Are there any recent cases about Section 9AC of the Sale of Land Act and material changes to plans of subdivision before registration?

The property market for the sale of apartments in Victoria, Australia has become more challenging recently. 

Lockdowns and other restrictions resulting from COVID-19 such as density limits and mask wearing combined with absent foreign buyers, as well as general concern about the viability of some projects, caused banks to impose limits on off-the-plan lending. Further, stamp duty increases have also helped to create downward pressure on values. Finally, we now have upward pressure on interest rates adding to the uncertainty in the apartment market. 

In August 2021, Associate Justice Matthews was called upon in the Supreme Court of Victoria to decide an application in relation to Section 9AC of the Sale of Land Act 1962 (see Burger & Ors v Longboat Holdings Group 2 Pty Ltd [2021] VSC 469).

Readers will be aware of the decisions in Besser and Lockwood (see my post of 3 May 2013 - here https://rb.gy/rs1otu) where purchasers of property off the plan were held to be entitled to rescind after material amendments were made to the plans. 

Facts in Burger Case

Between when contracts were signed and the plan of subdivision was lodged for registration, the developer made several changes to the Plan. These included:

• decreasing the area of the apartment (predominantly the master bedroom by 4.39%).
• reducing the size of the light court resulting in a decrease of natural light into the master bedroom.
• reducing the size of the common property by vesting part of it in the local council as a council reserve.
• decreasing the area of common property 1 by creating common property 2. Common property 2 was converted into a roof terrace, which the purchaser as a member of common property 1, could not access. Prior to the change, all owners were able to access the roof terrace (however, prior to the changes to the Plan, that terrace was inaccessible to everyone).
• changing the size and location of the car spaces, including reducing the size of one car space by 11% and relocating the other from the top of a car stacker to the bottom.

The developer notified purchasers of the changes (as it was required to do). However, it had not notified the purchasers of several interim alterations. 

In response the purchasers of two lots purported to terminate their contracts in accordance with section 9AC of the SLA. 

The developer refused to accept each termination and refused to return the deposits on the basis that the changes to the Plan did not materially affect the purchasers’ lots. Developers have traditionally relied upon a less than 5% change in apartment area is being the benchmark to determine that the lot has not been materially affected. 

Her Honour disagreed with the developer's position and upheld the termination of each of the contracts by the purchasers and declared that the respective purchasers were each entitled to have their deposits refunded.

Court's conclusions

In reaching her decision, Matthews As J considered whether each of the changes made to the Plan materially affected the purchasers’ lots. 

In her deliberations, the Associate Justice rejected the developer's arguments that there was only a "modest change" to the size of the master bedroom and the total reduction in the size of the lots of 4.39% was less than a 5% reduction in size. The developer argued that a 5% variation had previously been held as "generally regarded as tolerable". In that regard, the developer relied on the decision of County Court Judge Kennedy (as Kennedy JA then was) in Birch v Robek [2014] VCC 68. In that case, the developer had a similar clause in which purchasers acknowledged that a 5% reduction in size did not materially affect the plan. However Judge Kennedy concluded in that case that the purchaser was entitled to rescind the contract and have the deposit paid returned (the change in area in that case was 12%). 

It goes without saying that County Court decisions are not binding on the Supreme Court of Victoria. However, Judge Kennedy has since been promoted and is now a Justice of Appeal in the Court of Appeal, at least implying that her decisions should be given more weight. 

The developer also relied upon the decision of Teague J in Buckley v DRK [1993] ANZ ConvR 423, where Justice Teague was disposed to see 5% for a suburban allotment at least in a general sense as being if not the most appropriate balance point, then at least a better one than 2% or 10%. 

Readers will note that the wording used by Justice Teague is not exact, and certainly left open room for argument in later cases about whether the arbitrary nature of 5% was sufficient to dispose of a claim that the plan had not been materially changed. 

Matthews As J concluded:

• Decrease in area - a change in an area of less than 5% can be material, depending upon the location and nature of the change and its effect. 
• In this case the Court commented that a reduction in size of almost 4m2 (which effectively reduced the size of the master bedroom by a quarter), ‘to a master bedroom that could hardly be described as palatial prior to the change, is clearly material’ (paragraph 79). 
• Additionally, the Court agreed with the purchaser’s argument that the change was exacerbated by the creation of the alcove which created unusable space, making it very difficult for typical bedroom furniture to be manoeuvred into the room. The changes also impacted the ‘attractiveness of the room’.
• Despite providing no expert opinion of the light flow, and the vendor disputing that the size of the light court between the plans had changed, the Court was satisfied the change had materially affected the lots. The Court acknowledged while the change in the light court in isolation may not have been material, in combination with the changes to the master bedroom, the flow of light in to the bedroom was sufficiently impacted.
• The presence of a special condition where the purchasers agreed that a decrease of less than 5% was not material, standard in many off-the-plan contracts, did not protect the developer in these circumstances. 
• Light court change - this change was not significant on its own. However, when it was combined with the changes to the master bedroom size, it did materially affect the lots.
• Creation of council reserve - once the council reserve was created, the purchasers no longer had exclusive rights over the area. This change on its own materially affected the lots. 
• Change in common property - although the size of the newly created common property 2 was relatively small in the context of the development, the loss of potential use of the terrace was not insignificant and as a result materially affected the purchasers’ lots. 
• Car space changes - these changes did not affect the type of car that could use the car spaces. Her Honour concluded therefore that these changes did not materially affect the purchasers’ lots.

Matters to consider 

The decision in Burger confirms that no matter what provisions are included in a contract of sale (including the now common acknowledgement that a change in area of less than 5% is not material) it is not possible to contract out of section 9AC.

In reality, the practical impact of any change will always need to be assessed to determine if a change is material.

In those circumstances, developers should include in their contracts of sale off plan, plans of subdivision that are finalised as much as possible and endeavour to keep changes to a minimum. 

They should also engage with purchasers affected by material changes to manage the impact of those changes. 

Whilst many changes are obligatory in order for the proposed plan of subdivision to be accepted by council, it is always recommended that developers obtain legal advice on the specific changes before they are made to the Plan to manage any risk that a purchaser may rescind.

Since material changes to a plan of subdivision can entitle a purchaser to rescind their off-the-plan contract lawfully, any such rescission can impact a developer's pre-sales and financing arrangements, resulting in reductions to total pre-sales amounts, as well as potential breaches of conditions in development facility agreements.

Developers need to be acutely aware of their financier's conditions in relation to purchasers' rights to rescind contracts and obtain legal advice when entering into financing arrangements which are conditional upon a development's pre-sales.

Developers should also ensure compliance with the strict timeframes set out in Section 9AC, and notify purchasers of changes and potential changes early in an attempt to manage the impact of those changes. 

Clearly, communication with purchasers is key. 

Conclusion

While the case turns on its own facts, this decision still sounds a warning to developers in increasingly difficult times. 

The decision confirms that the attempts by many developers to impose an arbitrary figure of 5% variation on purchasers as being not material will not always be successful.  

WG Stark

Hayden Starke Chambers

The Sale of Land Amendment Act 2019 has been passed by the Victorian Parliament

Further to my post about this issue on 16 April 2019 (see: https://melbournepropertylaw.blogspot.com/2019/04/the-sale-of-land-amendment-bill-has.html), the Sale of Land Amendment Bill 2019 was passed by the Victorian Parliament on 28 May 2019 and it received Royal Assent on 4 June 2019.

WG Stark

Hayden Starke Chambers

The Sale of Land Amendment Bill has been reintroduced into the Victorian Parliament

Further to my post about this issue on 30 January 2019 (see: https://melbournepropertylaw.blogspot.com/2019/01/what-amendments-are-proposed-to-sale-of.html), the Sale of Land Amendment Bill 2019 was reintroduced into the Victorian Parliament on 20 March 2019 and had it second reading in the  lower house (the Legislative Assembly) on 21 March 2019.

It is expected to be passed when the state Parliament resumes sittings later in April 2019. 

WG Stark
Hayden Starke Chambers 

What amendments are proposed to the Sale of Land Act 1962 relating to sunset clauses and sales off the plan?

The Sale of Land Amendment Bill 2018 was passed by the Victorian Legislative Assembly and introduced into the Victorian Legislative Council on 20 September 2018. However, with the Victorian state election in November 2018, the legislation lapsed. 

As the state government was re-elected (with an increased majority), I expect that the legislation will be reintroduced into the Victorian Parliament this year. 

Off the plan contracts of sale

The 2018 version of the Bill introduced provisions similar to those in New South Wales that limited the ability of a developer/vendor to rescind an 'off the plan' contract of sale because either a plan was not registered or an occupancy permit was not issued before a nominated sunset date. 

The Bill stated that it would apply to all "off the plan" contracts (regardless of when they were entered into), so that the requirement to obtain the purchaser's written consent would apply to any purported rescission after 23 August 2018. I expect that date will change once the Bill is reintroduced. 

The 2018 Bill introduced the definition of a “sunset clause” that applied only to residential contracts which provided for the contract to be rescinded if either the plan had not been registered by the sunset date or an occupancy permit has not been issued by the sunset date.

If the Bill is eventually enacted in the same form as the 2018 Bill, new sections 10A and 10B of the Act will provide that a vendor can no longer automatically rescind a contract under a sunset clause unless the vendor first obtains the written consent to the rescission of each purchaser after giving at least 28 days written notice before the proposed rescission.  The notice must state:

(a) the reason why the vendor is proposing to rescind the contract; 

(b) the reason for the delay in the registration of the plan of subdivision or the issuing of the occupancy permit; and 

(c) that the purchaser is not obliged to consent to the proposed rescission.

This right cannot be contractually removed (s 10C).

As in New South Wales, a vendor/developer would be able to obtain an order from the Supreme Court to rescind the contract if the contract contains a sunset clause, or if all the purchasers do not agree.  

The Bill listed the matters that the Court was to take into account in determining if such an order should be made, including:

• the reasons for the delay;
• whether the vendor has acted unreasonably or in bad faith;
• whether the lot in question has increased in value; and
• the effect of the rescission on the purchaser.

The Supreme Court would need to be satisfied that making the order is just and equitable in all the circumstances. If the order was granted, the Court would also be able to order that the vendor pay reasonable compensation to the purchaser. 

As a further protection for purchasers, vendors would need to pay purchasers' costs of Supreme Court proceedings, unless they satisfy the Court that the relevant purchaser unreasonably withheld consent to rescission of the contract.

Other amendments proposed in the 2018 Bill required off the plan contacts to include specific statements about a vendor's right to seek rescission under a sunset clause. 

These statements would set out the need for vendors to obtain purchasers' consent or a Supreme Court Order to rescind a contract of sale pursuant to a sunset clause and also confirm that a purchaser was not obliged to provide its consent. Failure to provide such statements in a contract of sale would attract a fine of 240 penalty units ($38,685.60) for natural persons and 1200 penalty units ($193,428) for bodies corporate.

The 2018 Bill proposed that its provisions were to come into effect on the day on which the Bill received Royal Assent.  If the provision is enacted in this form, it may mean that the Bill may apply to existing contracts.

Not surprisingly (as this is consumer legislation), there is no protection for vendor/developers against purchasers using a sunset clause to their advantage should the value of the land sold go down (noting that the property market has recently had a downturn in Melbourne).

Practitioners should note that the 2018 Bill also contained other amendments to the existing legislation, including the prohibition of:

•     rent to buy arrangements; 
•     terms contracts below a prescribed value; and
•     some land banking arrangements.

It should be noted that the New South Wales Supreme Court has made at least one decision on an application pursuant to the relevant NSW provisions (see: DGF Property Holdings P/L v Butros & Ors [2018] NSWSC 344). That case sent a strong message to developers that the Court will not easily permit rescission of off-the-plan contracts, even if the vendor’s conduct cannot be said to be in bad faith or unreasonable. In that case, the developer had been in dispute with the vendors of the land to the developer, which was the main cause of delay in the registration of the plan of subdivision. Despite that, the Court only granted the application on certain specified conditions being met by the developer.

WG Stark

Hayden Starke Chambers 

Who is an agent for the purposes of section 32 of the Sale of Land Act, 1962?

Who is an agent for the purposes of section 32 of the Sale of Land Act, 1962?

1.     This topic arises out of the decision in Lo v Russell [2016] VSCA 323 about section 31 of the Sale of Land Act, 1962 and the (ultimately successful) termination of a contract of sale of real estate by sending a cooling off notice to a real estate agent rather than directly to the vendor.

2.     Readers will recall that the Court of Appeal concluded that in the particular circumstances of that case that the real estate agent was the vendor’s agent for the purposes of section 31, and therefore that the service of a cooling off notice under section 31 was a valid termination of the contract of termination.

3.     The Victorian government has since passed legislation amending the Sale of Land Act 1962 to fix a perceived problem with section 31. The definition of estate agent was inserted (by Act No 13 of 2017) into section 30 (1) of the Sale of Land Act 1962 to have the same meaning as in the Estate Agents Act 1980. In other words, a real estate agent is an agent for the purposes of Part II of the Sale of Land Act, 1962 (which includes section 31 and 32). Further, section 31(3) was specifically amended to include real estate agents as a place to deliver a cooling off notice.

Agency / Requirements under section 32K of the Sale of Land Act 1962

4.     In Downing v Lau [2018] VCC 33, Judge Marks concluded that a vendor was entitled to forfeit the deposit in that case, due to the failure by the purchaser to pay the 10% deposit.

Relevant background

5.     The dispute arose out of the purchase at auction by the defendant, John Lau (“Lau”) on Saturday, 19 March 2016 of a potential development property in Earl Street, Kew (“the Property”). At the time of the auction, the Property had an old weatherboard house on it. Lau hoped to build seven or eight units on the site.

6.     By a contract (“the Contract”) Lau agreed to purchase the Property from the plaintiff Sarah Downing (“Downing”) for $3,050,500 with a six month settlement period. He handed a cheque for the deposit of $305,050 to the vendor’s real estate agent (“the Agent”).

7.     The next day, Sunday 20 March 2016, Downing’s husband Jason emailed a Dropbox link containing documents about the Property to Lau. The documents included a VCAT decision made 8 August 2014 (“VCAT decision”), that allowed a four building development on the Property.

8.     The documents in the Dropbox link also included the current planning permit that was issued by the Boorondara Council on 2 September 2014 (“Planning Permit”) after the VCAT decision. It gave permission to develop the Property to build four double storey buildings on it.

9.     On Monday 21 March 2016 Lau asked for a further three month period until settlement. It was refused. The deposit cheque was cancelled.

10.  On 29 March 2016, Lau’s solicitors sent a letter on his behalf saying that he was rescinding the Contract, because the s32 statement attached to the Contract had failed to disclose the Planning Permit, in breach of s32D of the Sale of Land Act 1962 (Vic) (‘the Act’).

11.  On 7 April 2016, Downing’s solicitors sent a letter on her behalf treating the purported rescission as a repudiation of the Contract, and accepting the repudiation.

12.  In September 2016, Downing resold the Property for $185,000 less than the price at which it was sold to Mr Lau.

13.  Downing sued Lau for the $305,050 deposit due under the contract, or alternatively for damages for breach of the contract.

14.  Section 32K of the Act relevantly provides:

(1) This section applies if a vendor—

...

(b) Fails to supply all the information required to be supplied to a purchaser, either in a section 32 statement or attached to the section 32 statement, as required by this Division; ...

(2) The purchaser may rescind any contract for the sale of land which has been entered into on the basis of information contained in the section 32 statement or attached to the section 32 statement at any time before the purchaser accepts title and becomes entitled to possession or to the receipt of rents and profits.

...

            (4) Despite subsection (2) ... the purchaser may not rescind a contract       for the sale of land if the court is satisfied that—

(a) the vendor has acted honestly and reasonably and ought           fairly to be excused for the contravention; and

(b) the purchaser is substantially in as good a position as if all     the relevant provisions of this Division had been complied       with.

15.  The parties agreed that the Planning Permit ought to have been disclosed in the s32 statement, as it falls within the description of an approved proposal directly and currently affecting the land under s32D(a) of the Act (see: Bonacci v Ruyten [2000] VSC 138 and Overton v Baker [1997] 2 VR 297 at 315).

16.  The consequence was that Lau was entitled to rescind the contract, unless the Court was satisfied of the matters in s32K(4): that Downing acted honestly and reasonably and ought fairly be excused for failing to disclose the Planning Permit in the s32 statement, and that the purchaser was substantially in as good a position as if the planning permit had been disclosed.

17.  Judge Marks conducted an analysis of the requirements to be met under section 32K. She noted that “As stated in Fifty-Eighth Highwire v Cohen & Anor [1996] VicRp 57; [1996] 2 VR 64 (‘58th Highwire’) at 71-72 and 77, a vendor seeking to establish a case under s32K(4) of the Act must establish that:

(1) the vendor has been honest (a subjective inquiry);

(2) the vendor has been reasonable (an objective inquiry);

(3) in the exercise of judicial discretion, the vendor ought fairly be excused for the contravention; and

(4) the purchaser is substantially in as good a position as if all the relevant provisions of Division 2 of the Act (being s32) had been complied with.

18.  The vendor bears the burden of establishing the s32K(4) factors.

19.  Judge Marks concluded that it was not disputed that the vendor had been honest.

20.  Her Honour also concluded that it was not disputed that when a vendor is found to have acted honestly and reasonably, it follows that without more, he or she ought fairly be excused for the contravention: Curtain v Aparo (1988) V ConvR 54-316, per Gobbo J.

21.  The issues before the Court in this case were whether:

·      The vendor was reasonable; and

·      The purchaser was substantially in as good a position as if the details of the planning permit had been provided in the s32 statement.

22.  The test to be applied in deciding if the vendor acted reasonably is an objective one. Did the vendor act with due care and attention and without negligence: Payne & Anor v Morrison (1992) V ConvR 54-428. This test has recently been applied by Digby J in McHutchison v Asli [2017] VSC 258 at [19].

23.  In the circumstances of the case, Judge Marks was satisfied of those matters. As a result, Her Honour concluded that Lau was not entitled to rescind the contract and Downer was entitled to recover the amount of the deposit, which was due before the contract came to an end, as a debt and interest on it.

24.  The conveyancer was apparently at fault in not including a question about the relevant planning permit in her questionnaire about the s32 statement, and was arguably negligent in that respect. The purchaser argued that the negligence of the vendor’s conveyancer ought to be taken into account in determining whether the vendor acted reasonably in the circumstances.

25.  This is where the question of agency arose.

26.  After conducting an analysis of the question of agency in general, Her Honour then analysed whether the decision in Lo v Russell affected the question of agency in this particular case.

27.  The purchaser submitted that the effect of s30 was one of identification of the conveyancer as the vendor in s32. He argued its effect was that the vendor and her agent were to be treated as one and the same for the purposes of Part II of the Act.

28.  S30 of the Act includes the definition, for the purposes of Part II of the Act that ‘vendor includes any person acting as agent for the vendor’.

29.  ‘Agent’ is not defined in the Act. Elsewhere the Act makes reference to ‘estate agents’ and ‘licenced estate agents’, including in s31, which does not apply to a contract where the purchaser is an estate agent within the meaning of the Estate Agents Act 1980: see Lo v Russell [2016] VSCA [37].

30.  The question was whether this definition adds anything to the analysis in relation to agency conducted by Her Honour. The purchaser submitted that it did. The vendor claimed it did not.

31.  The purchaser referred to Lloyd & Rimmer, Sale of Land Act Victoria, where the learned authors state (S.32K.320):

In none of the reported cases on the subject of the second element has reference been made to the definition of vendor in s30, which includes a person acting as agent for the vendor. Plainly enough a solicitor, estate agent or conveyancer preparing a section 32 statement on instructions from the vendor can be said to be acting in the capacity of an agent of the vendor for the purposes of s 32. Taking the s 30 definition of vendor into account, it seems inevitable that for the purposes of the second element of s 32K(4) a vendor should not be entitled to escape the consequences of negligence on the part of an agent in terms of the drafting of the section 32 statement, as the negligence is by virtue of the s 30 definition effectively that of the vendor personally. In these circumstances, it should not be open for a court to find affirmatively that vendor has acted reasonably for the purposes of S43K(4) where the vendor’s agent has been guilty of negligence in relation to the drafting of the section 32 statement. [Emphasis added]

32.  In footnote 388 to that section, the learned authors say that the statements in 58th Highwire are distinguishable as statements of obiter dictum on vicarious liability, and similarly seek to distinguish Beach J’s statement in Paterson at [31] that:

So long as a vendor acts reasonably in relation to the preparation of an appropriate section 32 statement he or she will not be held vicariously liable for the negligence of his or her solicitor or real estate agent.

33.  Her Honour respectfully disagreed with this analysis. What was being referred to in 58th Highwire, and decided in Paterson, is precisely the same point as is for consideration in Downing v Lau: do you take the negligence of a solicitor or estate agent in preparing the relevant documents into consideration in deciding if the vendor is negligent?

34.  Her Honour concluded (at paragraph 102):

The conveyancer was not the agent of the vendor in the present case in preparing the s 32 statement. She was a retained expert.

35.  The purchaser claimed that the conveyancer was the vendor’s agent because she is named as conveyancer on the contract, and later she dealt on behalf of the vendor in relation to this transaction by sending a letter to the purchaser’s conveyancer.

36.  Her Honour found (at paragraph 104) that:

… being named conveyancer for the vendor on the contract does not mean she is an agent in the usual meaning of that term in relation to work she privately did for the vendor. In sending the letter to a third party on the vendor’s behalf she acted as agent for the vendor. But being an agent in one context does not make her an agent in another.

37.  If the conveyancer was not the agent, the definition in s30 takes matters no further.

38.  At paragraph 106, Her Honour found that:

The Court of Appeal has made this distinction clear recently. Lo v Russell [2016] VSCA 323 (‘Lo’) involved a direct dealing between an estate agent and purchaser. The Court of Appeal considered the question of whether a notice of termination sent by the purchaser to the vendor’s estate agent was effective under s31(3) of the Act, which provides that such a notice:

… shall be given to the vendor or his agent or left at the address for service of the vendor specified in the contract or the address of his agent within three clear business days after the purchaser has signed the contract.

39.  As Warren CJ, Tate JA and McLeish JA stated in Lo, at [45]-[46]:

Especially when ‘estate agent’ is used in s 31(5), it is more likely that ‘agent’ in s 31(3) has its ordinary meaning rather than the special meaning of ‘estate agent’. Secondly, s 15(1)(b) contemplates service of notices under the SLA on persons authorised by the person served to receive them. The better view is that, consistently with that provision, ‘agent’ in s 31(3) simply means a person authorised by the vendor to receive the notice for which s 31 provides. In other words, ‘agent’ in s 31(3) has its ordinary legal meaning.

Further, ... the word ‘agent’ does not accurately describe the legal status of an estate agent in relation to a vendor. The suggested special meaning of ‘agent’ is therefore based on a non-technical usage rather than the legal meaning of the word. There is a presumption that where a statute uses a word with an established legal meaning, that is the meaning that the word will bear unless the context suggests otherwise. In the present case, there is no indication in the statute that it adopts any meaning for ‘agent’ other than its established legal meaning, and the presumption that this is the correct meaning is therefore not displaced. [Citations omitted and emphasis added]

40.  In Lo, the Court of Appeal decided that a notice sent to the estate agent in that case did constitute notice to the vendor, but that was despite its construction of the word ‘agent’ in s31 of the statute. It was because of its construction of the sale contract (and it expressly noted that the outcome of that case depends on the operation of the contract there employed: at [62]). The contract referred to the ‘important notice’ and used the words ‘vendor or the vendor’s agent’ in describing whom the notice was to be given. At the top of the next page were found the details of the vendor’s estate agent. No other person was described in the contract using the term ‘agent’. The Court said:

a reasonable person in the position of the purchaser or the vendor reading the contract would infer that the ‘vendor’s agent’ to whom reference is made in the ‘important notice’ is the person with whom the purchaser has been dealing in place of the vendor and who is described immediately thereafter as the ‘vendor’s estate agent’. [55]

41.  Judge Marks disagreed with the contentions put on behalf of the purchaser that someone who is engaged to do some work, which is then adopted and presented as their own by the vendor, falls within the definition of vendor’s agent under s30. The Court of Appeal in Lo answers the point regarding s31, and there is no relevant distinction in applying its logic to s32.

42.  Judge Marks concluded that the vendor in that case acted reasonably. As a result, relief was granted under section 32K(4).

43.  As we all know, the Victorian state parliament subsequently amended sub-section 31(3) and part of section 30 (the definition of agent), and inserted new section 31A into the Sale of Land Act 1962 to alter the position so that estate agents are in fact agents for the purposes of section 31.

44.  However, the amendments have not made real estate agents an agent for the vendor for the purposes of section 32.

 WG Stark 

Hayden Starke Chambers