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1001 Conveyancing Answers (NSW)

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Contract

The contract between a vendor and purchaser is the primary document setting out the obligations of the parties. It is an executory document, meaning that it establishes the rights and obligations of the parties to be performed over a period of time, culminating with payment by the purchaser of the purchase price and transfer by the vendor of the title to the property. This exercise is known as completion (or settlement) and usually occurs 42 days from signing of the contract.

Most contracts in NSW are in the form of the joint copyright contract for the sale of land known as the standard form contract. The principal legislation is the Conveyancing Act. The principal regulation is the Conveyancing (Sale of Land) Regulation 2010.

Form of contract


Whilst no form of contract is prescribed by law, various requirements are prescribed before a contract, once created, can be enforced and various conditions are implied into a contract that does come into existence. Provided that the contract complies with these various requirements, and the other formality requirements discussed below, the contract will be valid and enforceable.

The 2005 contract

Formation

At the risk of stating the obvious, the long-standing practice in New South Wales, where parties intend to enter into an agreement to sell and purchase land, is for two copies of the contract to be prepared which are in identical form (Allen v Carbone [1975] HCA 14; (1975) 132 CLR 528 at 533). One copy is signed by the vendor and the other copy by the purchaser. The parts are subsequently exchanged, so that the vendor will hold the copy of the contract bearing the purchaser’s signature and the purchaser will hold the copy bearing the vendor’s signature. A commonly quoted analysis of the significance of exchange is contained in the judgment of Lord Greene MR in Eccles v Bryant [1948] Ch 93 at 99:

... there is a well-known common and customary method of dealing, namely by exchange, and anyone who contemplates that method cannot contemplate the coming into existence of a binding contract before that exchange takes place.

It was argued that exchange is a mere matter of machinery, having in itself no particular importance or significance. So far as significance is concerned, it appeared to me that not only is it not right to say of exchange that it has no significance, but it is the crucial and vital fact which brings the contract into existence. As for importance, it is of the greatest importance, and that is why in past ages this procedure came to be adopted by everybody as the proper procedure. In dealing with contracts for the sale of land, it is of the greatest importance to the vendor that he should have a document signed by the purchaser and to the purchaser that he should have a document signed by the vendor.

That statement has been approved by the High Court in Brien v Dwyer [1978] HCA 50; (1978) 141 CLR 378 at 391; 22 ALR 485 at 495; 53 ALJR 123.

When parties propose to enter into a contract for the sale of land by the customary procedure of exchange there is a strong (though not irrebuttable) presumption that the parties do not contemplate the coming into existence of a binding contract before exchange takes place (GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 4 BPR 9315).

The essential characteristic of exchange of contracts is that each party will have a document signed by the other party in their possession and control (or the possession and control of their representative such as their legal adviser). One rationale is that it is important that a party to a contract knows what the party’s obligations are.

While it is clearly desirable that the counterparts of the contract be identical, this is not an essential requirement, and a valid contract may be made by exchange of copies which are not identical (Sindel v Georgiou [1984] HCA 58). In Sindel the property was passed in at auction, and negotiations in the auctioneer’s office led to a consensus between the parties. The counterpart signed by the purchaser had details of the purchaser’s name, the price and the deposit inserted, but for some reason those details were not included in the counterpart signed by the vendor. The High Court found the exchange of contracts had been effective on the following basis (at [14] to [15]):

14. An unqualified acceptance of the proposition that delivery of two parts in identical terms is crucial to an effective exchange would exclude the parties’ intention as the governing or, even as a relevant, factor. The question whether the delivery of parts in identical terms is essential must ultimately depend on the parties’ intention. The answer to this question determines the manner in which the contract becomes binding. And as Lord Greene M.R. emphasised in Eccles v. Bryant (at p 99), the manner in which the contract is to be created so as to become binding is to be gathered from their intention, express or implied. In ascertaining their intention, we must take account of those factors which favour an insistence on documents in such a form as will evidence with certainty a contract and the terms of that contract, factors expressed and underlined by Lord Greene M.R. in Eccles v. Bryant (at p 99) and by Lord Denning M.R. in Harrison v. Battye (p.60). We must also take account of the real intention of the parties, giving due weight to their objective - the making of a binding contract by means of the exchange of parts. And if the parties, through negotiations between their solicitors, have agreed on the terms of their bargain and settle on an exchange of parts in order to seal that bargain, it would usually accord with their intention to treat the exchange as creating a binding contract, notwithstanding the lack of correspondence in the parts, so long as that lack of correspondence is capable of being remedied by rectification. It will be otherwise when it appears that the parties intend to be bound only by an exchange of parts in identical terms or when the prior negotiations do not completely settle the terms of the bargain and the parties look to the parts as exchanged to fix these terms.

15. This approach places less emphasis on the advantage of bringing into existence a document which establishes with certainty the terms of the contract and more emphasis on the intention of the parties in creating a contract by the ceremony of exchange, the terms of the bargain having already been determined. In such a case the importance of exchange lies not so much in the circumstance that it fixes the terms of the contract as in its function in fixing the existence of a binding contract, thereby terminating the period in which each party is free to withdraw from the negotiations. This concept of exchange enables the courts to do greater justice between the parties by precluding one party from acting on the footing that there is no binding contract when, as a result of an undetected error one part of the contract does not correspond with the other. On this view of exchange the availability of rectification is not a problem.

The principle expressed above has its practical limits. In Longpocket Investments Pty Ltd v Hoadley (1985) NSW ConvR 55-244 there was a significant difference in the 'subject to finance' clause in the respective counterparts. The purchaser’s solicitor sought the change, and the amendment was agreed to by the vendor’s solicitor after the vendor had signed the contract. The amendment was made on the counterpart signed by the purchaser, but not on the other copy. The Court of Appeal held that, since the amendment was agreed to without the knowledge or authority of the vendor, it could not be said that the parties had agreed on the terms of the bargain.

Several cases decided since the issue of the 2005 edition have raised issues relating to the formation of a contract for sale

Parkin v Pagliuca [2008] NSWSC 168 involved an unsuccessful attempt to form a contract for sale by exchange of counterparts. The counterpart signed by the purchaser contained two s 149 certificates, but the copy signed by the vendors contained only one (the transaction was a sale off the plan of a lot in a consolidated site). More critically, the counterpart signed by the vendors contained printed pages 3 to 11 of the 2000 edition of the contract; those pages were not included in the copy signed by the purchaser. Bryson AJ held that no contract had been formed or, alternatively, that if a contract had been formed the purchaser was entitled to rescind any such contract due to the absence of the statutory cooling off notice. The vendors and the purchaser successfully cross-claimed against the solicitor who had been acting for both parties at the time of the attempted formation of the contract. The measure of the purchaser’s damages was, effectively, her costs of the proceedings (which were awarded against the solicitor on an indemnity basis); the damages sustained by the vendor were quantified at first instance in Parkin v Pagliuca [2008] NSWSC 827, but reduced on appeal (Williams v Pagliuca [2009] NSWCA 250).

Whether a contract had been validly formed was also one of the issues which featured in Iannello v Sharpe (2006) NSW ConvR 56-162, [2006] NSWSC 713; (2007) 69 NSWLR 452, 12 BPR 23,887, NSW ConvR 56-179, [2007] NSWCA 61. Iannello involved a contract drafted with a deposit of 5 per cent of the purchase price on page 1, the identification of the purchaser as 'Malcolm Sharpe or nominee', and a special condition in these terms:

Notwithstanding anything else herein contained, the vendor shall accept on exchange of this agreement payment of $225,000, being part of the deposit. The parties expressly agree that if the purchaser defaults in the observance of performance of any obligation hereunder which is or has become essential, the balance of the deposit, namely $225,000, shall become immediately due and payable and the purchaser shall forfeit the whole of the sum of $450,000 pursuant to clause 9 hereof to the vendor.

Prior to exchange, the vendor’s solicitor, on instructions, deleted the phrase “or nominee” and amended the deposit figure on page 1 by changing the amount to 10 per cent of the price.

The changes to the purchaser’s signed copy were made after the purchaser signed the contract. Contracts were exchanged, the purchaser defaulted, and the vendors terminated the contract, claiming the amount paid at exchange, the top-up sum, and damages.

The vendor was unsuccessful on the basis that there was no evidence before the court that the changes to the purchaser’s signed copy were made with the authority of the purchaser.

The legal issue raised by the lack of evidence of authority is succinctly stated at [10] of the decision at first instance:

There can be no doubt that a solicitor is not authorised unless authorised in writing to make a contract on behalf of a client purchaser. There is equally no doubt in my view that if authorised he can agree to and make alterations to the document, even after it has been signed by the purchaser. In this case, however, there is no evidence of such authorisation and the only evidence is that of the defendant after the contract was signed by him. Mr McGrath [the purchaser’s representative] did not tell him that the words “or nominee” had been deleted, nor that the deposit was changed from five per cent to ten per cent on the front page of the contract. There is no evidence, and he was not asked whether he authorised the change.

That statement of the law seems to have caused the Court of Appeal no difficulty.

The issue then became whether the alterations were significant or substantial.

Windeyer J considered that the deletion of the phrase 'or nominee' may or may not have been significant or material. His reasoning appears at [9]:

It is not really necessary for me to decide whether or not the deletion of the words “or nominee” was a significant or material alteration. In ordinary terms, Mr Sharpe could have required the vendor to transfer to his nominee. That might have had some stamp duty consequences, but probably no more than those which would have arisen had the words remained.

This finding was not challenged on appeal (CA at [15]).

The key issue on appeal was the status of the amendment to the deposit on page 1 of the contract.

That change was held at first instance to be material because (per Windeyer J at [9]):

… it is generally regarded at law in conveyancing matters that no penalty arises if there is provision for forfeiture of a deposit of up to 10 per cent. It is also significant because the change would give some work to special condition 14 of the contract because it would have allowed the deposit to be paid by two instalments, yet the amount of $225,000 not paid on exchange would still remain part of the deposit and become liable to forfeiture upon termination if that termination occurred as a result of default by the purchaser. Had the deposit figure remained at $225,000 then that would have been the amount of the deposit liable to forfeiture under clause 9 and the vendor would have been left to any right in damages to claim any additional amount.

The result at first instance was that a purchaser 'with no merit whatsoever' (per Windeyer J at [4]) received a refund of his $225,000, and an order for costs.

The Court of Appeal came to a different conclusion as to whether the alteration to page 1 was a material change, principally on the basis that the attempted change was ineffective. This aspect will be discussed in more detail below when discussing 'deposit top-up' clauses.

The issue of whether a contract had validly been formed again became an issue in Zhang v VP302 SPV & Ors [2009] NSWSC 73; BC200900869, discussed earlier in this paper.

Reproduction of the standard form

A frequently asked question relating to intellectual property issues is what is the status of photocopies of the contract. The short answer is that an exchanged contract is not invalid simply because one of the exchanged parts is a photocopy (or for that matter a facsimile copy).

I understand the policy of the joint copyright holders is that there is no objection to producing photocopies to comply with statutory obligations (such as making available a copy of the proposed contract prior to the estate agent marketing residential property) or arming prospective purchasers (for instance, so they can seek legal advice about the draft contract). Exchange should take place using original documents rather than photocopies. For each transaction there should be two 'blue' contracts. An electronic version of the standard form was released in late 2009, and is available for purchase from the Law Society shop. My understanding is that there is no general authority to convert the form to any other electronic format.

Co-agents

The details of the vendor’s agent are required to specify who holds and invests the deposit under clause 2 and who holds money if there is a claim under clause 7. If more than one agent is involved, you need to distinguish between the listing agent (the one who has the agency agreement with the vendor) on the one hand, and the selling or conjunction agent (the agent who is the first point of contact for the purchaser). The listing agent should be named first and full details given. In the 2000 and earlier editions the selling agent can be added by name on the final line prefaced by the words 'in conjunction with'. In the 2005 edition there is a specific term 'Co-agent'.

Mentioning both agents will minimise the risk of the purchaser being embroiled in any commission dispute, particularly where the contract contains the commonly used additional provision in which the purchaser warrants that it was not introduced to the property by any agent other than one named in the contract.

One further development since 2005 is the rise of the buyer’s agent. That class of agents was first formally recognised under the Property, Stock and Business Agents Act in September 2003, and is a growing sector of the industry. While a buyer’s agent may have an important role in negotiating the sale, they typically have no ongoing role in the conduct of the conveyance after exchange. If it is thought appropriate to mention the buyer’s agent on page 1, then the space provided for a co-agent’s details to be inserted could be utilised (even though they arguably are not co-agents in the strict sense).

GST

The 2005 edition of the contract was amended having regard to the development in legislation, case law, and practice regarding GST. There have been further developments in that area since 2005.

The 2008 Budget papers foreshadowed significant legislative amendment to the margin scheme.

These foreshadowed changes are incorporated into the GST legislation by the enactment of schedule 1 to the Tax Laws Amendment (2008 Measures No. 5) Act 2008. Those amendments took effect from 8 December 2008, except for the anti-avoidance amendment which took effect from 9 September 2008. In brief these amendments:

  • Limit the scope for the use of the margin scheme (and potentially increases the GST revenue from the series of transactions) where the vendor has acquired the property on a GST-free basis (as a going concern, or as farmland), or through a non-taxable supply from an associate for no consideration. When that vendor comes to sell, it has to look back to the transaction through which it acquired the land to determine whether its "predecessor" vendor was entitled to apply the margin scheme (plainly the margin scheme on that earlier transaction would in general not in fact have been applied because, for instance, if the earlier transaction were GST-free it would not be a taxable supply). The amending Act inserts section 75-5(1B), new paragraphs (e) to (g) in section 75-5(3), a new subsection 75-5(3A), subsections (5) to (6B) of section 75-11, and a new section 75-16.
  • In the cases mentioned above, if the margin scheme is available on the later transaction, and if the parties choose to apply it, the margin is to be calculated based on either the consideration that the predecessor vendor paid when that vendor acquired, or an approved valuation of the property as at the date it was acquired by the predecessor vendor (new sections 75-12 and 75-13). There are consequential amendments to section 75-22 (dealing with increasing adjustments relating to an input tax entitlement when using the margin scheme).
  • A strengthening of the anti-avoidance provisions in the GST Act so that they extend to circumstances where a vendor has used an available choice or election to obtain a GST benefit from an artificial or contrived scheme or arrangement (new s 165-5(3)). This last change extends potentially beyond the margin scheme, and could, it seems, apply to a choice to use the going concern exemption.

To illustrate how the amendment affects transactions, consider this example:

A. W sells a parcel of land to X for $1.1 million. The transaction was a taxable supply.

B. X sells the parcel to Y for $2.2 million. That transaction is the supply of a going concern, or GST-free farmland.

C. Y sells to a series of purchasers for amounts totalling $5.5 million.

What are the GST implications of this series of transactions prior to the amendments?

1. W would have to pay GST of $100,000 on transaction A if the parties chose not to apply the margin scheme (but less if the parties had chosen to apply the margin scheme).

2. Considering transaction B:

2.1 If the margin scheme was not used at A, on general principles X is unable to apply the margin scheme.

2.2 However, by the use of the going concern or farmland exemption, the supply is GST-free in any event so the non-availability of the margin scheme is irrelevant.

2.3 The GST payable on transaction B is nil.

3. Now considering transaction C:

3.1 Y can use the margin scheme, since Y acquired the property otherwise than through a taxable supply.

3.2 If the margin scheme is used, the margin is $3,300,000 ($5.5 million minus $2.2 million).

3.3 The GST liability is $300,000.

What are the GST implications of this series of transactions under the amended legislation?

1. As before, W would have to pay GST of $100,000 on transaction A if the parties chose not to apply the margin scheme (but less if the parties had chosen to apply the margin scheme).

2. Considering transaction B, again the GST arising from that transaction is nil, on the same reasoning as set out above.

3. Now considering transaction C:

3.1 If the margin scheme was not used for transaction A, Y cannot now use the margin scheme (despite the intervening GST-free transaction). The GST payable by Y will be $500,000.

3.2 Alternatively, if the margin scheme was used in transaction A:

3.2.1 Y can use the margin scheme (provided the relevant purchaser agrees).

3.2.2 The margin is $4,400,000 ($5.5 million minus $1.1 million).

3.2.3 The GST liability is $400,000.

There is an excellent article by Matthew Cridland (including worked examples) in the February 2009 Law Society Journal. Purchasers who wish to use the margin scheme when on-selling may need to include warranties by the vendor about the predecessor transaction (beyond the warranties in the printed form) to ascertain whether, and to what extent, the margin scheme can be used in the next transaction. Whether such warranties will find their way into a future edition of the contract is not so clear-cut; there will only be a tiny proportion of transactions affected by these amendments, and clause 13 of the standard form contract is already a lengthy and complex provision.

In May 2009 the Federal Treasury issued a discussion paper entitled Implementation of the recommendations of the Board of Taxation’s review of the legal framework for the administration of the GST. Chapter 2.8 of the paper is entitled: 'Reverse charge mechanism, GST free farm land supplied for farming'. The proposal is, in essence, that the GST law be amended to remove the GST free concessions for the supply of going concerns and farm land supplied for farming, and replace the concessions with a reverse charge mechanism (if the parties agree). The reverse charge mechanism will also be available for a wider range of supplies of going concerns (by broadening and clarifying the concept of a going concern).

The concept of a 'reverse charge mechanism' already exists in the GST Act – see section 83-1 of the GST Act:

83-1 What this Division is about

The GST on taxable supplies made by non-residents can, with the agreement of the recipients, be “reverse charged” to the recipients.

The 'reverse charge mechanism' is explained at para 2.8.13 to 2.8.14 of the discussion paper:

2.8.13 Under a reverse charge mechanism, the recipient of a supply is responsible for remitting GST that would otherwise be remitted by the supplier.  The recipient is also entitled to claim input tax credits where it has made a creditable acquisition.  Thus at the time of acquisition the recipient will be liable to remit the GST and will be entitled to claim input tax credits to the extent it has made a creditable acquisition.  The two amounts, generally, would offset one another, whilst maintaining the normal GST revenue result.  The reverse charge for the supply of a going concern and farm land would operate similarly to section 83-5 of the GST Act.

2.8.14 The amount of GST charged is 10 per cent of that part of the price of the supply that relates to the taxable component of the supply because using the basic GST rules (broadly 1/11th of the price) would not result in the correct amount of GST.

If the new regime is adopted there will probably be an overall increase in GST revenue as a result, particularly where the recipient in the case of a supply of farmland is not registered for GST at the time of the supply (under the current regime the supply is nevertheless GST-free; under the contemplated regime the parties will be unable to agree to reverse charge and the vendor/supplier would have to remit GST under general principles).

The proposal is subject to the unanimous agreement of the states and territories. As at the date of preparation of this paper, no Bill has surfaced reflecting these proposals.

The Home Building Act

The Home Building Act 1989 and its impact on conveyancing practice is worthy of a separate seminar, but some brief comments should be made about matters highlighted in the 2005 edition.

The 2005 edition included one new item relevant to home warranty insurance – Item 16: Brochure or Note (Home Building Act 1989). This item will be relevant where the vendor is a developer, an owner-builder or a 'person who does building work otherwise than under a contract (within the meaning of the Act)'.

It should also be noted that in the absence of an express statutory provision, there is no obligation to attach certificates of insurance or any other relevant documentation to the contract (although it would be nice if this were done even though there is no duty to do so). So for instance a client who has had their house built in 2007 by the holder of a contractor licence, or who was supplied with a kit home in 2008, has no statutory obligation to attach any documentation regarding home warranty insurance to the contract. This view is confirmed by the reasoning in Adderton v Festa Holdings Pty Ltd & Ors [2003] NSWSC 1065; Festa Holdings Pty Ltd & Anor v Adderton & Ors [2004] NSWCA 228.

Issues regarding whether there has been any building work done to which the Act applies, the identity of the builder, whether or not a permit or licence was issued under the Act, and particulars of insurance, should ideally be addressed prior to exchange of contracts. From the vendor’s perspective, it is vital to identify whether the vendor has obligations under sections 95, 96 and 96A, and to prepare the contract in a way that meets those obligations. From the purchaser’s perspective, there are two issues. The right to rescind for a lack of insurance will not arise independently of the Act, so the purchaser’s position should be assessed before the purchaser is contractually bound. Where a purchaser has a right to render the contract void, the purchaser needs to be aware of that right.

A solicitor who failed to advise their purchaser clients of a right to rescind under section 95 was held liable in damages in Livingstone v Mitchell [2007] NSWSC 1477; BC200711121. In that case, the purchaser’s solicitor inquired about the applicability of the Act in post-contractual requisitions. The replies indicated that the property was insured, named an insurer, and quoted a policy number. Unfortunately, the details related to a home and contents policy, not a policy under the Act. The case highlights the prudence of verifying insurance details by obtaining certificates of currency.

Can the purchaser lose rights of rescission given under the Act by estoppel, waiver, or election? Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87 held that the common law doctrine of election applied to the 1988 version of the Conveyancing (Sale of Land) Regulation. In consequence, where the purchaser has a right of rescission under the regulation, the purchaser could consider his or her position but, during that period, must not do anything inconsistent with the purchaser reserving his or her position. It seems unlikely that the doctrine applies to rights under sections 95, 96 or 96A of the Home Building Act in the light of the reasoning in Tudor Developments Pty Ltd v Makeig [2007] NSWSC 1116; BC200708585.

In that case, Young CJ in Eq held that estoppel could not validly be pleaded against a defendant for a plaintiff’s non-compliance with section 96A of the Act. In that case, the fact that the purchaser knew that insurance had been effected did not preclude the purchaser from rescinding the contract on the grounds of a failure to provide a certificate of insurance in the prescribed form. The appeal by the developer was dismissed by a majority of the Court of Appeal (Basten JA, Beazley JA agreeing; Handley AJA dissenting): Tudor Developments Pty Ltd v Makeig [2008] NSWCA 263.

Deposit

The deposit clause is one which, as between editions of the contract, is often substantially redrafted to take into account developments in law and in practice. Through all these redrafts the three essential functions of the deposit remain:

  • it is an 'earnest', something which indicates the genuineness of the buyer;
  • it is a security for performance by the purchaser – the purchaser runs the risk of losing the deposit on default in an essential respect;
  • it is part of the price.

Some property professionals would add a fourth function – the deposit is the amount out of which the estate agent typically receives commission.

In the 1996 edition this clause was substantially redrafted to take into account two developments:

  • the increasingly prevalent part payment of deposits;
  • the use of deposit bonds and guarantees.

Clause 2 contemplates the possibility that part of the deposit might be paid after exchange of contracts. The practice is permissible (for instance, a deposit payable in two instalments passed without any comment by the High Court in Romanos v Pentagold Investments Pty Limited [2003] HCA 58), although not in general recommended.

For a case since the issue of the 2005 contract illustrating potential problems with ‘staggering’ the time for payment of the deposit, see Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40. That case involved a contract for sale for a Port Macquarie property. Page 1 of the contract contained the following details:

Price in words: SIX MILLION SIX HUNDRED THOUSAND DOLLARS
Price     $6,600,000.00
Deposit $ 330,000.00 65,000.00 (10% of the price, unless otherwise stated)
Balance $6,270,000.00 6,535,000.00
(The figures in italics were hand-written).

The contract also contained an additional provision in the following terms:

5. In the event that the Purchaser pays less than ten percent (10%) of the purchase price as deposit then if the Purchaser commits a default hereunder the whole of the 10% deposit shall become due and payable notwithstanding that this Contract is not completed. This clause shall not merge on completion and the Vendor shall be entitled to sue for recovery of so much of the 10% deposit that remains outstanding as a debt due by the Purchaser to the Vendor.

Finally, in a Deed of Variation to the contract (entered into following a failure to complete on the date originally nominated under the contract) there was reference to a release to the vendor of 'the SIXTY FIVE THOUSAND DOLLARS ($65,000.00) deposit'.

The purchaser failed to complete, and the vendor sought to recover the difference between 10 per cent of the price (as adjusted under the Deed of Variation) and the $65,000 already held by the vendor. At first instance before Truss J in the District Court, the vendor succeeded. The purchaser successfully appealed to the Court of Appeal.

The Court of Appeal held that any implication in the special condition that the deposit was 10 per cent of the price was displaced by the 'unmistakeably clear provision, on the first page of the contract' that the deposit was $65,000. Having identified the deposit as being the sum of $65,000, the question remained as to whether the special condition was unenforceable as a penalty. The judge at first instance considered the clause was enforceable. The Court of Appeal held the provision was penal in nature. One relevant factor in reaching this conclusion was that the use of the word 'default' in special condition 5 (unqualified by a phrase such as 'in an essential respect' as used in cl 9 of the standard contract) would cover any default, even so slight a default as, for instance, the 'altogether unimportant' default of submission of a transfer later than the due date under standard cl 4 (at [23] per Bryson JA).

The Sovereign Developments case was considered, and distinguished, in Australian Land Co Pty Limited v Tumut Festival Centre Pty Limited [2006] NSWSC 828. In that case, the contract provided for a purchase sum of $238,000 and a deposit of $28,000, leaving a balance of $210,000. Special condition 67 of the contract which was headed 'Reduced Deposit' provided that notwithstanding cl 2 of the printed form the deposit was to be paid as to $5,000 on the date of the contract, and, as to the balance of $23,000, 'on the completion date or on default by the purchaser of the purchaser’s obligation under this agreement, and nothing shall relieve the purchaser of the obligation to pay the full 10 per cent deposit ... by the vendor'. Windeyer J held that, unlike the Sovereign Developments case, there was no ambiguity between the manner in which the printed form was filled out and the special condition, and the deposit was plainly the larger amount. Having said that, it may have been preferable for the drafter of special condition 67 to limit the operation of the clause to defaults in an essential respect.

The use of a deposit 'top-up' clause was one of the issues raised in the decision of Iannello v Sharpe [2006] NSWSC 713; [2007] NSWCA 61, mentioned earlier in the paper. As foreshadowed, the Court of Appeal held that the attempt to provide for a top-up of the deposit was ineffective; considering the contract as a whole the deposit was in fact only 5%, despite the amendment to page 1 of the printed form.

The rationale appears in the leading judgment of Hodgson JA (at [18] to [21]):

18 In my opinion it is clear that the alteration did not make any difference to the amounts required to be paid under the contract or to the time and circumstances in which they were required to be paid. Both before and after the alteration, Special Condition 14 had the effect that $225,000.00 was payable on exchange of contracts, and a further $225,000.00 was payable “if the purchaser defaults in the observance or performance of any obligation hereunder which is or has become essential”. 

19 The circumstance that, on the front page, $450,000.00 was said to be the deposit rather than $225,000.00 does not make any difference to this. The circumstance that, on the front page, the balance is said to be $4,050,000.00 rather than $4,275,000.00 also makes no difference to the effect of the contract, because cl.16.7 requires the purchaser on completion to pay “the price (less any deposit paid)”; so the purchaser would still be paying $4,275,000.00 on completion, if only $225,000.00 had been paid as a deposit, even though the balance stated on the front page is $4,050,000.00.

20 Mr. Inatey SC for the purchaser did not contest the above propositions in any significant way; but he submitted that the alteration did make a material change because it had the effect of making the whole $450,000.00 properly characterised as a deposit and therefore not subject to the rules concerning penalties. Alternatively, he submitted that, if the alterations did not make that change, the position both before and after the alteration was that the provision in Special Condition 14 about the second $225,000.00 was a stipulation for damages on default, not for a deposit, and was invalid as a penalty. He relied particularly on Luu v. Sovereign Developments Pty. Limited [2006] NSWCA 40.

21 Mr. Orlov for the vendors submitted that, both before and after the alteration, Special condition 14 was a provision for payment of a deposit by instalments; and he relied particularly on Ashdown v. Kirk [1999] 2 Qd.R. 1 and Romanos v. Pentagold Investments Pty. Limited (2003) 217 CLR 367 at [19]-[20]. He submitted that in Ashdown, default by the purchaser accelerated the vendors’ entitlement to a second instalment of the deposit to the date of default, so that the provision that the instalment be paid on default did not alter its character as a deposit. In a case such as the present, what operated as an earnest for performance of the contract was the purchaser’s unconditional promise to pay the balance of the deposit.

Hodgson JA (at [27] to [32]) considered there were two distinguishing issues between the present case and the decision of the Court of Appeal in Luong Dinh Luu v Sovereign Developments Pty Ltd [2006] NSWCA 40:

27 … First, Bryson JA was able to say that the front page made it clear that the deposit was $65,000.00, and that the special condition in that case related to something which the contract was not treating as a deposit. Second, the amount in special condition 5 was payable on any default, no matter how trivial, so that its character as a penalty was clear.

28 On the first matter, in the present case the reference to deposit on the front page is expressly qualified by reference to special condition 14; so it is not possible to say that the front page makes it clear that the second $225,000.00 is not part of the deposit. It can also be said that this is clearer in the altered form of the contract, where the front page refers to the deposit as being $450,000.00 or 10% of the price. 

29 The second matter is not directly relevant to the question of whether the second $225,000.00 is a deposit; but rather is relevant to the question whether, accepting it is not a deposit, it is or is not a pre-estimate of damages. That is a question on which Mr. Orlov did not address submissions; and in my opinion, accepting that the obligation to pay the second $225,000.00 would only arise in circumstances where the vendors have lost their bargain, nevertheless it cannot be considered a pre-estimate of damages. The first $225,000.00, which was undoubtedly a deposit, would be greatly in excess of expenses that could be lost in connection with the terminated contract; and there is no evidence to suggest that the loss of the bargain would involve other loss, for example because of some problem in effecting a re-sale for a similar price. In fact, it appears that the re-sale was for a higher price; and although this is not directly relevant, it tends to confirm that there was no reason to anticipate that a later re-sale would be for a substantially lesser price. 

30 In those circumstances, the Court should conclude that, if the second $225,000.00 is not part of a deposit, provision for its payment would be a penalty and not enforceable. On that basis, the significance of the second difference from the case of Luu disappears.

31 Returning to the first possible point of distinction between Luu and the present case, in my opinion the statement of principle in the last sentence of par. [24] of the judgment in Luu is correct; so that the name which the parties have chosen to give to a payment is not determinative of whether or not it is a deposit. It is necessary also to look at the character of the payment and/or the obligation to make it. The first point of distinction between Luu and the present case relates only to the name the parties have chosen to give to the payment; and in my opinion the nature of the obligation to make the payment is more important in determining its character than the name chosen by the parties; although I do accept that in some cases the name could be relevant, particularly where a deposit is payable by instalments. 

32 On that approach, in my opinion the obligation to make the second payment of $225,000.00 is not an obligation to pay a deposit or part of a deposit. There never would be a time when this second $225,000.00 (as such) would be paid so as to show that the purchaser is in earnest in committing himself to pay the rest. On the contrary, the only time when special condition 14 obliges the purchaser to pay this sum is when the purchaser has demonstrated that he is not in earnest, and indeed the termination of the contract means that he would not be able to complete the contract. The obligation to pay the second $225,000.00 is inconsistent with the characteristics of a deposit. In my opinion, this would equally be so whichever version of the front page was operative.

The net effect of the Court of Appeal decision was that, since the alteration to the quantum of deposit on page 1 was held to make no difference to the amount of deposit, a contract was formed; the amount paid on exchange was the deposit; that amount was validly forfeited to the vendor; the second payment dealt with in the special condition was penal and unenforceable.

The issue continues to feature in litigation.

A clause requiring payment of a second amount by way of deposit on the 'completion date' (as defined on p 1 of the contract for sale of land) was held to be effective in Cloud Top Pty Limited & Anor v Toma Services Pty Limited & Anor [2008] NSWSC 568; BC200804579 (18/6/08 per Einstein J), although it is submitted that such a clause stretches to the limit the notion of a payment 'in earnest' within the reasoning in Iannello.

A contractual provision providing that 'the deposit is 10 percent of the price, but payable by instalments, with half the deposit payable on exchange and the balance of the deposit payable on the completion date (as defined in the contract.)' was considered by Brereton J in Boyarsky v Taylor [2008] NSWSC 1415. His Honour considered both Sovereign Developments and Iannello (but not Cloud Top), and declined to order that the purchaser make the second payment. His Honour observed (at [48] to [51]):

48 I turn then to the second question, which is whether an order should be made requiring payment of the second instalment of the deposit. In Luu v Sovereign Developments Pty Limited [2006] NSWCA 40, Bryson JA, speaking for the Court of Appeal, held that provisions requiring a 5 per cent deposit to be topped up to 10 per cent on default were void as a penalty. In Iannello v Sharpe [2007] NSWCA 61; (2007) 69 NSWLR 452, Hodgson JA, in the Court of Appeal, rejected two attempts to distinguish the relevant condition in that case from that in Iannello v Sharpe. Two reasons were advanced in the present case for distinguishing the present special condition from those in Luu and Iannello in that case. The first was that in each of those cases, the obligation to pay the second instalment of the deposit was in terms conditioned on default, and that is not so in the present case, where the provision does not refer to default but simply requires payment "upon the completion date". The second was that in this case there were circumstances in which the deposit could become payable and have effect as an earnest for performance of the purchaser’s obligations under the contract.

49 As to the first of those arguments, it is correct that in this case the provision is not conditioned on breach or default under the contract. That, however, is not an answer. Where the right to receive such a payment arises on the happening of any number of events, some only of which are breaches of contract and some of which are not, but the event in the particular case is one which is a breach of contract, then the provision is a penalty and void [Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86; Bridge v Campbell Discount Co Ltd [1962] AC 600; O’Dea v All States Leasing System (WA) Pty Ltd (1983) 152 CLR 359, 367, 390; AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 184-185, 211; Bartercard Ltd v Myallhurst Pty Ltd [2000] QCA 445, [2]]. Even if, which for reasons to which I shall come I doubt, the second payment was exigible in events other than breach of contract, on the facts of this case it is exacted on breach of contract, and in those circumstances is a penalty and void. 

50 In any event, I do not see how it could become payable under the present contract in circumstances that did not involve a breach by the purchaser of the contract. It was hypothesised that it could become payable as an earnest of the purchaser’s continuing commitment to the contract where an extension was granted by the vendor of time to complete. That would itself involve either a contractual variation to the completion date or at least some allowance of an indulgence outside what was required by the contract so as to involve a departure from rather than adherence to the terms of the contract. If the contract is applied according to its terms, the only circumstance in which the second instalment would become due would be if, in breach of special condition 15, the purchaser did not complete on the completion date. Accordingly, both reasons advanced for distinguishing Iannello do not apply. As Hodgson JA said (at [33]), an unconditional promise to pay an amount on default cannot itself count as a deposit, because that is the very sort of promise that would normally amount to a promise to pay a penalty, unless it is a genuine pre-estimate of damages. In the light of Luu and Iannello, it could not seriously be argued, and indeed it was not, that the second instalment of five per cent could be seen as a genuine pre-estimate of damages.

51 Accordingly, I would hold that the obligation to pay the second instalment "upon the completion date" is void as a penalty.

What advice should then be given to vendors when a purchaser requests a reduced deposit? In the light of Luu and Iannello in particular, I suggest:

  • If the deposit is to be reduced from the “usual” 10 per cent, it is likely (both in a legal and practical sense) that the amount recoverable if the purchaser defaults in a way that brings cl 9 of the contract into play is that reduced amount.
  • The vendor should be advised about alternatives to a cash or cheque deposit (for instance, a deposit bond or guarantee).
  • The front page of the contract and any special conditions should be checked for internal consistency as to the amount of deposit, although such consistency in itself will not ensure that the second payment is characterised as a deposit.
  • A special condition providing for a further payment on a specified date (for instance, the fifth business day after the contract date) or the happening of a particular event (for example, the receipt of development approval – see Romanos v Pentagold Investments Pty Ltd, cited earlier) – is less likely to strike difficulty than a further payment triggered by a (serious) default.
  • A clause which requires a post-exchange payment to be made at a time when the purchaser could fairly be said to be 'in earnest', rather than at a time when the purchaser has demonstrated an unwillingness or inability to proceed, is less likely to be open to challenge.
  • The express categorisation of the second payment as part of the deposit will not be conclusive.

There are two clauses in the 2005 edition dealing with satisfaction of the deposit by a 'bond or guarantee', either in whole [2.6] or in part [2.7]. These clauses exclude the operation of the preceding provisions of cl 2, together with cl 3 (in the 2000 edition relating to investment of deposit, and in the 2005 edition relating to release of the deposit to pay vendor duty), to the extent that the deposit is covered by a bond or guarantee.

The clause contemplates the use of a bond or guarantee, but only if the vendor accepts the bond or guarantee. Purchasers and their solicitors should not automatically presume that a bond or guarantee will be acceptable; it is a matter for inquiry in each case.

Some issues which should be considered in advising a vendor client about a proposal to tender a bond or guarantee are:

  • The bond may be useful where a purchaser cannot provide a 'normal' 10 per cent deposit.
  • Is the bond issuer financially sound?
  • Does the bond have a time limit for its operation, and, if so, will the time limit be sufficient (allowing for possibly substantial delay between the due date for completion and the time for calling on the bond)? Should the contract address the possibility of a substitute bond?
  • How is the validity of the bond to be verified? The banking of a cheque tests its validity; what corresponding steps might be taken for verifying a bond?
  • Is the bond truly unconditional, or will the issuer require further evidence prior to paying out on the bond? To put it another way, are there circumstances in which the issuer will decline payment?
  • Who holds the bond? If a bond is to be used, it is in the interests of both parties for the bond to be handed over on the making of the contract. It should be retained by the vendor until completion, and given the occasional forged deposit bond, its veracity should be checked. The developing practice seems to be that on completion the bond is returned to the purchaser’s solicitor. If a replacement bond is required during the transaction perhaps there should be specific provision that the older bond be returned to the purchaser.
  • If there is a claim on the bond, the claimant should comply strictly with the terms of the bond. A vendor whose solicitor provided the bond issuer with the wrong notice of termination (the client had, it seemed, terminated both a contract for sale and a lease by written notice issued on the same day – the vendor’s solicitor supplied the notice of termination of lease, not the notice of termination of the sale contract) failed to recover under the deposit bond in Reliance Developments (NSW) Pty Limited v Lumley General Insurance Limited [2008] NSWSC 172. The case also highlights the prudence in checking details for service of documents on the bond issuer. The bond referred to an 'address' for service of notices by setting out a fax number and a post-office box. Between the date of issue of the bond and the termination of the contract for sale the bond issuer had relocated from Hurstville to North Sydney, and there was some delay in the hard copy documents (and for that matter the fax) coming to the attention of the bond issuer.
  • If there is a dispute about the validity of termination of the contract, what should the bond issuer do? If the bond is paid out to the vendor, and it is subsequently found that the purchaser had validly rescinded the contract, is the purchaser exposed to a claim by the bond issuer by way of subrogation? This issue arose in Detmold v Oldtex Pty Ltd [2005] NSWSC 1197. Young CJ in Eq observed (at [67] to [72]):

67 The deposit under the contract was secured by a deposit bond issued by the third defendant in the sum of $40,500. On 21 June 2004 Ms Maitland wrote to the issuers of the bond enclosing a notice of termination of the contract for sale, advising that the deposit had not been paid and demanding payment.

68 On 25 June that $40,500 was paid to Oldtex Pty Ltd. On 25 June the issuers of the bond claimed on the plaintiffs, pursuant to the indemnity agreement which they had signed, $40,500, and in due course claimed interest as well.

69 On 28 May Ms Maitland wrote to NOT Lawyers:

We refer to the above matter and to your letter dated 19 May 2004 and confirm that our client terminates the contract. Our client is entitled by reason of such termination to call upon the deposit bond.

70 It is odd that this letter talks about confirming the termination. There does not appear to have been any actual termination. However, for all intents and purposes certainly after May 2004 each party recognised that the contract was no longer on foot.

71 So then there has been, on the part of the purchasers, a rescission of the contract, as they were entitled to do. They were entitled to do this either in equity, under the doctrine of innocent misrepresentation (see eg Redgrave v Hurd (1881) 20 Ch D 1) or under the Trade Practices Act. Rescission basically is an act of the parties, provided that the contract is executory, and there is no need to make any restitution, as appears to be this case (see eg Kramer v McMahon [1970] 1 NSWR 194).

72 As the parties have indicated, both parties have accepted the contract is at an end, so I do not see any need to make any further order. However, the plaintiffs are out of pocket by the conveyancing costs, which they have incurred, and they are also possibly liable to the issuers of the bond ...

If the parties agree at the last minute to use a bond or guarantee, the estate agent should be informed.

Requisitions

The contract has, since 1996, used an extended definition of requisition to cover objections and questions as well. Apart from some re-wording consequential upon this change, the new clause was substantially unchanged from the 1992 edition.

The contract continues the philosophy of not attempting to codify what requisitions (now used in the widest sense of the term) the purchaser can make. It is worth remembering that the 1992 and subsequent editions speak in terms of dealing with those requisitions 'a purchaser is or becomes entitled to make'. The threshold question of entitlement must always be considered.

The contract is silent as to the vendor’s obligation to reply (implicit – if the purchaser is entitled to make a requisition, the purchaser is entitled to a reply). Nor is there express mention of when replies must be sent (the general law position – replies within a reasonable time – is preserved; also see [21.1] about the general obligation under the contract to do things within a reasonable time). Generally it would be prudent for a vendor’s solicitor to have answered requisitions before issuing a notice to complete – see for example Winchcombe Carson Trustee Co. Ltd v Ball-Rand Pty Ltd [1974] 1 NSWLR 477.

For cases considering the law of requisitions, see Adolfson v Jengedor Pty Ltd (1995) 6 BPR 14,147; (1996) NSW ConvR ¶55-775 and Australian Mortgage v Baclon [2001] NSWSC 774. In the latter case, Justice Austin held that a requisition seeking a stamped or certified copy of a document relating to a development application would (if it were a requisition at all) be a requisition covered by cl 5.1 of the contract, and the failure to make that requisition within time was one of the reasons for the purchaser’s failure in the litigation.

The adequacy of replies to requisitions, and the consequences of inadequate replies in the context of a vendor issuing a notice to complete, was considered in the case of Crowe v Rindock Pty Ltd and Anor [2005] NSWSC 375. In that case, by contract of sale dated 19 September 2003, the defendants agreed to sell and the plaintiff, Ms Crowe, agreed to buy property 38 Murdoch Street, Cremorne, for $1,530,000. The contract provided for a deposit of $76,500 and for completion 84 days after the contract date, namely, 12 December 2003.

Standard cl 10 of the contract was amended from the printed form. Relevantly the clause read:

10 Restrictions on rights of purchaser

10.1 The purchaser cannot make a claim or requisition or rescind or terminate in respect of:

10.1.9 anything the existence of which is noted in this contract (except a caveat, charge, mortgage or writ)

10.3 For the purposes of this clause 10 the Vendor discloses all of the information appearing in the copy documents attached to this contract even if the contract does not refer to that disclosure.

The changes were the 'substance/existence' change in 10.1.9, and the additional cl 10.3.

The s 149 certificate attached to the contract relevantly provided:

The subject land is NOT proclaimed as a Mine Subsidence District within the meaning of Section 15 of the Mine Subsidence Compensation Act 1961.

The land is NOT AFFECTED by a policy, adopted by the council or adopted by any other public authority and notified to the Council for the express purpose of its adoption by that authority being referred to in planning certificates issued by the Council, that restricts the development of the land by reason of the likelihood of landslip, bushfire, flooding, tidal inundation, subsidence, acid sulphate soils or any other risk except contamination.

The purchaser’s s 149 certificate had the same statement except that the words 'except contamination' were omitted.

A printed form of requisitions was sent on 30 September 2003. Among those requisitions were the following:

12. (a) Evidence must be furnished that all covenants, agreements, etc (if any) mentioned in the Contract and shown or noted on the title have been complied with; and any not in accordance with the Contract must be removed before completion.

17A (c) Is there any currently applicable development approval or consent to the use of the premises?
(d) Are there any restrictions on the use of, or development of, the subject land by reason of the likelihood of landslip, bush fire, flooding, tidal inundation, noise exposure, subsidence or any other risk?

20. Has the subject land been proclaimed to be a mine subsidence district within the meaning of the Mine Subsidence Compensation Act 1961?

Replies were sent by letter dated 5 December 2003. To each of those requisitions the reply was 'The purchaser must rely on his own inquiries'. In the words of Windeyer J (at [11]):

It is fair to say that had the reply to 12(a) been “there are none” and the replies to the others “not to the vendors’ knowledge” this litigation would probably not have commenced. It is generally accepted that a reply in the form of reply given is an insufficient response to a proper requisition, whereas the response “not so far as the vendor is aware, but the purchaser should make his own inquiries” is proper. See In Re Solomon & Davey (1879) 10 ChD 366; Stonham The Law of Vendor and Purchaser (1966) [1011]; Butt: Standard Contract for Sale of Land in NSW 2nd Edition [545].

On 8 December 2005 there was a phone call between the solicitor for the purchaser and the clerk with day to day carriage of the matter on behalf of the vendor. Issues were raised about the adequacy of those replies. The vendor’s representative asked for those concerns to be put in writing, and the purchaser’s solicitor agreed to do this by fax. The solicitor’s evidence was that he did not regard the reduction of those concerns to writing as urgent. That may seem a little strange considering how close the due date for settlement was, but is perhaps explainable because the purchaser was having difficulties about finance and may have been unable to settle in part since the purchaser had not by then put her finance in place.

Despite no fax being received by 16 December, the solicitor for the vendor faxed amended replies to two of the requisitions in these terms:

12 (a) There are no such covenants.

17A (c) Not to the vendors’ knowledge however the purchaser should make own inquiries.

The letter finished 'All other answers remain as in our letter dated 5 December 2003'.

A few minutes after sending that fax, the vendor’s solicitor sent a second fax – a Notice to Complete. The nominated date for compliance with the Notice was 15 January 2004. The sufficiency of that time was not disputed, but unsurprisingly other aspects of the validity of the purported Notice were. By letter of 12 January 2004, the purchaser’s solicitor stated:

We submit that the notice to complete is not valid as it was issued prematurely as our request for amended answers to certain requisitions on title was not satisfied until the moment that the notice to complete was served on us.

The vendor’s solicitor gave Notice of Termination on 19 January 2004.

His Honour identified five issues for determination (at [19]):

(a) Were the four relevant requisitions allowed under the contract and general law;

(b) Were the two outstanding requisitions allowed under the contract and general law;

(c) Was the vendor entitled to serve a notice to complete shortly after furnishing the answers to 12(a) and 17A(c);

(d) Did the purchaser waive the right to an answer to 17A(d) and 20;

(e) Did the contract preclude the right to make requisitions 17A(d) and 20.

On the specific requisitions (at [21] to [25]):

12 Not relevant to the transaction. The question should not have been asked and therefore need not have been answered.

17 A (c) Matter not going to title, but nevertheless a valid requisition – original answer insufficient.

17 A (d) Impermissible because of its breadth – in effect a “wide and searching interrogatory” in large part because of the use of the phrase “or any other risk”.

20 A proper question in relevant circumstances (although His Honour doubted whether a property in Cremorne would fall within the net of “relevant circumstances”).

Clause 10 of the contract did not preclude the valid requisitions (at [26]).

As to the short time between the sending of amended replies and issuing the Notice to Complete, the failure to give a proper answer to requisition 17A(c) and 20 before 12 December 2003 meant that the vendors were not entitled to expect completion on the completion date provided for by the contract. In fact the vendors were in breach by failing to give any reply prior to 8 December 2003 as such a time was not reasonable. Had a proper reply been given prior to the date for completion in the contract, even if only a few days – but not minutes – it might be that, even taking into account the default in failing to respond at all within a reasonable time, the default could have been overlooked (at [27]).

His Honour also expressed the view that cl 5.2 of the contract did not allow a purchaser 21 days after receiving the replies to requisitions to raise supplementary requisitions. To the extent that the decision of Gzell J in McIntyre v Marshall [2004] NSWSC 412 suggested a further 21 days would always be available, Windeyer J found himself unable to agree with that decision. Such a view would not accord with the reality of a typical 42-day contract.

In summary, the vendor was in breach for failing to provide proper replies to requisitions, and that breach disentitled the vendor from issuing a Notice to Complete when the vendor did.

His Honour’s concluding comments are instructive (at [31] to [34]):

31 Neither side comes well out of this. Solicitors for purchasers should make requisitions appropriate to the property the subject of the contract; solicitors for vendors should give proper answers to requisitions and should not have their staff insist upon receiving unnecessary faxes when they could work through the problem by talking to the opposing solicitor themselves. They should in any event give proper replies. As I have said, just why [the vendor’s solicitor] decided to respond to requisition 17A(c) and not (d) or 20, remains a complete mystery, as he did not give evidence.

32 Counsel in their careful arguments referred me to many decisions on requisitions, but none determining the question here, namely whether a purchaser admittedly without funds to complete, can rely on an inadequate reply to a requisition, to buy more time in the hope that funds will eventuate from some source. [The purchaser’s solicitor] could have been pressed further in cross-examination than he was; for instance he was not asked whether the reason he did not pursue a further response to requisition 20 was that he accepted it as irrelevant to the subject property.

33 Mr Murr, SC said at the outset that the purchaser stood upon her entitlement to rely on her strict rights under the law. That is what parties in difficulty in conveyancing matters invariably do when served with a notice to complete. The courts have not held that they cannot do so. The uninformed view that conveyancing work is easy work of a routine nature is quite incorrect as this case shows.

34 I summarize this rather long judgment as follows:

a. Requisitions 17A(c) and 20 were proper requisitions to which the vendors were required to give a proper answer. They did not do so before the date fixed for completion.

b. This meant that the purchaser was not in default for failing to complete on the date for completion in the contract.

c. The answer given to 17A(c) on 16 December was adequate. But as the date fixed had passed it was necessary to allow a reasonable time after the reply was made before it could be said the purchaser was in default, so as to justify a notice to complete. That time had not passed.

d. The purported termination consequent upon the expiry of the notice to complete amounted to a repudiation the purchaser was able to accept and which she did accept, bringing the contract to an end and entitling her to a refund of deposit.

e. It is not necessary to make a final determination about requisition 20. It was a proper question and the response inadequate and late. While I would have thought there was no genuine concern about mines subsidence in Cremorne, the fact the information is shown on the s 149 certificate for a Cremorne property goes some way to counter this.

f. If the final time for completion had not been validly fixed, the fact the purchaser did not have the funds at the date originally fixed or when the time claimed to be fixed by notice expired is not fatal to her claim. She may have somehow got the funds by an appropriate date; she may have extracted further time from the vendor.

g. The plaintiff is entitled to return of the deposit. The parties should agree on the interest.

Increasingly vendors are including a special condition requiring purchasers to raise requisitions by use of a particular form on inquiries (and sometimes attaching replies to the contract). To the extent that vendors and their advisers are thinking about requisitions prior to formation of contract, that development is arguably welcome. Indeed, where replies are attached, there is merit in providing “up-front” information to a prospective purchaser. There are also certain efficiencies in this technique, particularly where the vendor is selling a large subdivision off the plan. Where the practice becomes objectionable I suggest is in those special conditions which go on to say that the purchaser cannot raise any requisition other than those on the attached form.

Claims by purchasers

Clause 7 of the standard contract is not intended to codify the rights of a purchaser to make a claim. The clause clearly cannot extend to all claims by the purchaser - for example, claims about rights which continue after completion, claims under the Trade Practices Act 1974. Furthermore, a claim which is specifically precluded by the contract could not be a claim within the meaning of clause 7 – see the Court of Appeal decision of Nassif & Ors v Caminer [2009] NSWCA 45. The clause does:

  • prescribe the manner in which a pre-completion claim must be made;
  • give the vendor the opportunity to rescind as regards certain claims; and
  • provide the opportunity if the parties proceed to completion for funds to be held back pending resolution of the claim.

I cannot leave discussion of cl 7 without mentioning the practice of attempting to limit or modify the operation of the clause. This is a dangerous practice, and often is undertaken without consideration of the rationale behind the clause.

Clause 7 and its predecessors in earlier editions of the contract were designed to provide a non-litigious alternative to resolving minor disputes. The clause is designed to mirror the approach which would probably be taken by a court of equity in resolving disputes over matters which do not substantially reduce the value of the property. At common law, a purchaser could rescind for even the most trivial error or misdescription. Equity would intervene to limit the strictness of the rule and order specific performance provided the vendor allowed compensation to the purchaser for the deficiency. On general principles, equity would not specifically enforce at the vendor’s suit if the purchaser would thereby fail to obtain substantially that which the purchaser contracted to buy (Flight v Booth). In proceedings by the purchaser, the order might be refused if the problem was so great that monetary compensation could not adequately compensate the purchaser, or compensation could not be estimated in monetary terms. Hardship was also an available defence.

Clauses such as the standard cl 7 were designed to deal with problems which are not major enough to justify the deal falling through, but are significant enough that the price should be adjusted. The alternative method was cheaper and quicker than going to court, and importantly settlement need not be delayed while the problem was sorted out.

If the usefulness of cl 7 is accepted, the remaining question is at what point a problem becomes so substantial that a vendor should not be compelled to go ahead with the sale (with payment of compensation to the purchaser). To use less legalistic language, when should the 'done deal' be so compromised that a vendor can say 'If you don’t forget about this problem I propose to call the whole thing off'?

Completion

An issue which is of great significance to issues of 'unencumbered title' was raised in the case of Black v Garnock [2007] HCA 31. In that case a writ was lodged on the morning of settlement of a purchase (subsequent to the obtaining of a final search). The High Court, upholding the appeal from the Court of Appeal (which itself had reversed by majority the decision at first instance), held that exchange of contracts did not give any priority to the purchaser over the claimants under the writ. The case raises important practical issues about the prudence of a purchaser lodging a caveat after exchange, the timing of final searches (the purchaser obtained a final search early on the morning of settlement but prior to the recording of the writ late that morning, with the settlement occurring after lunch), and the venue for settlement.

The issues are encapsulated in the opening paragraphs of the decision of Callinan J (at [52]–[53]):

52 It used to be the practice of careful conveyancers, acting for persons acquiring registrable estates or interests in Torrens title land, to lodge with the officials in charge of the Register, a caveat as soon as the agreement for the relevant dealing was made, in pre emptive protection of their clients’ prospective legal estates or interests pending completion of their agreements and registration of the instruments perfecting them. It was a further practice of those conveyancers to effect the actual settlement of the agreement by the exchange of all relevant instruments and funds at that office, simultaneously with a search of the Register, to verify that no other such caveat or record of dealing had been lodged as might obstruct, delay or detract from the registration of their clients’ instruments to perfect their estates or interests.

53 The questions raised in this case would be unlikely to have arisen had those salutary practices not fallen into disuse, whether by reason of electronic recording of dealings or otherwise, although it is difficult to understand why some comparable prudent practice could not equally, and perhaps more easily, have been adopted here to accommodate electronic lodgement, searching and recording. The questions are as to the effect of the registration of a writ of execution, and the rights of purchasers whose transfer of Torrens title land was lodged subsequent to that.

What are the practical implications for conveyancing practice of the High Court’s decision?

1. Purchasers will need to be advised of their entitlement to lodge a caveat following exchange of contracts, and the risk that failure to do so may expose the purchasers to the fate of the purchasers in Black.

2. That advice should also address the costs of lodging a caveat (not only the fee for lodging the caveat and legal costs associated with the caveat itself, but also amounts payable in relation to any necessary discharge – whether a discharge is necessary will depend on the current practice within the Department of Lands regarding registration of dealings in the face of a caveat, and the attitude of any incoming mortgagee).

3. If the purchaser instructs their solicitor to lodge a caveat, the caveat should be drawn carefully. A caveat which does no more than describe the interest of the caveator as an 'equitable interest' will not suffice. A caveat in that form was held to be 'inadequate to specify the interest claimed' in Hanson Construction Materials Pty Ltd v Vimwise Civil Engineering Pty Ltd [2005] NSWSC 880. The inadequacy is so fundamental that it '... is not susceptible of being cured under section 74L' of the RPA (Warden v Mortgage House No 1 Pty Ltd [2006] NSWSC 1462; BC200611297 at [15]). This observation was cited with approval in Choy v Hoang [2007] NSWSC 390; BC200703369. Section 74H(1) of the Real Property Act contemplates that a caveat can be lodged in a form which allows the registration of a dealing referred to in the caveat. If the caveat were to permit expressly the registration of the dealings by which the purchaser is to come onto title, there should be no need for a withdrawal of caveat to be lodged following completion – subject to the matters raised at point 2 above. (It should also be noted that section 74H(1)(a) allows the recording of a dealing with the written consent of the caveator.) As noted in Black (at [43] per Gummow and Hayne JJ; [97] per Crennan J), the effect of section 74H(5)(f) is that a caveat drafted in general terms to protect the interests of the purchasers would not have prevented the recording of the writ. These comments provide a salutary reminder of the scope of section 74H(5), which lists 28 categories of applications, recordings and dealings which will not be prevented by the lodging of a caveat. What is not made clear in the judgments is the opening words of section 74H(5) – 'Except in so far as [the caveat] otherwise specifies'. A caveat which specifically prohibits the recording of a writ would, it is submitted, take effect in accordance with its terms. It should be said that the reminder of the existence of section 74H(5) is not intended to promote an apparently developing practice of attempting to prohibit every matter mentioned in the subsection (occasionally it seems by the device of annexing a photocopy of the subsection to the caveat form). Such a caveat would prohibit matters which should not sensibly be prohibited, and would inevitably be too wide. Practitioners should also note that the Department of Lands has amended the approved form of caveat to add a new item 7 to the list of matters prohibited. Item 7 prohibits the recording of a writ. If using the new form care should be taken to ensure that the appropriate number in addition to item 7 be inserted.

4. If the contract for purchase contains a prohibition against lodging a caveat on behalf of the purchaser (a not uncommon provision in, for example, strata off the plan contracts), the position of the purchaser becomes more problematic. The existence of such a provision will be relevant to, but not determinative of, whether the caveat will survive proceedings for its removal. Indeed, the New South Wales Court of Appeal has held in one case that despite the existence of a contractual prohibition against a purchaser’s caveat, a prudent purchaser would nevertheless have lodged a caveat (Broster v Brueckner [2003] NSWCA 281 at [9]).

5. Black involved a 42-day contract. Where the contract has a longer settlement period, the lodging of a caveat becomes an even more critical issue for purchasers.

6. It is difficult to identify any features of a transaction which would 'flag' to a purchaser the possibility of a writ being recorded on title during the transaction. Nothing on the face of the contract is likely to do so, nor will a special condition in the contract provide any real protection to the purchasers, given that the ultimate contest is likely to be between the purchaser and the judgment creditor (not the vendor). Similarly, the raising of a specific requisition on title (or the making of a pre-contract inquiry) about the financial soundness of the vendor will not bind the judgment creditor.

7. The judgment creditors in Black did not advise the purchasers of the intention to record a writ against title (nor, it seems, of the fact that a writ had been recorded). At no stage in the litigation was it alleged that the behaviour of the judgment creditors was unconscientious (Gummow and Hayne JJ at [13], [50]). It may be that if a purchaser (or for that matter a vendor) were to obtain (or seek?) confirmation from a judgment creditor that no enforcement action will be taken during the course of the sale without giving prior notice, the taking of such action could be said to ground an estoppel against the judgment creditor, or to be misleading, deceptive or unconscientious conduct. (Having said that, it may be that mentioning the possibility of recording a writ against land raises a thought which would not have otherwise occurred to the judgment creditor.)

8. It is notable that the time between lodging and recording the writ on title was of the order of 20 minutes. It seems that a final search early on the morning of the day of settlement may not provide sufficient protection if the settlement is scheduled to occur hours later.

9. Where the settlement is postponed because of problems with a creditor of the vendor, a second final search at the time of settlement would be prudent.

10. Whether it is necessary to adopt as a matter of routine the 'salutary practice' of settling at the office of the Registrar-General (Callinan J at [52]-[53]) is, it is suggested, by no means settled law. The practical implications of routinely settling conveyancing transactions in New South Wales at a single venue would need to be considered.

11. Black did not appear to involve an incoming mortgagee. The position of those taking through the purchaser will need to be considered in the light of the decision. For example, if the purchaser does caveat after exchange, the incoming mortgagee should be put on notice of that step, and any further requirements of the mortgagee (for example, will the mortgagee accept that the way the caveat has been drawn will allow registration of the post settlement dealings without more, or will a withdrawal of caveat be required?).

12. The decision reinforces the paramount nature of the Register, and the importance of prompt registration, to take advantage of the general principle of 'first in, first served'.

13. From a risk management perspective, the advisers to purchasers and lenders should be able to prove the advice given, and the informed consent of the client to the course which is adopted.

14. The providers of title insurance products now refer to Black v Garnock as part of the promotional material for their products.

15. The Torrens statutes in both Queensland and Tasmania contemplate the use by purchasers of a 'priority notice' or 'settlement notice' which gives comparable but not identical protection to that given by a caveat (for a substantially lower lodgement fee) for a limited period of time (60 days or 2 months). Given the move towards a nationally-based electronic conveyancing system and the benefits of harmonization of Torrens statutes, it may be worth exploring the possibility of law reform in this direction in New South Wales. It is understood that the Department of Lands is currently exploring the possibility.

16. What would have been the position of the parties if the writ had been recorded after, rather than before, settlement, but prior to registration of the transfer? The joint reasons indicate that, since a writ creates no interest in land (section 105 RPA), section 43A RPA would not assist the purchasers (at [33]). Section 43A is in these terms:

43A Protection as to notice of person contracting or dealing in respect of land under this Act before registration

(1) For the purpose only of protection against notice, the estate or interest in land under the provisions of this Act, taken by a person under a dealing registrable, or which when appropriately signed by or on behalf of that person would be registrable under this Act shall, before registration of that dealing, be deemed to be a legal estate.

(2) No person contracting or dealing in respect of an estate or interest in land under the provisions of this Act shall be affected by notice of any instrument, fact, or thing merely by omission to search in a register not kept under this Act.

(3) Registration under Division 1 of Part 23 of the Conveyancing Act 1919 shall not of itself affect the rights of any person contracting or dealing in respect of estates or interests in land under the provisions of this Act.

(4) Nothing in subsection (2) or (3) operates to defeat any claim based on a subsisting interest, within the meaning of Part 4A, affecting land comprised in a qualified folio of the Register.

The judgment creditors provided affidavit evidence in the special leave application (Black v Garnock [2006] HCATrans 619) that some 369 writs are recorded each year in New South Wales. It is understood that only a miniscule proportion of recorded writs proceed to a registered transfer pursuant to a Sheriff’s sale (in a typical year of the order of low single figures).

It is arguable that, when compared with the number of transfers registered in New South Wales annually, the risk of a transaction being intercepted by a writ is extremely slight. However, the success of the judgment creditors, and the consequences for the purchasers, in Black could well increase the popularity of writs against land as a method of enforcement. The significant changes to conveyancing practice (making the process more complex and expensive, and 'cluttering' the register with short-term caveats) which are likely to flow from this decision may be considered to be disproportionate, and possibly worthy of law reform. On the other hand, from a purchaser’s perspective, it is better to be safe than sorry.

Obligation to prepare a contract

Whilst no form of contract is prescribed, there is an obligation on a vendor in relation to the proposed sale of residential property to have a proposed contract, including warranties and required documents, in existence prior to advertising the availability of the property for sale.

Section 66R Conveyancing Act

Standard form contract

To satisfy the various requirements in relation to the contract, the Law Society and Real Estate Institute publish a standard form contract. If this form is correctly completed (with necessary attachments) the prescribed requirements will be satisfied.

Do I have to use the standard form contract?

The standard form contract is a form of convenience as it complies with the requirements of a valid and enforceable contract. However a non-standard form which complies will be equally valid and enforceable.

Formality requirements


The fundamental requirement for a contract for the sale of land to be valid and enforceable is that it be in writing and that it be signed by the party against whom it is to be enforced, or by someone authorised to sign on behalf of that person. The standard form contract, when correctly completed, will satisfy this requirement and be both valid and enforceable.

Section 54A Conveyancing Act

An agreement that does not satisfy these requirements will not be enforceable. Such an agreement, for instance an oral agreement to buy and sell supported by consideration, might still be a valid contract between the parties, but it will not be enforceable in court.

A simple form of contract may be in writing and signed by the parties, thereby being valid and enforceable, however it may not contain further terms and conditions. Such a contract is known as an OPEN CONTRACT and it will not have the benefit of the standard conditions set out in standard form contract. However it will nevertheless be enforceable between the parties and the purchaser will be able to enforce such a contract against the vendor. A vendor however may be unable to enforce the contract against the purchaser as, whilst it is a valid and enforceable contract, the purchaser may have various statutory rights (see below) allowing the purchaser to avoid the contract.

Section 60 and Schedule 3 Conveyancing Act

To be valid and enforceable the written document must establish the essential terms of:

  • the parties;
  • the property; and
  • the price.

The document need not be constituted by one piece of writing; it may rely on the combination of a number of documents, such as a series of letters between the parties or their representatives.

Storer v Manchester City Council [1974] 3 All ER 824
G R Securities P/L v Baulkham Hills Private Hospital P/L (1986) 40 NSWLR 631
Darter P/L v Malloy [1993] 2 Qd R 615
Marist Brothers Community Inc. v Shire of Harvey (1995) 14 WAR 69

Oral evidence may be led to establish facts additional to the written document.

Forster v Swain (1992) 57 SASR 309
Tonitto v Bassal (1992) 28 NSWLR 564

Intention

As well as satisfying all of the formal requirements, the parties must have intended to be bound by the contract. It may be possible that, while all the formal elements exist, the parties will not be bound to proceed because one or both did not intend that contractual relations should arise. This will be an objective test based on the conduct of the parties.

Masters v Cameron [1954] HCA 72

The nature of the transaction may well indicate that one or both of the parties did not intend the documents that are relied upon to constitute a contract and may have intended that the contract would only become binding when more formal documents were executed and/or exchanged.

David Loudoun-Shand & Anor v Jadasi Investments P/L [2007] NSWCA 316

Offer and acceptance

A contract will not be binding until one party has made an offer, the other party has accepted that offer, and the acceptance of the offer has been communicated to the party that made the offer. This will generally mean that even if there has been an offer and that offer has been accepted by the other party, the offering party will still be able to withdraw from the transaction at any time prior to the acceptance of the offer being communicated back to the offering party.

IVI P/L v Baycrown P/L [2005] QCA 205

A deposit is not an essential requirement for a valid contract.

Plastyne Products P/L v Gall Engineering Co P/L [1988] NSW ConvR 55-376

Signing


Only the ‘party to be charged’ is required to have signed the contract. This means that, if the vendor is seeking to enforce the contract against the purchaser, then the vendor needs to prove that the purchaser has signed the contract; and, if the purchaser is seeking to enforce the contract, the purchaser will have to prove the vendor’s signature.

If one party makes a signed, written offer and the other party accepts that offer and communicates acceptance, then it is irrelevant that the accepting party has not signed the document if it is the accepting party who is seeking to enforce the agreement. The party ‘to be charged’ with fulfilling the contract in those circumstances is the party making the offer and that party has signed. If the offer is made by the vendor to sell the property to the purchaser and the purchaser orally accepts that offer and orally communicates acceptance to the vendor, then the purchaser can enforce the contract against the vendor, notwithstanding that the purchaser has not signed the contract. In those circumstances the vendor, despite being bound by its signature, would be unable to enforce the contract against the purchaser as the purchaser has not signed any document.

Section 54A Conveyancing Act

An email ‘signature’ may suffice.

McGuren v Simpson [2004] NSWSC 35 and Mehta v J Pereira Fernandes SA [2006] EWHC 813 (Ch)

In all circumstances, however, the court must be satisfied that it was the intention of the parties to enter into contractual relations. For a case of the vendor only signing see:

Agius v Sage [1999] VSC 100

This case involved a million dollar sale recorded on a paper serviette.

A signature on a faxed copy of the contract is a valid signature.

Molodysky v Vema Australia P/L (1989) NSW ConvR 55-446

A contract may be signed by one or two directors of a company on behalf of the company.

McNichol P/L v RF Heritage P/L & Ors [2010] VCC 1429
S.126 Corporations Act 2001.

Proving intention

The courts are reluctant to presume that parties intended to enter into contractual relations. The best evidence to support the claim that a contract has come into existence is a document signed by both parties or two identical documents each signed by one party, although even then the court may decide that the relevant intention was absent.

Where the contract is formed by exchange of counterparts, the counterparts should be identical. If the counterparts are not identical there may be difficulty in establishing what terms have been agreed to, or whether consensus has been reached at all.

Longpocket Investments P/L v Hoadley (1985) NSW ConvR 55-244

De Jong v Carpenter (1982) 2 BPR 9524

However in some cases the ‘exchange’ of non-identical counterparts has not been fatal to the creation of a binding contract.

Sindel v Georgiou and Anor [1984] HCA 58

Gilberto v Kenny (1983) 57 ALJR 283

If a document has only been signed by one party, the other party seeking to rely upon it will have the difficult evidentiary task of proving oral acceptance and communication. Even if that is established, the court may conclude that the offer made by the signing party was in fact not made with the intention of entering into contractual relations.

Any suggestion in the offer that it is made ‘subject to formal contract’ or ‘subject to exchange’ will generally mean that the requisite intention is absent.

Lee & Ors v Ross & Ors [2003] NSWSC 289

Compare Jadasi Investments P/ L v Loudoun-Shand [2006] NSWSC 1170

Implied terms

Contracts may include terms implied by legislation. Some terms cannot be excluded or modified, such as the right to requisition in relation to encroachments that are not disclosed and clearly described.

Conveyancing (Sale of Land) Regulation 2010, schedule 2, clause 1

Most implied terms may be modified or excluded, such as:

  • the vendor will deliver an abstract of title and relevant instruments;
  • the vendor will produce the title to allow for registration;
  • the vendor will provide good title.

Section 57 Conveyancing Act

The standard form contract does modify those implied terms.

Part performance

Section 54A Conveyancing Act requires a signed document. The equitable principle of ‘part performance’ allows a party who has partly performed a contract that is unenforceable due to lack of compliance with s 54A to enforce the contract. However, the principle is extremely limited in relation to contracts for the sale of land and few recent cases have successfully relied upon it. This is primarily because of the nature of such contracts, with the obligations of the parties being relatively limited and therefore little opportunity for part performance to occur.

Khoury & Anor v Khouri [2006] NSWCA 184 (part performance of oral agreement between siblings)

Article (2007) LSJ July 54

A purchaser who has paid the full purchase price or enters into possession pursuant to the contract might be able to establish part performance, but the mere payment or acceptance of a deposit does not constitute part performance.

Joint vendors

If one only of joint vendors has signed the contract the requirement of s 54A Conveyancing Act that the contract be signed would mean that any joint vendor who has not signed could not be personally liable. It might nevertheless be argued that the contract can be enforced against the vendor who has signed, however it is likely that a court would find that the intention of that vendor was to be bound only when, and if, the other joint vendor signed the contract.

Martinez v Rowland [1983] 1 Qd R 496

A joint vendor signing as agent for the other vendors could bind all the vendors.

Lee v Smith (1998) NSW ConvR 55-869

Joint purchasers

If only one of joint purchasers has signed the contract then the requirement of s 54A Conveyancing Act that the contract be signed would mean any joint purchaser who has not signed could not be personally liable. It might nevertheless be argued that the contract can be enforced against the purchaser who has signed, however it is likely that a court would find that the intention of that purchaser was to be bound only when, and if, the other joint purchaser signed the contract.

Auction contract

Auction contracts are no different to any other type of contract from this point of view, and until the contract is signed by a party it is not enforceable against that party. There is English authority that an auctioneer has implied authority to sign a contract on behalf of either party.

Butt P., Standard Contract for the Sale of Land in NSW [0.255]

Wright v Madden [1992] 1 Qd R 343 - bidder not bound

McConville v Australian Telecommunications Commission (1991) NSW ConvR 55-602 - bidder not able to enforce

Auction conditions in a contract

Agents are obliged by law to conduct auctions in a particular way. They must announce vendor bids, not accept bids after ‘knocking the property down’, and so on; but none of that needs to be in the contract, which is a document between vendor and purchaser.

Variation of contract

 Parties to a contract may agree to vary the contract. They might also authorise an agent, such as a solicitor, to agree to a variation of the contract but a solicitor’s authority might not extend to variation of significant terms.

Iannello v Sharpe [2006] NSWSC 713

A solicitor is not authorised to alter the apportionment of price between freehold and goodwill.

CTM Nominees P/L v Galba P/L (1982) NSW ConvR 55-062

Faxed contracts

Documents that are faxed are made when and where the message is received and are enforceable in exactly the same way as original documents.

Molodysky v Vema Australia P/L (1989) NSW ConvR 55-446

Reese Bros Plastics Ltd v Hamon-Sobelco Australia P/L (1988) 5 BPR 11,106

IVI P/L v Baycrown [2005] QCA 205 (email communications also considered)

c/f Smoothseas P/L v Lawloan Mortgages P/L [2007] QCA 445 – option required original document to be served, so faxed document failed to satisfy the requirement.

Vendor disclosure and warranty obligations

In addition to being formally valid and enforceable, a contract for the sale of land must also satisfy statutory disclosure and warranty obligations. Failure to do so will not make the contract invalid or void. However it may be unenforceable by one party, the vendor, against the other party, the purchaser. It will, notwithstanding failure to comply with these requirements, still be a valid contract and thus capable of being enforced by the purchaser against the vendor.

Conveyancing (Sale of Land) Regulation, clause 4 and schedule 1

The regulation requires the disclosure of the following documents:

  • easement;
  • profit a prendre;
  • restrictions on the use of the land; and
  • positive covenants
  • strata title, common property title and strata plan;
  • strata title, common property title, strata plan and registered lease for strata leasehold;
  • stratum parcel strata management statement;
  • strata development statement;
  • Community Land Development Act property certificate, precinct, community or neighbourhood plan, management statement and development contract;
  • additional strata information if strata development within a community scheme;
  • a smoke alarm notice (see CSOLR 2006 effective from 1/12/06);
  • any order made under the Trees (Disputes between Neighbours) Act 2006.

NOTICE - the contract must include a notice (in prescribed text) warning the parties of the significance of the documents.

COOLING OFF NOTICE - a contract relating to residential properties also requires a Cooling off Notice – see Cooling Off chapter.

Section 66ZI Conveyancing Act

Prescribed implied terms

A term preventing the removal of the right to object to occupational boundaries is implied into every contract unless the contract includes specific disclosure of any title discrepancies (e.g. by including an identification survey).

Other prescribed implied terms include:

  • A term requiring a vendor in a strata off-the-plan sale or a land and house sale package to serve an occupation certificate on the purchaser at least 14 days before completion.
  • A term regulating the release of deposit prior to settlement to pay vendor duty.

Conveyancing (Sale of Land) Regulation - clauses 5 to 7 and schedule 2

Prescribed implied warranties

A vendor warrants that, as at the date of the option:

  • the land is not subject to any adverse affectation;
  • the land does not contain any part of a sewer belonging to an authority;
  • the s 149 certificate is accurate;
  • no money is payable in relation to a positive covenant; and
  • no building or structure is liable to have a upgrading or demolition notice issued.

Adverse affectations

Adverse affectations include:

  • proposed road widening;
  • compulsory acquisition;
  • heritage order;
  • fencing notice;
  • demolition order.

Conveyancing (Sale of Land) Regulation 2010, schedule 3, part 2

Exemptions

Exempt contracts

  • Contracts between neighbours to alter boundaries, between co-owners, with various government departments and arising out of a will.
  • Contracts arising from options, provided that the option included a proposed contract that complied with all of the vendor’s disclosure and warranty obligations current as at the date of the option.

    The rationale for this exemption is that the purchaser has received all relevant disclosure and warranties at the time of entering into the option and has then had the choice of deciding whether to proceed with the purchase by exercising the option.

  • Contracts (for other than residential land) arising from an option, provided that the option cannot be exercised earlier than three months after the option date.

    The rationale for this exemption is that the non-residential purchaser has at least three months to investigate the property and therefore vendor disclosure is unnecessary.

Conveyancing (Sale of  Land) Regulation 2010, schedule 4

Exempt land

Contracts relating to interests in land such as mortgages, easements and some leases.

Conveyancing (Sale of Land) Regulation 2010, schedule 5

Consequences of non-disclosure

A purchaser may rescind a contract that fails to comply with the vendor’s disclosure or warranty obligations. There are no restrictions on the purchaser’s ability to rescind for breach of vendor disclosure except that the right to rescind must be exercised within 14 days of the contract.

In relation to a breach of vendor warranty, the purchaser can rescind at any time prior to completion but cannot rescind unless:

  • the breach of warranty relates to a failure to disclose a matter affecting the land; and
  • the purchaser was unaware of the matter affecting the land; and
  • the purchaser would not have purchased the land if the purchaser had been aware of the matter affecting the land.

In relation to breach of warranty relating to potential orders concerning building work, a purchaser cannot rescind if the vendor obtains a building certificate after the date of the contract.

Conveyancing (Sale of Land) Regulation, clause 19

The right of rescission can be lost if the purchaser does not act promptly to exercise the right.

Zucker v Staightlace P/L (1987) 11 NSWLR 87

Rescission must be effected by notice in writing:

  • within 14 days of the contract in relation to failure to attach prescribed documents;
  • prior to completion in relation to breach of a prescribed warranty.

Conveyancing (Sale of Land) Regulation, clause 20

A rescission notice must be served in accordance with s 170 Conveyancing Act or in accordance with the standard form contract 20.6.

If the contract is validly rescinded, a purchaser is entitled to a refund of the deposit but breach of these requirements does not, of itself, create a right to damages.

Nomination


The common law recognises the purchaser’s right to nominate an alternative purchaser.

Vickery v Woods [1952] HCA 7; (1952) 85 CLR 336 per Dixon J at 343
Re Davies [1989] 1 Qd R 48
Lord v Trippe (1977) 51 ALJR 574

There is no need for a condition in the contract to confer this right. Standard form contract 4.3 regulates the purchaser’s obligations if the purchaser is not the transferee.

Nomination, assignment or novation

 A purchaser remains liable under a nominated contract, the nominee merely being permitted to exercise the purchaser’s rights.

An assigned contract results in the nominee standing in the place of the purchaser. A novation is where the original contract is cancelled and the new purchaser enters into a new contract with the vendor.

J R Stevens Holdings P/L v Von Begensey (1992) ANZ ConvR 375

Article (1997) 71 ALJ 12

Nomination and default


The vendor can enforce the contract against the original purchaser and any notice of default must be served on that purchaser.

Nguyen v Taylor (1992) 27 NSWLR 48

J R Stevens Holdings P/L v Von Begensey (1992) 5 BPR 11,534

In practice, it may be served on both the original purchaser and the nominee.

A nominee ordinarily has no right to enforce against the vendor, as the nominee is not a party to the contract. Only the purchaser may do so.

Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427; but see

Parland P/L v Mariposa P/L [1995] TASSC 91

Conditional contract

Other than the simplest contract (open contract) all contracts will include conditions. The standard form contract contains 29 provisions, the last of which anticipates additional provisions, such as a finance clause, a Foreign Investment Review Board condition, a council consent requirement or a provision requiring the vendor to obtain a building certificate. Provision 29 sets out a framework for the interpretation of any such additional provisions, which are usually referred to as special conditions.

Waiver of special condition

If the special condition is for the benefit of one party only, then only that party may waive the benefit. If the benefit is waived by that party the contract would proceed as if the condition had been satisfied.

Standard form contract 29.3

Sandra Investments P/L v Booth [1983] HCA 46
Peatties Road v Hanson and Anor [2004] NSWSC 831

If the condition is for the benefit of both parties then one party cannot unilaterally waive it. In that case the condition will remain operative and either party may bring the contract to an end if the condition is not satisfied.

Misiaris v AFC Holdings P/L (1988) 15 NSWLR 231
L Cusato P/L v P P Cleary P/L (1980) NSW ConvR 55-003
Barooga Projects (Investments) P/L v Duncan [2004] QCA 149

Finance conditions


There is no standard finance condition in the standard form contract, however a ‘subject to finance’ condition is common.

See generally Hamdan v Widodo [2007] WASC 26.

A purchaser may elect to proceed notwithstanding that finance is not obtained from a nominated financier.

Morrow v Tucker [2006] NSWSC 750

An election to terminate a contract if finance is not available is irrevocable.

McVeigh v Bell [2001] VSC 291

A purchaser or representative is entitled to access to the property during the contract for the purpose of obtaining certificates or reports.

Standard form contract 12.1

Foreign Investment Review Board

The standard form contract contains a promise by the purchaser that the Foreign Acquisitions and Takeovers Act does not apply. If that is not the case the purchaser will have to seek to amend the contract to negate this promise and to make the contract conditional on obtaining approval.

Standard form contract 22

A condition that the purchaser obtain Foreign Investment Review Board (FIRB) approval is for the benefit of both parties and either party may rely on non-approval within the time limit to terminate the contract.

Re Wickham Developments (Australia) P/L v Feros (1994) ANZ ConvR 347

Express obligation to satisfy

Standard form of contract 29.4 requires each party to do ‘whatever is reasonably necessary’ to satisfy any additional provision.

A purchaser who fails to take steps to satisfy a condition will not be entitled to rely on non-fulfilment of the condition as a basis for avoidance of the contract.

Kheng v Secola (2001) ANZ ConvR 118 - FIRB condition

Provost P/L v Collingwood Ltd (1981) ANZConvR 21 - solicitor’s approval

Smith v Pisani No. SCGRG-00-470 [2001] SASC 21 - finance condition

Cannon Real Estate P/L v Hubble[2000] VSCA 116 - planning condition

Similar conditions, which have required the purchaser to ‘use best endeavours’, have been interpreted as being satisfied by the purchaser applying him or herself conscientiously to the task of securing approval with the vigour that would be expected if he/she were prudently attempting to secure his or her own interests.

Parland P/L v Mariposa P/L (1995) 5 Tas R 121

Erley P/L v Gunzburg Nom P/L (1998) ANZConvR 522

A party that makes genuine attempts to satisfy a condition may be permitted to rely on the condition to terminate the contract even if there has been some technical failure by that party to fulfil all of the requirements of the condition.

Failure to satisfy a minor requirement of a special condition, or the imposition of some minor encumbrance, will not entitle a party to avoid the contract.

Everards P/L v C G Maloney P/L (1988) 73 LGRA 81; 4 BPR 9494

Bosbury P/L v Comgrigg P/L (1992) 57 SASR 241

The breach of a condition requiring the vendor to hand over a document, such as an engineer or architect’s certificate, may not justify the purchaser refusing to settle. Such a document is not a document as to title and may not go to the substance of the contract. The appropriate remedy is for the purchaser to settle and sue the vendor for any loss or damage.

Zonebar P/L v Surfers Paradise Investments P/L (1997) Qld Conv R 54-496

Unregistered plans

Standard form of contract 28 requires a vendor to ‘do everything reasonable to have the plan registered within six months after the contract date’. This six month period may be amended by the inclusion of an additional provision. If the plan is not registered within the specified period, either party may rescind the contract (standard form of contract 28.3) however the vendor can only do so if the vendor has done everything reasonable to secure registration during that period.

Actall P/L v Pacific Bay Development P/L [2006] NSWCA 190 – vendor had complied.

Express and implied obligation to satisfy

Whilst provision 29 of the standard contract requires a party to do what is reasonably necessary to register the plan even if this express obligation on the parties to secure satisfaction of any special condition is deleted , there may well be an implied obligation to do so.

If a plan is not registered within the specified period the purchaser may be entitled to object to the vendor, ending the contract pursuant to standard form contract 28.3.2 or 29.5 but the vendor’s express obligation to secure registration only applies to the specified period which has, by definition, expired. The vendor might therefore simply ‘sit on his hands’ and wait for the purchaser to rescind. However there is support for the proposition that the vendor cannot simply stop endeavouring to seek registration if the plan is not registered by the specified date if the vendor has failed to use best endeavours to secure registration prior to that date. There is an implied condition that the vendor will continue to use best endeavours to secure registration.

Hawes and Ors v Cuzeno Pty Ltd and Anor [1999] NSWSC 1167
Churnin & Ors v Pilot Developments P/L [2003] NSWCA 391
Grieve & Anor v Enge & Anor [2006] QCA 213 – general duty to uphold contract
Pelley & Anor v Tebran P/L [2006] NSWSC 1072
Actall P/L v Pacific Bay Development P/L [2006] NSWCA 190
Wolseley Investments P/L v Gillespie [2007] NSWCA 358
See also Foster v Hall [2012] NSWCA 122 – Vendor had not used ‘Best reasonable endeavours'

This may require the vendor to enter into an Agreement with Council pursuant to s.93F of the Environmental Planning and Assessment Act 1979.

Purchaser's lien

A purchaser who signs a contract and pays a deposit acquires a lien over the land that is the subject of the contract for the amount of the deposit. This lien arises upon exchange of contracts, even if the contract is conditional on satisfaction of a special condition.

Chattey and Another v Farndale Holdings Inc noted at (1997) 71 ALJ 15
Standard form contract 2.8

Option to purchase

An option to purchase land is a document that creates an interest in land. As such it will not be enforceable unless it is in writing and signed.

Section 54A CA

The interest created by an option to purchase is capable of supporting a caveat.

Laybutt v Amoco Australia Pty Ltd [1974] HCA 49

The written document need not be contained in one document and oral evidence may be led to resolve any ambiguity.

Tonitto v Bassal  (1992) 28 NSWLR 564

See earlier discussion in relation to formality requirements of contracts.

The parties may sometimes intend that the option will not create an interest in land.

Dekala P/L v Perth Land & Leisure Ltd (1987) 17 NSWLR 664

Whilst the option must comply with these formality requirements, the document which exercises the option need not.

Spiro v Glencrown Properties Ltd [1991] 1 All ER 600

Nguyen v Taylor (1992) 27 NSWLR 48

What if the exercise is out of time?

Traditionally courts have construed time limits strictly and a late exercise will be invalid; however, equity may forgive a minor breach of these requirements.

Hillier v Goodfellow (1988) V ConvR 54-310

Options - Vendor disclosure and warranty obligations

Options may be entered into in relation to different types of land, but options relating to the purchase of residential property attach statutory disclosure and warranty obligations similar to those attaching to contracts for the sale of land.

These obligations require such options to include:

  • a copy of the proposed contract that is to be entered into if the option is exercised;
  • section 149 certificate (Environmental Planning and Assessment Act);
  • sewerage/drainage diagram;
  • property certificate and deposited plan;
  • copies of registered dealings relating to :
  • easement;
  • profit a prendre;
  • restrictions on the use of the land; and
  • positive covenants
  • strata title, common property title and strata plan;
  • strata title, common property title, strata plan and registered lease for strata leasehold;
  • stratum parcel strata management statement;
  • strata development statement;
  • Community Land Development Act property certificate, precinct, community or neighbourhood plan, management statement and development contract;
  • additional strata information if strata development within a community scheme;
  • a statement that the building complies with any obligation to have smoke alarms (effective 1/11/06). This basically applies to buildings with bedrooms; and

Notice - the contract must include a notice (in prescribed text) warning the parties of the significance of the documents.

Cooling off notice - contract relating to residential properties also requires a cooling off notice – see Cooling Off chapter.

s 66ZI CA

Prescribed implied warranties

A vendor warrants that, as at the date of the option:

  • the land is not subject to any adverse affectation;
  • the land does not contain any part of a sewer belonging to an authority;
  • the s 149 certificate is accurate;
  • no money is payable in relation to a positive covenant; and
  • no building or structure is liable to have a upgrading or demolition notice issued.

Adverse affectations include:

  • proposed road widening;
  • compulsory acquisition;
  • heritage order;
  • fencing notice;
  • demolition order.

Conveyancing (Sale of Land) Regulation, Schedule 3, Part 2

Options - Exemptions

Exempt options

  • options to purchase giving rise to an exempt contract.
  • options to purchase in wills or leases.

Exempt land

  • Options relating to interests in land such as mortgages, easements and some leases.

Conveyancing (Sale of Land) Regulation, Schedule 4

Consequences of non-disclosure in options

Either party may rescind an option (or the contract resulting from the exercise of the option) if the option fails to comply with the vendor’s disclosure or warranty obligations. There are no restrictions on a party’s ability to rescind for breach of vendor disclosure except that the right to rescind must be exercised no later than 5 pm on the fifth business day after the day of exercise of the option.

s 66ZI Conveyancing Act

The purchaser cannot rescind for breach of vendor warranty unless:

  • the breach of warranty relates to a failure to disclose a matter affecting the land; and
  • the purchaser was unaware of the matter affecting the land; and
  • the purchaser would not have purchased the land if the purchaser had have been aware of the matter affecting the land.

For breach of warranty relating to potential orders concerning building work, a purchaser cannot rescind if the vendor obtains a building certificate after the date of the option.

Conveyancing (Sale of Land) Regulation, clause 19

The right of rescission can be lost if the purchaser does not act promptly to exercise the right.

Zucker v Staightlace P/L (1987) 11 NSWLR 87

Rescission must be effected by notice in writing at any time before the option is exercised or is exercisable and any consideration paid is refunded.

Conveyancing (Sale of Land) Regulation, clause 20

A rescission notice must be served in accordance with s 170 Conveyancing Act.

Options - Formality requirements

 In addition to complying with disclosure and warranty obligations, options for the purchase of residential land must:

  • be made by way of exchange of counterpart documents, one signed by the vendor and the other signed by the purchaser; and
  • not be exercisable within 42 days.

s 66ZG Conveyancing Act

Option to purchase or right of first refusal

An owner of land may grant an option to purchase, a right of first refusal or a right of pre-emption. A right of first refusal and a right of pre-emption differ from an option in the strict sense. These rights are principally contractual and frequently appear in leases. Such a right is regarded as different to an option to purchase. It is a purely contractual right, giving the lessee no additional interest in the land.

Attorney-General v Methodist Church of New Zealand [1996] 1 NZLR 230
Walker Corporation P/L v W R Pateman P/L (1990) 20 NSWLR 624
However compare:
Bob Jane T-Marts P/L v Baptist Union of Victoria [1999] VSC 346
Transfield Properties (Kent Street) P/L v Amos Aked Swift P/L (1994) 36 NSWLR 321

The practical application of such clauses often causes difficulty for the lessor and care must be taken in drafting. There must be some clearly definable end point to the lessee’s right or else the lessor can be in a position where the lessor is unable to sell the property to a third party without constantly checking back with the lessee.

As to the meaning and effect of an option in a commercial context see:

GPT RE Ltd v Lend Lease Real Estate Investments Ltd & 1 Or [2005] NSWSC 964

Terms contract


A vendor terms contract will be subject to the Consumer Credit Code if it requires payment of interest and relates to a domestic transaction.

Lewis v Ormes (Commercial) (2005) NSWCTTT 481
(2006) LSJ Nov. 34

Settlement of a terms contract

Settlement is usually the time when the purchaser pays the balance due under the contract and receives possession of the property. This is the normal type of transaction and is known as a ‘cash contract’. A terms contract, however, usually separates the time of possession and the time for payment of the final balance due under the contract, with the purchaser usually taking possession at some earlier time, often upon payment of just the deposit.

Thus settlement in a terms contract environment usually consists of ‘preliminary settlement’, being the time when the purchaser goes into occupation of the property, and ‘final settlement’, being the time when the final balance is paid to the vendor.

Settlement is most significant as the time that responsibility for the outgoings passes to the purchaser. In a terms contract this is at the time of ‘preliminary settlement’, when the purchaser becomes entitled to possession of the property. Thus rates are adjusted at that time.

In the absence of a special condition entitling the purchaser to pay the purchase price prior to the due date for final payment, a purchaser has no right to complete a terms contract prior to the due date. A vendor may choose to allow early completion, but the purchaser has no right to insist on early completion.

Residential conveyancing protocol

The Law Society of NSW and Real Estate Institute of NSW publish an agreed residential conveyancing protocol.



© Copyright By Lawyers For Lawyers, 2010, Sydney. All rights reserved.Last Updated: 16/07/2014


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