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

Who is responsible when external cladding fails in an apartment tower during a fire?

In early 2019, in a judgment that ran to 647 paragraphs, County Court Judge Woodward, sitting as a Vice President at VCAT, had to deal with a claim following a fire at a residential tower in Melbourne that occurred due to faulty cladding (see: Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd (Building and Property) [2019] VCAT 286). 

This was the first major decision in Australia in relation to the respective liability of parties involved in the design and construction of a building which included combustible cladding.

Facts

The case concerned the well-publicised fire at the 21 storey Lacrosse Apartment Tower in La Trobe Street, Docklands (near Marvel Stadium) on 24 November 2014. 

That fire (as well as the Grenfell Tower fire in England and the Sydney Opal Tower cracks) prompted widespread critical analysis of the adequacy of building regulation by governments across Australia.

The commencement of the fire was quite simple – the tenant at the apartment returned from a working holiday in France, dropped his backpack, and decided to smoke a cigarette on the apartment balcony. He left his cigarette butt in a plastic food container that served as an ashtray.

At 2.23am, the smoke detector in the hallway outside his apartment activated and notified the Metropolitan Fire Brigade. A fire crew arrived minutes later, by which time the fire had travelled rapidly up the external wall cladding to the fourteenth floor and spread to the balcony on each level. Six minutes later the fire had reached the roof of the Tower.

The fire lead to losses exceeding $12 million.

The unextinguished cigarette butt was held to be the ignition source but the rapid spread of fire up the side of the building was facilitated by the aluminium composite panels (Cladding) used on the southern wall. The Cladding had a 100% polyethylene core.

In late 2018, the builder of the Tower, L U Simon Pty Ltd (L U Simon) agreed to replace the Cladding. 

The claim in VCAT focused on the allocation of responsibility between the remaining respondents.

The proceeding

The owners corporations and apartment owners brought a claim in VCAT against the following:

• L U Simon;
• the building surveyor and his employer (Gardner Group);
• the architect, Elenberg Fraser Pty Ltd (Elenberg Fraser);
• the fire engineer Tanah Merah Pty Ltd, trading as Thomas Nicolas (Thomas Nicolas);
• the occupier of apartment 805, Gyeyoung Kim (Mr Kim);
• the resident who lit the cigarette, Jean-Francois Gubitta (Mr Gubitta); and
• the Superintendent, Property Development Solutions Pty Ltd (PDS).

None of the Respondents had a direct contractual relationship with the Owners.

The case was heard over 22 sitting days, with 91 volumes of tribunal books and 10 barristers and 5 firms of lawyers representing the parties. Evidence was given by seven lay witnesses and 13 expert witnesses. Mr Kim (the apartment occupier) and Mr Gubitta (the tenant who lit the cigarette that caused the fire) did not participate in the proceeding. 

PDS reached a settlement and withdrew their involvement before the hearing.

Judge Woodward’s findings

His Honour found that:

1. The external cladding specified in the original design, namely Alucobond, failed to comply with the Building Code of Australia (BCA). The substitute aluminium composite cladding (ACP) ultimately installed also failed to comply with the BCA and accordingly, the Building Regulations 2006 (Vic).
2. In installing the cladding, L U Simon breached the implied warranties of suitability of materials, fitness for purpose and compliance with the law set out in section 8 of the Domestic Building Contracts Act 1995 (Vic) (the DBC Act) and is therefore liable to pay damages to the Owners. However, his Honour found that L U Simon did not fail to exercise reasonable care in the construction of the Tower.
3. Each of the consultants (Gardner Group, Elenberg Fraser and Thomas Nicolas) breached their obligations to L U Simon under their respective consultant agreements (which were novated to L U Simon by the developer) by failing to exercise due care and skill in that:
   • Gardner Group issued a Building Permit for the relevant stage of the building approving the specification by Elenberg Fraser of the ACP. Gardner Group also failed to notice and query the incomplete description of the cladding system in a report produced by the Thomas Nicolas.
   • Elenberg Fraser failed to remedy defects in its design (namely the specification of ACP and design drawings providing for extensive use of ACPs at the Tower) which caused the design to be non-compliant with the BCA and not fit for purpose. Elenberg Fraser also failed as head consultant to ensure the ACP sample provided by L U Simon was compliant with Elenberg Fraser’s design intent as articulated by its specification and the BCA.
   • Thomas Nicolas failed to conduct a full engineering assessment of the Tower in accordance with the International Fire Engineering Guidelines and failed to include the results of that assessment in its fire engineering report. Thomas Nicolas also failed to recognise that the ACP used at the Tower did not comply with the BCA and did not warn L U Simon (or Gardner Group, Elenberg Fraser or PDS) accordingly.
   • The resident, Mr Gubitta, had breached a duty of care owed to the Owners by failing to take care in the disposal of his smouldering cigarette, but concluded that his responsibility for the loss and damage was minimal.

The Result

While his Honour concluded that L U Simon was liable to pay damages to the Owners, he then determined that the damages payable by L U Simon were to be reimbursed by the other Respondents as ‘concurrent wrongdoers’ pursuant to Part IVAA of the Wrongs Act 1958, in the following proportions:

• Gardner Group: 33 percent
• Elenberg Fraser: 25 percent
• Thomas Nicolas: 39 percent
• Mr Gubitta: three percent

Because Mr Gubitta had taken no part in the proceeding and no party had sought judgment against him, no order was made against Mr Gubitta and L U Simon was not reimbursed the three percent damages it is liable to pay to the Owners that was apportioned to Mr Gubitta.

The Owners originally claimed at least $12,765,812.94 in damages; of that amount, $4,851,937.19 was agreed as payable between the parties.

Including the agreed sum, his Honour awarded damages in the sum of $5,748,233, finding that damages in the sum of $194,414.01 were not proven by the Owners and were disallowed. The remainder of at least $6,823,165 are to be the subject of further submissions and remained unresolved at the date of the decision.

In his reasons, his Honour takes care to note that his comments ‘should not be read as commentary generally on the safety or otherwise of ACPs and their uses’. His Honour notes that there may be circumstances (such as signage or decorative use) where the use of ACP can be compliant, including where made subject to a performance-based solution under the BCA, or where types of ACP with a lower polyethylene content is used. His Honour notes that his findings relate only to the particular use of ACP at the Tower and are informed by the particular contracts between the parties in the case.

The judgment focuses on the selection, approval and installation of the ACPs that enabled the fire spread. Critically, his Honour found that the ACP did not satisfy the Deemed-to-Satisfy provisions of the Building Code of Australia (BCA).

As noted, His Honour also found that the builder breached the warranties implied into the design and construct contract under section 8 of the DBC Act. Those are the warranties as to:

• suitability of materials (section 8(b) of the DBC Act);
• compliance with the law (which includes the BCA) (section 8(c) of the DBC Act); and
• fitness for purpose (section 8(f) of the DBC Act).

His Honour confirmed the well established position that the builder’s liability for design and construction was not merely an obligation to use reasonable care and, in particular, the warranty for fitness for purpose was “absolute”. Further, the obligation of the builder must be measured by reference to the purpose for which the building was required under the conditions likely to be encountered (i.e., Lacrosse was a multi-storey residential apartment building).

The builder was found to have breached the warranties and, therefore, held primarily liable to the owners.

However, his Honour found that the builder did not fail to exercise reasonable care in the construction of Lacrosse by installing the ACP's.

Instead, his Honour found there was no evidence that the builder failed to take reasonable care and no evidence adduced from any party to the effect that the builder did not act reasonably or in accordance with what would be expected of a reasonably competent builder in the circumstances of the case. The critical point here (at paragraph 307):

... for a large and complex project, [the builder] has sought to cover acknowledged shortcomings in its own expertise by engaging highly skilled professionals to (in a variety of different ways) direct and supervise its work.

Implications 

The Victorian State Government has undertaken an audit of buildings with Cladding issues. 

According to "The Age" on 26 November 2019: 

More than 1200 buildings with risky levels of flammable cladding are included on the state government's list – which is not publicly available – but the [Master Builders's] Association believes there are potentially many more buildings around Victoria that could be dangerous.

Cladding is clearly an issue that will have ramifications for a long time to come, and that needs a concerted effort by all parties concerned (Builders, Architects, Engineers, Building Surveyors, Owners Corporations, Residents, Owners, Regulators and Insurers) to resolve. 

The Andrews government has committed $600 million to remove the combustible material used on hundreds of high-risk buildings. However, it seems that money has all been allocated and it is most likely to be used for extremely high-risk buildings housing the frail, elderly and very young (such as hospitals, child care centres and nursing homes). 

The State government has also stated that it will 'crack down' on dodgy builders and building products. 

The solution to this major problem seems to be that existing buildings with dangerous Cladding will need to be rectified, and as soon as possible. 

The problem of who will pay for the cost of doing this remains to be resolved. However, Judge Woodward's decision points to the direction that is likely to be followed. 

In other words, the professionals involved in the choice of Cladding, and its installation, will be held responsible if negligence against them can be established. 

Primarily, the DBC Act obliges builders to meet certain minimum standards (among others) as to the suitability of materials and fitness for purpose. 

As this case has shown, builders can defray that responsibility if they employ suitable professional advisors who in turn fail to meet their professional obligations. 

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 

Can parties to a Contract of Sale of Real Estate for a sale 'off the plan' agree to make the purchaser responsible for the costs of subdivision?

The unanimous decision of the Court of Appeal of the Supreme Court of Victoria in Bisognin v Hera Project P/L [2016] VSCA 322, confirms how important it is for lawyers in Victoria who draw Contracts of Sale of real Estate to take great care in drafting special conditions in the contract. 

Background 
The case concerned a dispute over the interpretation of certain special conditions in a Contract of Sale of Real Estate of part of a rural property by the owners to a developer. 

Gino Andrew Bisognin and Leah Joan Bisognin ('Mr and Mrs Bisognin') are the joint owners of a rural block at Cranbourne.  In 2012, they received an unsolicited approach on behalf of a developer who was seeking to buy the southern portion of their land.  The developer told Mr and Mrs Bisognin that he proposed to develop the southern portion of their land by the construction of a supermarket. He said he had already discussed the matter with the local municipality. In 2012, the parties entered an agreement for the sale and purchase of a lot on an unregistered plan of subdivision. Subsequently, Hera Project Pty Ltd (‘Hera’) was nominated as the ‘purchaser.’ The contract was in standard form save that it contained a number of special conditions relating to the preparation and eventual registration of a plan of subdivision.  After a delay in performance, Mr and Mrs Bisognin issued a notice of default. Hera commenced proceedings to restrain the termination of the contract.  The proceedings settled on terms that a new contract was to be executed that contained the same special conditions as well as two further special conditions: (1) a sunset clause such that, if the plan of subdivision had not been registered by 25 August 2015, the parties could terminate the contract; and (2) an obligation upon Mr and Mrs Bisognin to use their best endeavours to assist in the registration of the plan.

The appeal (and the original trial) required the Court to interpret the meaning of two of the special conditions in the Contract. 

The proceeding commenced as a summons pursuant to s 49 of the Property Law Act 1958; the vendors sought answers to three questions that related to the construction of those special conditions in the second contract.  

The developer brought a cross-application seeking injunctive relief against termination of the contract upon the basis that the conduct of Mr and Mrs Bisognin had prevented it registering the plan of subdivision by 25 August 2015.  

The trial judge held that, in order to make good title, Mr and Mrs Bisognin were obliged under the new contract to enter certain agreements and undertake the associated financial obligations to the 'referral authorities' with a view to their providing services such as telecommunications, water and sewerage to the blocks after subdivision.  

The Court of Appeal concluded in essence, whilst ordinarily a vendor would bear the burden of performing all steps required to register a plan of subdivision (including the burden of entering into agreements with referral authorities and making payments to them) the parties here chose to shift the burden from the vendors to the purchaser. That is reflected in the contract that they made.


Special condition 3(a) of the 2012 contract was to the effect that the purchaser:

... shall at its own cost and expense prepare a Plan of Subdivision in respect of the land comprised in the Parcel in or to the like effect of the Plan of Subdivision annexed hereto and submit the same to the City of Casey for sealing in accordance with the provisions of Part 1 of the Act and shall use its best endeavours and do all things reasonably required to expedite and procure the registration of the said Plan pursuant to the provisions of Part II of the Act.

Throughout the period when the relevant contracts were on foot, the parties have engaged in various pieces of litigation. 

The dispute that was resolved by the unanimous decision of the Court of Appeal confirming that Hera was responsible for certain financial obligations to the relevant referral authorities (the sum involved was over $700,000, and possibly as high as $920,000). 

In the application for leave to appeal, Mr and Mrs Bisognin, as applicants, contended that, in reaching her decision, the primary judge erred by failing to read special condition 10 by reference to special condition 2(a) of the second contract, which made it plain that the obligation was with Hera to do all things reasonably required to procure registration of the Plan of Subdivision, and special condition 2(c), which imposed an obligation on Mr and Mrs Bisognin to allow Hera access to the property for the purpose indicated.

Mr and Mrs Bisognin also contended that if the second contract was ambiguous, it is permissible to consider the circumstances surrounding its making. In the standard case, it is the responsibility of a vendor of land to make title.   However, the present case was not standard.  The very existence of the special conditions altered the normal course of things.  There had been no prior consideration to the sale of the property by Mr and Mrs Bisognin.  The primary purpose of this transaction was to facilitate an opportunity for the purchaser to engage in a commercial property development.  The purchaser was to be responsible for the size, scale and nature of the proposed development and, in particular, the construction of it. Litigation occurred because there was delay in the settlement of the first contract. That proceeding was settled on the basis that the 2012 contract was replaced by the second contract. In bringing about the second contract, a sunset clause, which required registration of the plan by 25 August 2015, was added. It was added to address the very matter (the delay in completion) which led to the first proceeding. 

Importantly, special condition 10 was also added. It similarly did not exist in the 2012 contract. Special condition 10 was inserted to impose a specific requirement upon the vendors to cooperate and use their best endeavours and do all those various other matters that are set out elsewhere in the other special conditions. Again Mr and Mrs Bisognin submitted that it requires them to facilitate Hera’s endeavours to procure registration within the time limited by the sunset clause.  They re-emphasised that special condition 10 does not override the primary obligation of Hera under special condition 2. Rather, it provides a level of assistance to Hera so as to help it comply with special condition 2 within the period confined by the sunset clause.

The principal question in the appeal was whether the primary judge erred in holding that, by reason of the terms of the second contract, Mr and Mrs Bisognin were required to enter into the relevant agreements with the referral authorities and to make payments to them under those agreements.  No provision in the agreement expressly dealt with the entry into those agreements, nor with who was responsible for meeting the financial commitments under them.  Accordingly, the question became whether the special conditions imposed the obligation upon Mr and Mrs Bisognin or Hera.

The Court of Appeal noted that the special conditions are expressed in general terms and are poorly drafted.  The Court concluded that consequently, in construing the contract and, in particular, special conditions 2(a) and 10, regard must be had to the text, context and purpose aided by reference to the surrounding circumstances known to the parties at the time that the contract was entered into.

The Court concluded (at paragraph 79) that 

... the effect of the special conditions in the [second] contract is to shift the risk of registration of the plan of subdivision and the financial expenses associated with it from the vendors to the purchaser.  In part, our opinion depends upon the text and context of the special conditions; in part, it depends upon a consideration of the circumstances surrounding the making of the [second] contract.

The Court analysed the use of the word 'procure' in special condition 2(a) and concluded 

It is the word customarily used by lawyers to place the risk of performance of some necessary step onto a party that might not necessarily be able to perform that step without the involvement of another person.  If the step cannot be performed by the party which is charged with procuring it, that party will nonetheless be in breach of covenant if the obligation is not performed.

The court also took comfort from the wording of Special condition 10, which it concluded imposed obligations upon Mr and Mrs Bisognin to assist in securing the registration of the plan of subdivision.  One of those obligations is to make ‘the duplicate title available for the purposes of registration’ (of the plan of subdivision).  If the obligation to register the plan of subdivision rested upon Mr and Mrs Bisognin, the Court noted that the obligation cast on them to make the duplicate certificate of title available would be redundant.  The natural meaning of the obligation is that the title is to be made available at the request of someone else: the person charged with the task of registration.

In assisting with the interpretation of the Contract, the Court looked at the circumstance in which this contract was made.  The Court noted that special condition 2(a) formed part of the 2012 contract (as special condition 3). Mr and Mrs Bisognin had taken no steps to develop, let alone sell all or any part of their land.  They were approached by a developer who had already developed plans for the commercial exploitation of the southern portion of their land.  As a matter of common sense, one would not expect Mr and Mrs Bisognin to have taken on the commercial risk involved in the registration of the necessary plan of subdivision.  The cost of registration (including the payment of bonds and fees to referral authorities) was unknown; had it been at the risk of Mr and Mrs Bisognin, the impact on the purchase price might have been very significant and made the sale unattractive.

The Court also concluded that the addition of Special condition 10 as part of the terms of settlement of the 2013 proceeding confirmed that it is best understood as auxiliary to special condition 2(a) and special condition 8.  Unless the plan of subdivision was registered by 25 August 2015, the parties could terminate the second contract. As the risk of registration was to lie with the purchaser, there was every reason to ensure that the process was facilitated by Mr and Mrs Bisognin.

The Court concluded that on its proper construction the second contract required Hera to pay the amounts provided for in the referral agreements, albeit that it was for Mr and Mrs Bisognin to enter into those agreements.  

It is a most unfortunate situation that the parties find themselves in. This is even more especially so due to the fact that the Contract of Sale currently remains on foot, and there is still ongoing litigation about whether the Contract can be specifically performed. 

The lesson here is for lawyers who draft special conditions in contracts of sale of real estate to take extra care in ensuring that the Special Conditions clearly identify the obligations that each party is agreeing to undertake in the relevant Contract. 

WG Stark
Hayden Starke Chambers

Does a right to purchase an apartment off the plan in an undeveloped site create a caveatable interest?

The Supreme Court recently had to determine whether a person who claimed to have a right to purchase an apartment ‘off the plan’ had a caveatable interest in the undeveloped site. 

In Yuksels Nominees Pty Ltd v Nguyen & Anor [2015] VSC 763, Justice T Forrest concluded that in the circumstances of that case, the purchaser did not have a caveatable interest.

Background

The plaintiff (“Yuksels”) was the registered proprietor of land at Sun Crescent, Sunshine, Victoria, which it was proposing to develop.

The first defendant (“Nguyen”) was suing various parties (including Yuksels, its director and a related company) in the County Court. In that proceeding, she made a number of allegations, including:

(a)              that her former employer (the related company) and the director (of both companies) breached various terms of a contract that she had entered into whilst she worked for them between 2008 and 2014; and

(b)              that Yuksels would (assuming certain preconditions were met) grant to her the right to –

(i)              purchase a penthouse in the Sun Crescent development at cost price; and

(ii)              full listings of the Sun Crescent property upon plans being approved for the development.

On 7 November 2014, Nguyen lodged a caveat on the title to the Sun Crescent property with the grounds of the claim stated to be ‘Oral Agreement with Yuksels and [its director], part performed’.

Yuksels sought the removal of the caveat pursuant to s 90(3) of the Transfer of Land Act 1958 (‘the Act’). Its director swore that Yuksels could not borrow to finance the development unless the caveat was removed.

Nguyen opposed the removal of the caveat, alleging among other things that the proceeding to remove the caveat was an abuse of process as the substantiation of the caveat was a component of the County Court litigation. 

Justice T Forrest had to determine a threshold issue:  If there was already a proceeding on foot to substantiate the caveat, the caveat removal proceeding was prima facie vexatious and would likely be stayed.  T Forrest J analysed the allegations in the County Court proceedings, and concluded that they were not ‘a proceeding in a court to substantiate the claim’ of Nguyen within the meaning of s 89A(3)(b). 

The County Court Writ did not seek declaratory relief that Nguyen had a caveatable interest in the property; there was no reference in the entire 27 page document to the caveat or to s 89(3)(b) of the Act. 

In his analysis, the Honourable Justice T Forrest set out various paragraphs of the Amended Statement of Claim and the prayer for relief. He concluded that in the County Court proceeding, Nguyen did not seek to establish any proprietary interest in the Sun Crescent property, but rather sought to claim damages for breach of an alleged agreement.

As a result, T Forrest J concluded that the s 90(3) proceeding was not prima facie vexatious. Another proceeding was not being maintained in another court in respect of the same subject matter. 

In analysing the merits of the plaintiff’s application, the Honourable Justice T Forrest noted the usual legal principles that are applicable in caveat removal cases. He noted (in paragraph 10) that a “critical and perhaps decisive consideration is whether damages will provide an adequate remedy in the event the caveat is removed". Further, the contractual, equitable or statutory right asserted must attach to the caveated property and not simply lie against the proprietor of that property.

The learned judge concluded that Nguyen did not have a prima facie case to justify the maintenance of the caveat. 

In the caveat case, Nguyen argued that there was a serious issue as to whether the County Court would impose a constructive trust in her favour, or recognise her interest in some other manner.  Nguyen’s counsel, relying on the dicta of Deane J in Muschinski v Dodds, argued that a constructive trust is available in any case where some principle of equity calls for the imposition upon the legal owner of property of the obligation to hold or apply the property for the benefit of another. 

T Forrest J noted that the difficulty he had with this argument was that Nguyen did not seek that the property be held or applied for her benefit; she sought damages. The Honourable Justice T Forrest concluded that it was inappropriate to hypothesise as to whether and how her claim may mutate in the future.

T Forrest J concluded that it was impossible for Nguyen to maintain that damages were an inadequate remedy in the caveat proceeding when the only remedy claimed in the County Court action was damages.

Conclusion and commentary

Whilst the case turns on its unique facts, it is interesting for 2 reasons:

First, it points to the usual practice of the Registrar of Titles to refuse to look behind an allegation that a proceeding is on foot to maintain a caveat, once a lawyer on the record makes a statement to the Registrar to that effect; and

Secondly, it confirms that it is unlikely in the extreme that a right to purchase an apartment off the plan in an undeveloped site will create a caveatable interest.

In my experience, most developers will include a specific clause in ‘off the plan’ sales contracts to the effect that the purchaser has no right to lodge a caveat over the title to the Property before the Plan of Subdivision has been registered on title. The practical reason for such a clause is that the lodgment of a caveat by a purchaser will possibly prohibit and will definitely delay the registration of the Plan of Subdivision. 

Most contracts for sales ‘off the plan’ in Victoria also contain a sunset clause, and if a developer does not register the Plan of Subdivision by a certain date, the purchaser can walk away from the purchase and obtain a full refund of their deposit.

Any prohibition or delay in registering the Plan of Subdivision may impact on the developer’s ability to retain purchasers if the time period for registration of the Plan of Subdivision is running out.

W G Stark
Hayden Starke Chambers