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Off the Plan Contracts (QLD) Off the Plan Contracts (QLD) - August 2013

Off the Plan Contracts (QLD)


by Despina Priala, Priala Legal

Released August 2013

Off the plan contracts continue to cause grief for practitioners.  This presentation reviews some recent developments in the area, and visits the perennial traps practitioners need to avoid:

1. Bank scrutiny of off the plan contracts - what the banks expect to see

Off the plan contracts have generally become widely accepted in the commercial world. For a Bank to provide funding for a project, it must firstly understand the inherent risks associated with the type of development proposed, the sales process adopted to achieve pre-sales, and the nature of an off the plan contract used to secure such pre-sales.

Likewise for a purchaser looking to obtain finance approval to purchase off the plan, a purchaser’s financier will want a copy of the signed contract of sale early to review and if satisfied, provide a preliminary approval only to a purchaser in the early stages of a project. Until such time as registration of the plan is obtained and the contract becomes unconditional, a purchaser’s financier can only provide a preliminary approval subject to registration.

Whether as developer or purchaser, financiers will have certain expectations from off the plan contracts and some of these are listed below:

From a developer’s perspective:

  1. The contract needs to contain clear and unequivocal rights and remedies for developers in the event of a buyer being in default and in breach of the contract, including the right to forfeiture of the deposit.

  2. To aid in the security of pre-sales, contracts should provide for 10% deposit payable upfront. Sometimes buyers will try to negotiate this to 5%, however developers are more amenable to agreeing to this once a certain percentage of pre sales has been achieved.

  3. Usually contracts allow the deposit to be paid by the purchaser by way of a bank guarantee or security bond in terms of a cash deposit. The contract needs to contain terms acceptable for provision of such a bank guarantee or deposit bond and the right upon the developer or its financer to call upon such security if required;

  4. Under relevant state legislation, developers must provide for a sunset date in off the plan contracts. This date must be acceptable in line with the proposed construction and completion dates for the project.

  5. The contract must provide sufficient flexibility for the developer to terminate the contract without any repercussions, for events beyond their control, such as where the developer cannot obtain registration of the plan, or where the project no longer becomes commercially viable, or if there are insufficient number of pre sales.

  6. The contract must expressly provide that the developer is permitted to mortgage the whole of the development or individual lots as required given section 73 of the Property Law Act 1974 (Qld) do not apply. Section 73 provides that in certain circumstances a contract is voidable by a purchaser if any part of the land or proposed lot is mortgaged without the purchaser’s consent.

  7. Sufficient flexibility for the developer to refinance if required prior to registration to take into account additional funding required to complete the project.

  8. Clear provision for the developer to extend the sunset date in certain circumstances, noting the statutory time periods under the Land Sales Act in Qld as referred to below.

From a purchaser’s perspective:

  1. Banks expect that off the plan contracts are, by their very nature, a contract whereby the developer promises to deliver a product yet constructed or built (i.e. a block of land or build a unit or dwelling on a lot), based on the proposed plans, specifications and designs.

  2. Banks cannot provide finance completely initially to purchasers given the nature of the contract. A preliminary finance approval can be issued which will be subject to registration of the plan, and where a dwelling is being provided, completion of construction and issue of the certificate of classification.

  3. A reasonable period of time for a sunset date taking into account the statutory requirements.

  4. Banks normally do not object to any provision in off the plan contract (perhaps primarily because at the time they are provided with the contract it is already signed, sealed and delivered and the opportunity for negotiation is lost). However, given the Australian Consumer Law referred to below regarding unfair contract terms, we may find that Banks will start to object to certain provisions they identify as unfair which may have an impact on issuing any preliminary finance approval.

  5. Bank guarantee provisions are reviewed where a purchaser wishes to take advantage of this and have their bank issue such security.

2. What if the developer or builder goes broke - ability of financiers to step in to complete the contract

If a developer goes broke the ability of its financiers to step in and complete the contract will ultimately depend upon the rights afforded to them in the security documentation held over the developer and the project land itself. At a practical level, it will also depend upon at what stage the developer goes broke. For example, if a developer goes broke just prior to or immediately following registration of the plan, the financier’s ability to complete the contract is not as compromised as where a developer goes broke either prior to, or during the construction stage where very few contracts of sale with buyers may be in place.

If the developer’s builder becomes bankrupt or goes into liquidation, this is a different situation altogether as the builder’s insurance in place will need to be called upon to complete the build and the developer will need to liaise with the Qld Building Services Authority to ensure this is carried out. The developer may engage another builder to complete the contract whilst dealing with any insurance claims against the builder that became bankrupt. Difficulties may arise if the insurance in place is insufficient to complete the works.

Normally at the time the developer commences marketing and selling the lots off the plan, the security for the project is already in place and registered over the land. The security documentation would dictate the rights provided to the financier in the event that the developer is in default. General security provided as part of the funding for the project would undoubtedly include a registered mortgage over the project land as well as fixed and floating charges over the assets of the developer company. Pursuant to the Property Law Act 1974 (Qld) mortgagees are given extensive powers to take possession of land and exercise their power of sale to realise a secured asset. As long as the terms of the contract are not in contradiction to this, the financier’s ability to complete should not be impaired. However, even if the terms of the contract are in contradiction, the mortgagee’s rights and interest in the land were registered and in place prior to any off the plan contracts being executed.

In off the plan contracts where a party defaults the emphasis is almost always on the consequences of buyers who default not sellers. In fact it is unusual to see any provision detailing the buyer’s rights in the event of the seller defaulting. This is reflective of the nature of off the plan contracts, although a consumer contract, they are designed to be in favour of the developer given the subject of the contract.

3. Unfair terms in off the plan contracts - how to negotiate them on behalf of purchasers

The Australian Consumer Law contains the provisions for the national unfair terms regime. A provision is unfair if it:

  1. Would cause a significant imbalance in the parties’ rights and obligations under the contract;

  2. Is not reasonably necessary to protect the legitimate interest of the party who is advantaged by the term; and

  3. Would cause a detriment to a party to the contract if it were to be applied or relied upon, taking into account the extent to which the term is transparent (i.e. expressed in reasonably plain language, legible, presented clearly and readily available to the party affected by the term) and the contract as a whole.

All three elements of the test must be proved for a court to find a term unfair.

A limited range of provisions are not subject to the regime including provisions defining the main subject matter of the contract, provisions setting the upfront price payable, and provisions required or permitted by legislation.

It is not an offence to include unfair terms in a consumer contract, however where a party seeks to enforce such a provision which is declared unfair, penalties may apply.

As always, it will be up to the courts to determine whether a provision is declared unfair. From the cases thus far it can be said that:

  • Where clauses are unclear, inconsistent or ambiguous, these clauses will most likely be considered unfair;

  • Clauses that seek to unreasonably shift risks to consumers are at significant risk of being considered unfair;

  • Providing a party with an absolute discretion to determine an outcome may be considered a provision which goes beyond protecting its legitimate interests may be considered void.

Since the commencement of the unfair terms regime, drafters of contracts of sale have paid particular attention to try and ensure the regime is complied with. However, the very nature of an off the plan contract, is that it must provide sufficient flexibility to the developer to change or modify certain aspects of the development. And such provisions contained in off the plan contracts have been commercially acceptable given the developer is selling a product yet constructed, and may be subject to a variety of circumstances beyond its control during the construction and completion phases. Buyers entering into these contracts should be sufficiently made aware of this when obtaining pre-contract advice and understand the consequences and the limited circumstances by which developers will modify their contracts, if at all.

Having the knowledge of this new legislation in place, developers may be more lenient towards negotiating certain terms that have been ingrained in many off the plan contracts for years. For example, a typical clause that is often negotiated in favour of the purchaser is the deposit clause, specifically which party is entitled to the interest earned on the investment of the deposit. Under a standard REIQ contract the party entitled to the deposit is normally the party entitled to any interest earned on the deposit. If the contract settles, this is the vendor. If the purchaser defaults it is the vendor. If the vendor defaults it is the purchaser. In off the plan contracts, I often negotiate this clause so that either both parties share in the interest earned on the deposit, or that the purchaser receives the entire interest earned.

At the end of the day, the best way to negotiate any perceived unfair term is to discuss this first with the developer’s selling agent explain the reasoning behind it. Allow this agent to discuss the matter directly with the developer to obtain a response. More often than not, this is the preferred method particularly as this may save the developer on additional legal fees in determining whether a particular clause such as sharing in the interest can be altered for a particular purchaser. Certainly, this has been my experience in dealing with either the selling agent or the developer direct, when acting for a purchaser.

Other typical examples are these:

  1. The settlement date where it concerns foreign buyers. Usually, the settlement date in off the plan contracts notes the settlement date as 14 days from written notification of registration of the plan from the vendor to the purchaser. This can be particularly harsh or unfair for foreign buyers. For foreign buyers, developers often agree to change this from 14 to 30 days to allow these buyers sufficient time to transfer funds overseas to Australia.

  2. The pre settlement inspection and notification of defects to the purchaser prior to settlement to ensure defects will be rectified by developer. Developers cannot contract out of the provisions under the Qld Building Services Authority Act 1991 (Qld) but often attempt to include implied obligations to restrict the time by which buyers notify sellers of defects. Under the QBSA an owner is subjected to the statutory period of 6 years and 3 months for rectification of structural defects. Normally, in off the plan contracts developers insist that buyers notify them of the defects pre settlement, and developers have 3 months to rectify the defects. Not all defects notified are structural.

  3. The adjustment provision. Sometimes a developer provides that the buyer comes responsible for outgoings as from the date of registration of the plan as opposed to the settlement date. This normally includes adjustments for rates, water, land tax and if applicable body corporate levies. This has the effect that adjustments calculated for the purposes of settlement are calculated as from registration date not settlement date which is the opposite to what is contained in standard REIQ contracts of sale in Qld. Developers are usually amenable to having this provision changed so that buyers are only responsible for outgoings as from the settlement date. However, if this is not identified prior to signing and not requested, developers have no reason to agree to change this subsequently.

When it comes to buyers signing a contract of sale, the buyer needs to completely understand the terms and be satisfied with them. If the buyer is not completely satisfied, ask for them to be changed however the developer may refuse. A buyer should always obtain legal advice prior to signing. If the developer adopts a “take it or leave it” attitude with no flexibility to amend any of the terms, the best way to deal with this is perhaps for a buyer to leave it.

Buyers who get in early may be able to get a better deal with developers who are looking to secure sales, sometimes up to 5% or 10%. Generally, once a developer has obtained a certain percentage of pre sales, they will not be so amenable to negotiating terms with a buyer than at the very start of pre selling.

In March 2013, the Australian Competition and Consumer Commission released a report which highlighted the outcomes of the ACCC’s unfair contract terms reviews. From this report there were eight key issues identified during the industry reviews. Of these eight, I consider the following issues to be relevant to off the plan contracts:

  • Terms that unfairly restrict the consumer’s right to terminate the contract;

  • Terms that suspend or terminate the services being provided to the consumer under the contract;

  • Terms that make the consumer liable for things that would ordinarily be outside of their control;

  • Terms that prevents the consumer from relying on representations made by the business or its agents.

An example clause for the last issue is this:

“You acknowledge that you enter into this agreement entirely as a result of your own enquiries and that you do not rely on any statement, representation or promise by us or on our behalf not expressly set out in this agreement”.

The ACCC has caused the removal of such clauses from contracts used in the telecommunications and domestic aviation industries. Off the plan contracts often contain such a provision as the one above. It will be interesting to see what transpires in the future as, until a party under a contract is affected by such a clause where the other party seeks to rely upon it, such a provision will continue to be included in contracts. Any party wishing to enforce it will need to determine whether they are reasonably necessary to protect their legitimate interests.

When drafting contracts with this legislation in mind and the above report issued, some suggestions include these:

  • the removal of any “red flag” provisions that are rarely relied upon;

  • the removal or limitation of over-reaching clauses to ensure they address the particular risks they were intended to cover;

  • if terms to suspend or terminate services are to be included, provide obligations for prior notice or communication to the consumer.

Contracts you have adopted in the past should be carefully scrutinised and where a significant imbalance in the rights of parties are identified and determine whether they are necessary to protect your legitimate interests.

4. Failure to register plan in time - position of vendor and purchaser

On or about 15 February 2012 changes were made to the Land Sales Act 1984 (Qld) (“LSA”) which limited a buyer’s right to terminate a contract of sale pursuant to Section 27 of the LSA.

Section 27(1) of the LSA requires a developer to deliver to a buyer a transfer capable of immediate registration under an off the plan contract within the statutory period set, (either 3 ½ years or 5 ½ years if extended by regulation). If the seller has not given to a buyer the transfer capable of immediate registration within this time frame then the buyer has a right to avoid the contract under Section 27(2) of the LSA. The intention behind this provision within the LSA was to ensure developers were tied to a sunset date for delivery of title to off the plan contracts.

Prior to the amendments the section provided a “loophole” for buyers whereby there was an opportunity for buyers, (who failed to settle on the contract and therefore were in default), to avoid a contract where the seller had not delivered the transfer. This provided a risk to both developers and financiers in situations where a buyer was in default and the seller was seeking specific performance of the contract. Where a seller seeks specific performance of the contract to force the buyer to settle on the purchase, the contract remains on foot between the parties until such time as the court determines the outcome. If the court had yet to determine the dispute before the time period within which the seller had to deliver a transfer capable of immediate registration to a buyer, the buyer was permitted to avoid the contract based on Section 27, regardless of the buyer’s default. This was inconsistent with the legal principle that a party should not be able to rely upon its own default to avoid a contract of sale.

The amendments to Section 27 of the LSA now make it clear that only in the event where the seller has not delivered the transfer capable of immediate registration within the relevant time frame which was not caused by the buyer’s default, can a buyer avoid the contract. The words contained in section 27(1)(b) of the LSA, “other than as a result of the purchaser’s default” have been inserted as a result of the amendments, which were not previously included. Recent case law has also settled this discrepancy. The Landmark Qld Court of Appeal decision of Meridian AB Pty Ltd & Anor v Jackson & Ors [2013] QCA 121, which was handed down on 21 May 2013, has now confirmed by a unanimous decision, that Section 27(2) does not permit a purchaser to avoid a contract in circumstances where they refused to settle and the 3 ½ year sunset period has subsequently expired. Some interesting comments from the Court of Appeal on the construction of Section 27 were these:

“Section 27 was not intended to be read literally and contemplated that a registrable instrument of transfer will not be provided by the vendor to the purchaser except in return for the balance purchase price…..It is unlikely that Section 27 was intended to operate to permit a purchaser, who refuses to settle, to avoid the contract and benefit from their own wrongdoing….The “purchaser” referred to in Section 27 is one which, at the time of giving the required notice, was not wrongfully refusing to perform those obligations under the contract which were dependent upon the obligations of the vendor to provide it with a registrable instrument of transfer…..This construction did not detract from the consumer protection purpose of Section 27 and was consistent with the mischief Section 27 seeks to address by preventing vendors from delaying indefinitely before providing a buyer with registrable title”.

The amendments to the LSA ensure protection for sellers against a buyer’s wrongful refusal to settle, and has potential for the overall protection of developer’s rights in respect of off the plan contracts.

5. Inconsistencies between development plan and the plan of subdivision

In Qld there is provision in the Land Sales Act to provide for the consequences of any variations that may occur from the development plan as presented to buyers from the outset and the proposed plan of subdivision, for both allotment sales (vacant lots) and proposed lots (build on).

Under Section 10 of the LSA, if there is a “significant variation” between the disclosure plan delivered to the buyer initially and the plan of survey proposed for registration, the seller is required to notify the buyer of this variation including the details of the variation, and the buyer has 30 days from receiving this notice to avoid the contract. Section 10(5) of the LSA defines a “significant variation” to mean:

  1. In the details between a disclosure plan and a survey plan a variation of more than 2% in details of area, or a variation of more than 1% in details of linear dimensions;

  2. in the details between a disclosure plan and an as constructed plan—a variation of more than 500mm in height in details of surface contours or fill levels.

Similarly for proposed lots, if the original disclosure statement provided to buyers is subsequently found to be inaccurate the seller has an obligation to provide a rectification statement to the buyer, and if only if the seller fails to do so, does the buyer have a right to avoid the contract. The Body Corporate and Community Management Act 1997 (Qld) also make it sufficiently clear that for proposed lots within a proposed community title scheme, in circumstances where the further statement rectifying the inaccuracy, materially prejudices the buyer if they were compelled to settle on the lot, the buyer may terminate the contract of sale. This was expanded upon in 2011 when further amendments were made to the BCCMA which increased the rights or opportunities for buyers to terminate a contract of sale, but again the circumstances upon which they could use to terminate still had to be proven to be materially prejudicial to the buyer. These changes included where a community management statement recorded for the scheme is different to the one most recently advised to the buyer and where the CMS most recently advised to the buyer does not contain an explanation as to why the contribution schedule lot entitlements are not equal where it is required to do so.

The “material prejudice” test has been discussed in various cases over the years. In 2010 the Qld Supreme Court, in the case of Wilson v Mirvac Pty Ltd [2010] QSC 87, noted the test to be objective having regard to each buyer’s circumstances, “…the legislation must be construed in the buyer’s favour and the prejudice must be proportionate to, and have a relationship with, the inaccuracy…”.. As there are strict time frames for buyers to give the notice of termination, solicitors representing buyers should immediately obtain a copy of the registered CMS upon receiving notification of the scheme being established. In most contracts, the time to settle on the contract is 14 days from notification of registration of the scheme and plan, and the period to terminate under the BCCMA must be no later than the latest of 3 days before the completion date or 14 days after the notification to the buyer that the scheme is established.

Other states of Australia undoubtedly have similar legislation in place. An example of this was noted in a recent decision handed down by the Supreme Court of Victoria in Lockwood v PSP Investments Pty Ltd [2013] VSC 10. In this case, the issue was whether the changes to the plan of subdivision materially affected the lot and therefore entitled the purchaser to rescind the contract under section 9AC(2) of the Sale of Land Act 1962 (VIC). This purchaser entered into 8 contracts with the developer, 4 of which were for 4 apartments and the remaining 4 were for 4 car park lots associated for use with each apartment. The local council required the deletion of these car park lots from the plan and in turn they were deleted and merged with common property. This had the effect of enlarging the common property area for each lot and the corresponding rights and obligations of the owners of each apartment.

When determining the outcome and reviewing the impact of the change on the buyer, the court reviewed the 8 contracts together. The court found that the, “…deletion of the car park lots and the inability of the vendor to complete those contracts, materially and adversely affected each apartment lot”. The court found that the car park lots that were to have been made available for use with each lot would have enhanced the value of each lot. The Court allowed the contracts to be validly rescinded by the buyer and ordered the return of the deposit monies.

This case demonstrates that any material affect to the development may potentially give rise to a right to rescind. The subject matter of the contract must always be considered and whether the amendment has changed the context in which the buyer entered the contract.

Buyers have also sought to use the disclosure requirements in the BCCMA and LSA as a platform to pleading cases of misrepresentation against developers. A very good example of this is one of the many cases that stemmed from the Oracle Tower on the Gold Coast. In the case of Gough & Anor v South Sky Investments Pty Ltd the Court here was asked to accept that the on-site management operation effective as from commencement of the scheme, changed the nature of the development from a residential tower to a hotel operation, thereby making the disclosure initially provided to the buyers inaccurate.

The buyers argued several bases for being materially prejudiced by the change including:-

  • the inaccuracy of the change in the development from a residential tower to a hotel operation

  • the change to the branding of the building

  • mix of occupants - increased use of facilities by short term visitors and a deprivation of long term rentals as the emphasis was on short term facilities.

The Court rejected the buyer’s arguments that there was any contractual commitment from the developer to the buyer of the type of tower to be developed and the nature of the on-site operation to be confined only to long term rentals. The fact that hotel style services were available did not mean that the tower ceased to be a residential tower and in essence, the developer had delivered what was promised to the buyer in the contract, a lot in a residential tower. The disclosure given to the buyer of a lot in a residential tower had not changed by virtue of the nature of the on-site operations.

The Court further noted that, “…the fact that some people might label the building a hotel did not make the disclosure statements as issued inaccurate” as the tower was still a residential tower. The name of the building had changed as well, which was also an inaccuracy, however the Court found that this did not materially prejudice the buyer, nor did the fact that the building may not be as attractive to a class of potential occupiers.

The findings made in this case and other cases that stemmed from the Oracle Tower development and the courts examination of the contract, has meant that it is extremely important for developers to provide accurate disclosure to buyers prior to executing, and to ensure the contract terms are consistent with disclosed material and points of sale representation. If the buyer can prove that the developer failed to deliver what was contractually provided for or the change means the buyer is substantially disadvantaged, the buyer’s chances of succeeding in terminating a contract of sale are greatly increased.

I am not entirely convinced that the conveyancing process in terms of the plethora of disclosure obligations placed upon vendors in Qld will be simplified in the future. If the process can be simplified, this may result in fewer avenues for buyers to attempt to terminate contracts due to technical failures. Over the years the Courts have now shown that they are reluctant to uphold termination claims based solely on technical requirements. In another Oracle Tower case of Zhang and Wu v South Sky Investments Pty Ltd and Anor [2011] QSC 367, the buyers claimed they were entitled to terminate the contract for a penthouse worth $5.5 million based on two grounds:

  1. that the contract was entered into under common mistake; and

  2. the last disclosure statement provided was inaccurate pursuant to the BCCMA.

The common mistake argument centred on a proposed by-law which provided exclusive use of the penthouse lift. The buyers argued that they entered into the contract under the common mistake that such a by-law was valid, whereas in fact it was not pursuant to the BCCMA. This particular by-law had the effect of providing the occupiers of the two penthouses with exclusive use of the lift between levels 40 and 41. The BCCMA prohibits bylaws providing exclusive use to common property infrastructure. The Court held that the developer did not warrant the validity of the by-law and the BCCMA does not presume the validity of proposed by-laws. Although contained in the contract it was a mere acknowledgement by the developer of such a proposed by-law. The Court further found that, “…the existence or validity of the proposed by-law was held not to be a fundamental part of the consideration for the contract and failed to deter the due performance of the contract”.

The second argument raised by the buyer was that the amended disclosure statement provided was inaccurate as it contained an inaccurate reference to the lots. Justice Fryberg held that the error was contained within the CMS which did not form part of the disclosure statement, and that the, “… buyer was not deprived of the benefit of the by-law and wold not have been subject to any material prejudice due to the error in the CMS”.

In off the plan contracts, it is quite common to see clauses drafted whereby the developer has the flexibility to alter or change certain aspects of the development and the lot, for example:-

  • schedule of finishes

  • reconfiguration of the building or scheme land

  • plans and specifications

  • numbering of lots

  • area or location or permitted use of any lot including minor design changes

  • common property rights

  • the granting of any exclusive use or special rights over common property

  • the allocation or arrangement for access to and use of facilities;

  • encumbrances to support any facilities;

  • boundary fences or walls not within the scheme land

  • name of the scheme,

provided the alteration or variation does not materially prejudice the buyer.

6. Inconsistencies between actual size and size on the plan

Over the years, the cases have shown that generally there is an accepted margin of 5% tolerance and indeed following such cases, developers have included this reference of 5% in off the plan contracts of sale.

For example, in the Qld Supreme Court case of Mirvac Queensland Pty Ltd v Horne & Ors and Mirvac Queensland Pty Ltd v Beioley & Anor, the court had to determine whether a change to the configuration of a lot triggered the rectification statement obligations as noted above in the LSA and in turn, termination rights. In this case there were 2 contracts, the first had a change to the floor area of the lot and the other a change to the lot balconies.

In both cases, the Court qualified the trigger under the LSA to give further disclosure by reference to contractual provisions that allowed the developer to vary the area and configuration of the lots within certain parameters, that is, a 5% tolerance. Therefore, any change within that range did not trigger the right for further disclosure under the LSA.

However, the Court went on further to state that even if, as in this case, the area of the balcony changed by more than 5%, there was, “…no inaccuracy in the originally disclosed statement, including in respect of function and amenity”. In other words, the change to the balcony area alone was not sufficient to change the nature of what was sold to the buyer in a material way.

Solicitors acting for developers need to carefully consider the Courts interpretation of these legislative triggers when drafting off the plan contracts.

Following on from the above we must refer to case law to ascertain how the courts have determined certain cases in keeping with the legislation.

7. Marketing material not consistent with the plan

In the Oracle decision referred to above, the Court noted that, “…matters extraneous to the disclosure statements, such as brochures and representations by sales staff may have created expectations in the minds of buyers but the disclosure statement did not make representations of that nature”. In the Oracle case however it was interesting to note that the buyers did not plead a case of misrepresentation based on “extraneous matters”, and had they done so, the result may have been different. The buyers would need to prove that such representations were in fact made and that they significantly relied upon such representations when determining whether to enter into the contract of sale.

Generally, the test in Qld of whether a buyer has been materially prejudiced by an inaccuracy in a disclosure statement focuses on the materials disclosed not extraneous materials.

Marketing and advertising material is used in the sales process for projects. And normally marketing materials used contain disclaimers and exclusionary language as a defence for developers for any allegations of misrepresentation. However, usually these are interpreted by the courts narrowly and as against the particular buyer concerned.

Rather than rely on such disclaimers and exclusionary provisions, it is thought that developers should create a sales manual which contains procedures and processes to follow during the sales and marketing process and the parameters of making statements to potential buyers about the project. This manual would then form part of the evidentiary material for developers to assist them in the event of allegations of misrepresentations and future claims. In the case of Mirvac Queensland Pty Ltd v Tyan Pty Ltd ATF Tavakol Investment Trust, the sales manual process was accepted and counted against the claim representation. However, in the case of Nifsan Developments Pty Ltd v Buskley & Anor the buyer’s evidence based on a course of dealings with the selling agent was preferred over the evidence tendered by the developer.

In a recent case determined by the Supreme Court of Victoria, the court found that a vendor’s silence was not misleading or deceptive. In the case of Charles Lloyd Property Group Pty Ltd v Buchanan the court held that:

“…in this case for a finding of misleading and deceptive conduct, the circumstances of the sale of land need to have given rise to a reasonable expectation that a past suicide on the land would have been disclosed into the contract. By entering into a deed extending the completion date after learning of the suicide, the purchaser ‘refreshed’ the original contract and could not then argue that it had been misled by the silence when entering the original contract”.

Here the buyer’s subsequent conduct after learning of the suicide jeopardised its misleading and deceptive claim.

The court also made these general observations:

“...cases have drawn a distinction between mere silence and silence coupled with related positive statements that are capable of leading a plaintiff into error; for mere silence to attract liability, there must be something more - thus the approach of considering whether circumstances gave rise to a reasonable expectation that if some relevant facts existed, they would be disclosed…”.

In Victoria, a new consumer law aimed at improving transparency and disclosure for off the plan contracts came into force early in 2012. The front page of all sales contracts must state three things:

  1. That the amount of a deposit is negotiable but cannot exceed 10% of the purchase price;

  2. A “substantial period of time” may pass between signing the contract of sale and when the buyer becomes the registered owner of the property; and

  3. The value of the property my change between the time the contract is signed and when the buyer takes ownership.

Disappearing views - views on to other buildings instead of over the bay

Following on from the above cases, in terms of possible misrepresentation claims made by buyers against developers, in the case of Avis & Anor v Mark Bain Constructions Pty Ltd the buyer’s specific statements made to the selling agent prior to entering into the contract regarding significance of views provided the buyer with a termination right. Perhaps, had the developer here created a sales manual detailing the parameters for agents to follow when making statements concerning the project, would have assist the developer in succeeding against the buyer.

The very nature of off the plan contracts means that developers (and their sales and marketing team) do make representations to potential buyers about future matters and a product that is yet constructed and established, to only be tested years down the track when the project is complete. For this very reason alone, it is extremely important for developers to retain evidentiary records and material in the event that certain representations are tested. Such records would include a detailed account taken by the relevant party concerned (selling agent or developer) of particular concerns or issues that a buyer expressed pre contract, and how those issues or concerns were dealt with by way of statements or representations made at the time. Selling agents on projects should be required to keep a diary or log for each project they work on to keep for at least 7 years or 12 months following the sale of the last lot in the project to record their dealings with all buyers who purchased into the project.

Contracts and disclosure statements should always contain buyer’s acknowledgements concerning material and documentation issued to buyers pre contract. To take this a step further, developers could consider including an acknowledgement or ‘buyer’s disclosure statement’, similar to what is required under the Retail Shop Leases Act in Qld, whereby the buyer is given the opportunity pre signing, to list any statements, materials or other documents that the buyer was given and which they rely upon in entering into the contract. The developer would then be able to view this upfront and take any necessary steps required, and it would also form part of the evidentiary material the developer could use for any future claims of misrepresentation.

8. Remedies for the purchaser: rescission or damages

Termination of contracts needs to be distinguished from the right to rescind a contract due to misrepresentation or mistake. Where a contract is terminated each party is discharged from their future contractual obligations. However, where a contract is rescinded the contract is dissolved and the parties are returned to their original positions as though no contract ever existed.

In claims of misrepresentation or misleading conduct the first remedy buyers will seek is rescission of the contract. At law this is an equitable remedy and is within the court’s discretion to award. The court also has a discretion to award rescission pursuant to the Australian Consumer Law (previously the Trade Practices Act 1974 (Cth)). If an order for rescission is made, the parties are returned to their original position pre contract. Therefore, all deposit and other monies paid by the buyer are returned and all property is returned to the seller. Claims for rescission of the contract at equity are carried out by the act of a party, whereas claims for rescission under the legislation the parties must seek an order of rescission from the court.

Generally, a buyer who seeks rescission of a contract for misrepresentation before completion occurs will succeed in the claim at this point, provided there are no barriers to a rescission claim and that the actual misrepresentation was able to be substantiated and accepted by the courts. Where however, the misrepresentation is only discovered by the buyer after completion, the right for rescission is limited. If it occurs prior to registration of the transfer it may still be possible. However, where registration of the transfer has already occurred, rescission is no longer possible as the contract has merged in the conveyance (the principle of merger). In this case, a buyer would need to seek a reconveyance of the land in exchange for the purchase monies.

Sometimes the courts though will consider that damages as opposed to rescission of a contract will be sufficient to compensate the buyer for their loss. In the case of Tenji v Henneberry & Associates Pty Ltd (2000) 172 ALR 679, the buyer remained in possession of the premises after discovering the misleading statements and after sending a notice to cancel the contract. The Court held that because of the buyer’s conduct here and the fact that the buyer did not undertake to account to the seller for the takings whilst in possession, meant that rescission of the contract was not awarded. For rescission to be awarded, the court must be satisfied overall that it is an appropriate remedy to compensate the buyer for their loss, or serves another purpose to bring justice between the parties. Where a party has already affirmed the contract by their conduct, as with the above case for example, the courts will not make an order for rescission.

For a purchaser to be successful in a claim for damages, the purchaser must be able to firstly substantiate that a loss has occurred, and secondly that the loss occurred as a result of the misrepresentation.

As to the quantum of damage, the courts will consider a range of factors including:-

  • The amount of damages required to place the party in the position they were in prior to the act of misrepresentation

  • How much worse off the party is having entered into the contract where the misrepresentation induced him or her to do so than if the transaction never took place

  • Amounts of money spent in reliance on the misrepresentation (as opposed to the profit they expected to make)

  • A party’s financial position at the time of entering into the contract as compared with after the contract

At the end of the day damages will generally be measured by ascertaining how much worse off the applicant is as a result of the conduct of the other party which caused or created the misrepresentation.

It is also important to remember that under both the common law and state legislation, an applicant who claims a loss based on misrepresentation or other grounds, is under an obligation to mitigate their loss. This will be a question of fact in each case for the court to determine.

In addition to the rights afforded to a buyer to rescind a contract of sale under common law and under the Australian Consumer Law, a buyer also has other statutory rights to rescind a contract of sale pursuant to the Property Agents and Motor Dealers Act 2000 (Qld) and the BCCMA.

When drafting contracts consideration should also be given to whether a termination provision could contain implied terms of good faith and therefore be inconsistent with the purpose and intent of the clause. Some cases have identified that there were constraints on termination rights under contracts of sale where, for example, the requirement for a remedy notice and the power to extend the time for remedying the breach that were included in such provision. If the courts find that a contract of sale contains an implied obligation of good faith, consider this when drafting a termination clause:

  • Include an entire agreement clause which excludes implied terms (but consider other implied terms that you may or may not want to keep);

  • Include words such as “for any reason”, “in its absolute discretion”, “at any time” to evidence an intention not to restrict the exercise of the right to terminate the contract;

  • Do not draft termination provisions that contain onerous grounds or overly technical grounds which may leave room for an implied obligation of good faith.

9. Remedies for the Vendor: Specific performance

A vendor seeking to claim specific performance of a contract means the vendor is seeking to force or compel the purchaser to complete the contract of sale. This will usually be granted in equity where damages are an inadequate remedy for the vendor.

The party seeking specific performance, usually a vendor, will need to show that they are ready, willing and able to effect completion of the contract at the time the claim for specific performance is made. Any misrepresentation or misleading and deceptive conduct that can be substantiated will be a barrier to obtaining such an order.

Once a party elects to sue for specific performance, they can no longer elect to terminate the contract for breach and claim damages. They can however, in their claim, seek damages as an alternative pleading in substitution for specific performance.

In off the plan contracts, sufficient flexibility needs to be provided for developers in the event of default by the purchaser, including the forfeiture of deposits.

In a recent Qld Court of Appeal case (Willmott & Anor v McLeay & Anor [2013] 84), the Court found that a vendor under a standard REIQ Residential Contract of Sale has a right to claim the deposit as a debt in addition to the rights given to a vendor under clause 9.4 where the purchaser defaulted for failure to pay the balance deposit and failed to complete the contract. Under clause 9.4, where a vendor terminates a contract of sale it may do all or any of the following:

  • Resume possession of the property;

  • Forfeit the deposit and any interest earned;

  • Sue the buyer for damages;

  • Resell the property.

These provisions are almost always mirrored in off the plan contracts.

The purchaser in this case argued that the recover of the deposit in addition to the above remedies in clause 9.4 were an “unfair windfall” to the vendor. The Court of Appeal disagreed and stated that the recovery of the deposit was not an unfair windfall but rather, “…it demonstrated the dual character of the deposit as part payment of the purchase price and a guarantee that the purchaser means business”.

Off the plan contracts should be drafted in such a manner to ensure these rights are preserved.

DESPINA PRIALA

Director, Priala Legal Pty Ltd