Monday, 10 December 2012

When does a refusal of a further offer from a defaulting purchaser amount to a failure to mitigate?

When a purchaser defaults under a contract for the sale of real estate, the vendor can retain the deposit under the standard terms of the contract for the sale of real estate in Victoria. The vendor can then attempt to re-sell the real estate. When the property market is in uncertain times, the vendor may not achieve the same sale price the second time around. The contract provides that the vendor can sue the defaulting purchaser for the shortfall on the resale. The vendor must take into account the deposit that has been retained. 

The question often arises: "Did the vendor mitigate his or her loss on the resale?" 

In the South Australian Supreme Court, this issue arose in circumstances where the defaulting purchaser offered to purchase the property in question for the original price, provided the forfeited deposit formed a part of the purchase price.

The Court was called on to determine whether, by rejecting that offer, the vendor had mitigated her loss, when the property was later sold at auction for less than the previous offer?

In Murphy v Mitanovski - BC201207009; [2012] SASC 158, the relevant chronology was:
  • 14 February 2010: contract for sale of a (South Australian) residential property;
  • 2 July 2010: Settlement due; purchasers failed to complete;
  • 20 July 2010: vendor served a notice requiring the purchaser to complete the contract;
  • 30 July 2010: vendor served a further notice requiring the purchaser to complete the contract; 
  • Around August 2010: vendor rented out the property to cover some ongoing losses (she had purchased a new home in anticipation of settling the sale of the property);
  • 27 August 2010: vendor terminated the contract and forfeited the deposit ($10,000 of $782,000); 
  • August 2010: property withdrawn from the market;
  • 22 September 2010: original purchasers offered to purchase the property for the original purchase price, provided the retained deposit was credited against the price; 
  • the new offer was rejected;
  • late October 2010: property again advertised for sale through a new agent;  
  • 20 November 2010: the property was sold at auction for $750,000 (a shortfall of $32,000 over original sale price).
The vendor sued the defaulting purchaser for the difference between the original sale price and the price at auction ($32,000), plus costs (including the costs of bridging finance to allow the vendor to complete the purchase of her replacement property), less the forfeited deposit.

Appeal decisionThe Supreme Court dismissed the appeal from the original Magistrates Court decision to dismiss the claim.

Proof of loss
The vendor’s loss in these circumstances is the difference between the contract price and the market value of the land at the due date for completion (2 July 2010).

Although there was no direct evidence of the value at 2 July 2010, the court accepted that in this case the November 2010 auction price could be used as such evidence, noting that the value of similar homes does not ordinarily fluctuate significantly over a four-month period.

The purchasers unsuccessfully argued that:
  • there was a general decline in real estate values in 2010 ( in other words, the November 2010 price was not a substitute for the 2 July 2010 value);
  • the property was marketed for auction as “re-released” and “definite sale”, which contributed to the failure to achieve the best possible price; and
  • the purchasers’ September offer of $782,000 suggested that the 2 July 2010 value was $782,000, and so there was no loss suffered. It also suggested that the auction failed to achieve the best price.
White J of the Supreme Court of South Australia held that refusing the purchasers’ September offer was not unreasonable (at paragraphs 50 and following):
… a plaintiff should not be required to accept an offer from a defaulting party if the acceptance would involve a negation or abandonment of the rights which the plaintiff has under the contract against the defendant.
However, the Court found (at paragraphs 58 and following) that the vendor's obligation to mitigate her loss was ongoing and the vendor failed to take reasonable steps to mitigate her loss in and from October by failing to enquire whether the purchasers wished to renew their offer (after the September offer was declined) when the vendor’s agent estimated the property would sell in the range $670,000–$730,000.
In these circumstances, it would have been reasonable for the [vendor] to have instructed [the agent] to enquire whether the [purchasers] were still interested in buying the house at $782,000 and, if so, to provide some evidence of their ability to complete the contract … I think it likely that the [purchasers] would have renewed the offer.
... It is understandable that the appellant had concerns about the respondents’ reliability and financial capacity. It is understandable that she did not wish to experience again the uncertainty and difficulties which had occurred in July in relation to the completion of the contract. However, by October the appellant had already moved out of her home into new premises. Any delays by the respondents would not have caused the personal inconvenience which she no doubt experienced in July.

Relevance in uncertain times
As the property market in Victoria is still uncertain about where it is heading (up or down), it seems that the issue of losses by vendors on re-sale is likely to be tested. In light of this decision, defaulting purchasers will be looking very closely at the circumstances of the re-sale and deciding whether to challenge the vendor's efforts to obtain the best possible price on the re-sale.

W G Stark

Hayden Starke Chambers

Are there any proposed changes to section 32 (vendor) statements in 2012?

On 31 October 2012, the Minister for Consumer Affairs, Michael O’Brien, released a discussion paper into the efficiency and effectiveness of s 32 of the Sale of Land Act 1962: “The discussion paper invites community and stakeholder debate around the effectiveness of section 32 and how this section might be reformed for the benefit of both the buyer and seller.”

As readers of this blog will know, section 32 requires anyone selling land in Victoria to disclose certain prescribed information about that land by providing a vendor statement to prospective purchasers. That information includes title details and restrictions, services available and connected, and any notices issued by any government authorities that affect the land.

The review will examine vendor statements and consider whether all of the required information is appropriate, and whether there are alternative methods available for disclosing this information prior to sale. The review will also examine the volume and complexity of the information being disclosed.

Mr O’Brien said:
“In the 30 years since vendor statements were introduced the amount of information required to be disclosed has grown, as has the size of the document. It’s appropriate to take stock and ask if we’re doing this the best way possible. I encourage consumers, land owners, industry professionals and other relevant stakeholders to engage in this review to deliver lower costs, while maintaining consumer protections.”
The discussion paper is available at, and the closing date for submissions is 20 December 2012.

W G Stark

Hayden Starke Chambers

Friday, 7 December 2012

Can the sheriff sell land in Victoria without a reserve - part 2?

In my earlier post of today, I referred to the final chapter in the long-running saga involving the $1,000 purchase of the equity in a property worth over $150,000 (see Zhou v Kousal [2012] VSC 187 and the related cases of Kousal v Suncorp-Metway Ltd [2011] VSC 312 and Wu v Ma [2011] VSC 208).

The sale in that case was ultimately set aside by the Supreme Court [see Zhou v Kousal] on the basis that the sum for which the debtor's interest was sold was so far below his equity as to amount to no sale. 

Recently, Associate Justice Lansdowne of the Supreme Court of Victoria was called upon to make an order for a sale of land by the Sheriff at auction without reserve - see JG King Pty Ltd v Kim Ngan Thi Do [2012] VSC 545. 

Her Honour ordered that the Sheriff sell the relevant property without reserve, but subject to Supreme Court approval. 
Her Honour concluded (at paragraph 18) that sale subject to court approval is the best means to protect the interests of the plaintiff (judgment creditor), the defendant (debtor and property owner), the Sheriff and the purchaser. 

In view of the disastrous result in the Kousal cases, the decision in JG King Pty Ltd v Kim Ngan Thi Do was probably inevitable; in my opinion it is now unlikely that the court will ever allow an unrestricted sale by the Sheriff without reserve in Victoria.

W G Stark

Hayden Starke Chambers

Can the sheriff sell land in Victoria without a reserve - part 1?

In my post of 14 March 2012, I referred to a paper on recent developments that I had recently presented. 

One of the topics covered in the paper was the long-running saga involving the purchase of the equity (worth over $150,000) in a property for $1,000 (see Wu v Ma [2011] VSC 208 and the related case of Kousal v Suncorp-Metway Ltd [2011] VSC 312).

In Zhou v Kousal [2012] VSC 187, Vickery J was called upon to deal with the aftermath of that sale by the Sheriff.


Zhiping Zhou was the registered proprietor of the relevant property. He was born in Shanghai China in1962. He immigrated to Australia in 1989 on a student visa following the 4 June 1989 uprising in Tiananmen Square in Beijing. He obtained permanent residency in Australia in 1993 and became an Australian citizen in 1998.

Zhou graduated with a Bachelor’s Degree in mechanical engineering in China. Since graduation and immigrating to Australia, he worked principally in the area of building and construction.

Zhou built a house on the Property himself, as the owner builder. A Certificate of Occupancy was issued in 2006. The house is built of brick and has five bedrooms, and is a good house. The property was valued at approximately $630,000.

The property was mortgaged, and the mortgagee was owed in excess of $450,000. There were unpaid council rates of nearly $8,000.  The judgment creditor was owed in excess of $100,000. 

The sale
After several applications to the Supreme Court, and an earlier failed auction, the Sheriff purported to sell the equity in the property at a second auction without reserve for the highest bid, which was $1,000 made by Mr Kousal.

After the sale, Zhou issued proceedings against Mr Kousal, the Sheriff, the mortgagee, the judgment creditor and the Registrar of Titles. 

Zhou sought a declaration that the Sheriff breached his legal duty by selling his interest in the Property at the Auction for an amount which was illusory, unfair, unreasonable in that it bore no relation to the evident worth of his interest in the Property, and he sought an order that the purported sale be set aside. He also sought damages against the Sheriff. 

Vickery J noted (at paragraph 30) that: 
... although the Order of Mukhtar AsJ expressly authorised the Sheriff to conduct a sale of the Property without a reserve price, this was not an unfettered authority to sell at any price which could be obtained. The Order expressly directed that any such sale must be conducted in a manner which did not “derogate from, or relieve the Sheriff of a duty at law to the owner of the land when exercising a power of sale”.

His Honour rejected Zhou's claim that he suffered a special disability by reason of his limited understanding of English, which made the transaction by Mr Kousal unconscionable. In fact, Zhou had been involved in the purchase of at least 10 pieces of real estate in Victoria since 2000, and appeared to be an experienced property developer. 

Vickery J specifically found that Mr Kousal was not acting unconscientiously when trying to enforce his purchase of the equity in the property from the Sheriff. 

His Honour proceeded to analyse the conduct of the sale by the Sheriff and concluded that the Sheriff was in breach of his common law duty and his duty under the Sheriff Act.

Relying on that breach of duty by the Sheriff, Vickery J set aside the sale by the Sheriff, on the basis that the sum for which the debtor's interest was sold was so far below his equity as to amount to no sale.

W G Stark

Hayden Starke Chambers