the contract, the availability of an order for specific performance was not an issue; however judicial comment was made on the purchaser’s defence against such an order. The purchaser argued that they did not have the funds to complete the contract – that it was a typical ‘two dollar company’. That impecuniosity was shared by the guarantor (Clinton Casey) who claimed that his principal asset was an entitlement to share in distributions from a discretionary trust and therefore effectively valueless. The Judge found such arguments to be ‘without substance: Bovino P/L v The Casey Group Holdings P/L [2010] VSC 391 at para 70. They might also be of considerable concern to anyone engaging in commercial transactions with defendants.

Tip Box

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

Lease – Abandoned goods

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By Russell Cocks, Solicitor

 First published in the Law Institute Journal

Solicitors have to deal with abandoned goods left on premises in three common situations:

  1. in a sale, where the vendor is obliged to give vacant possession;
  2. in a lease, where the tenant is obliged to return the premises to the landlord in their original condition; and
  3. in a mortgage, where the mortgagor defaults and vacates the premises.

In each of these situations the ‘abandoning’ party may intend to return for the goods, or may have no such intention. However, one thing is certain and that is that legal ownership of the goods remains with the ‘abandoning’ party and the purchaser, landlord or mortgagee does not acquire ownership of the goods simply by taking possession of them.

Recollection of the many ‘finder’ cases that have been used to torture property law students for decades will remind us that the law is yet to devise an easily accessible formula for determining when ownership of personal property passes from one possessor to another. Additionally, the amounts involved in the typical situations outlined above rarely justify submission of the dispute to a court for determination. Thus our advice must strike a balance between a legal analysis and a practical solution.

Sale

Typically a purchaser discovers ‘abandoned’ goods, belonging either to the vendor or a vacating tenant, as settlement approaches. It is unlikely that the presence of abandoned goods will justify a purchaser in delaying settlement, unless their presence amounts to such a serious interference with the enjoyment of the property as to amount to a failure to deliver vacant possession. A purchaser might sue a vendor after settlement for damages, but this is rarely a satisfactory option and the purchaser, having been forced to settle, simply wants to be able to dispose of the goods. But the law has always regarded a person who has possession of goods known to belong to another as having duties to that true owner and concepts like bailment and trespass to goods linger in the background. It may be that the vendor intends to return for the goods shortly after settlement and the purchaser should be advised to secure and store the goods in a convenient location (the garage?) and await a claim for their return by the true owner. If no such claim is forthcoming the passing of time does not improve the purchaser’s legal right to the goods, but a trip to the tip in six months is likely to be a safer option than one made immediately after settlement.

Lease

A landlord faced with abandoned goods after determination of a lease may take some solace in the decision of Haniotis v Dimitriou where it was decided that a landlord could remove the tenant’s goods and place them ‘outside’, ‘in the street’, ‘on the footpath’. Indeed s 42B and C of the Landlord and Tenant Act give a landlord the right to remove and store abandoned goods and, ultimately, the right to sell them to recover such costs, treating any residue as unclaimed money. However few landlords are going to find such a time-consuming and labour-intensive option attractive.

Special rules apply in relation to the ‘darlings of the law’ – retail and residential tenants. Kiwi Munchies P/L v Nikolitis concerned a tenant who sought access to the premises after determination of the lease to remove goods. The landlord refused access until arrears of rent were paid, but upon application by the tenant, VCAT ordered the landlord to pay $5,000 damages to the tenant. The goods belonged to the tenant and the landlord was not entitled to prevent the tenant from exercising rights of ownership, even if the landlord had other rights against the tenant.

Division 3 of Part 9 of the Residential Tenancies Act sets out a prescriptive regime that a landlord must follow in respect of ‘goods which are left behind’ by residential tenants. Great care must be taken when following that regime as media reports tend to indicate that tenants often have an inflated view of the value of goods that landlord’s have regarded as worthless.

Mortgage

A mortgage of real estate does not encumber the personal property of the mortgagor. If the mortgagee takes possession of the mortgaged property after default, the mortgagee has no right to dispose of, or sell, the mortgagor’s personal property. A mortgagee will therefore generally leave any such property on the premises and include a condition in any sale made pursuant to the mortgage that the sale does not include personal property on the premises. In this way the mortgagee simply handpasses the problem to the purchaser, who is in the same position as a purchaser from a vendor who leaves abandoned goods on the premises, as discussed above.

Conclusion

Abandoned goods are one of life’s miseries. Nobody wants them, least of all the solicitor, but the law provides few answers to those afflicted by them. Whilst the old adage of ‘time heals all pain’ may not apply perfectly, the best advice to a client is to avoid impetuous action and make alternative arrangements so as to postpone a final decision for 3-6 months. The legal environment will not change in that time, but the climate might be better.

Tip Box

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

Stamp duty concessions

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By Russell Cocks, Solicitor

First published in the Law Institute Journal

Since the Stamps Act morphed into the Duties Act, it is not even correct to refer to the tax imposed on a transfer of land of land as ‘stamp duty’, however old habits die hard and it may take a generation or two to eradicate this habit. There is no particular justification for the government imposing a tax on this event, it is simply a convenient way for the government to raise revenue and given that the government controls the Titles Office, a citizen is not able to rely on the benefits of indefeasibility of title unless the tax is paid – a great incentive to compliance.

However various concession in relation to duty are recognised by the Act and duty may be exempt or reduced in transactions involving (amongst others) a trustee, domestic partners, family farm, principal place of residence and ‘off the plan’ sales.

Duty is normally calculated on the consideration paid for, or value of, the real estate transferred. This is generally represented by the contract price. However dutiable consideration does not include any amount paid in respect of a building to be constructed on the land after the date of the contract (s 21(3) Duties Act). This concession therefore means that the amount used for calculation of duty is not the contract price, but rather the contract price less the cost of construction works performed on the property between the date of the contract and the date of completion (Revenue Ruling DA.016). This reduction in duty is appealing to a purchaser in a transaction involving the sale of ‘yet to be constructed’ units and is therefore commonly referred to as an ‘off the plan’ concession, but it is not limited to transactions involving unregistered plans of subdivision. Indeed, in its simplest form, it applies to the sale of a stand-alone building sold prior to, or during the course of, construction. The cost of works performed after contract, and hence the amount available to reduce duty, will be greatest when the property is sold before construction has commenced and will gradually reduce as the purchase occurs later in time in the construction process, with no concession available if construction is complete when the contract is signed.

To establish the extent of the concession the purchaser must establish the cost of works performed during the contract and this is achieved by the vendor providing the purchaser with a Land & Building Packages statutory declaration (Form 4 available at www.sro.vic.gov.au). Completion of this form requires access to detailed cost of construction information, information that will not normally be available to the vendor’s solicitor. It requires the builder to have very precise information as to the cost of construction and to be able to apportion those costs to reflect the costs incurred after the date upon which the contract of sale was entered into. If the sale is of a stand-alone building these costs may be relatively simple to identify, but many of these transactions are as part of a multi-storey development and there may have been substantial infrastructure costs (including the cost of acquiring the land) incurred to reach the stage where the actual construction can commence. The calculations are complicated by the need to take account of the effect of GST on the actual cost of construction as well as on the sale price. The SRO does provide a ‘live’ version of the Form 4 on its website that will undertake the mathematical calculations when the information is entered. It is recommended that solicitors not attempt to prepare these forms but rather ensure that the builder/vendor fully understands the need to provide precise information.

A most unsatisfactory practice exists of including a figure in the contract of sale that represents a notional value of the land component of an off the plan sale. This figure is often as low as $40,000 and immediately creates a false impression in the purchaser that duty will be calculated on that figure. This is rarely so and results in a purchaser being liable to pay much more duty than was expected, a most unhappy turn of events. Inclusion of such amounts might in fact constitute misleading and deceptive conduct and whilst a vendor might protect itself by the inclusion of a ‘no representations’ clause, it recommended that a more generic clause, such as ‘the vendor will provide the purchaser with a statutory declaration establishing the cost of construction undertaken after the date of contract’ be included in such contracts.

The vendor’s obligation to provide a statutory declaration to the purchaser arises from Condition 12 of the Table, but if the purchaser nominates a substituted purchaser the vendor has no obligation to provide a second declaration detailing construction costs incurred after the nomination.

Tip Box

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

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