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Off-the-plan contracts: A tale of two stories

06 October 2021

#Property, Planning & Development

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Off-the-plan contracts: A tale of two stories

You’re likely experienced at selling or buying property – land with improvements, or land you will only convey after you’ve built on it, or unimproved land promised to come with a development consent. 

Issues arise when not everything promised can be provided, maybe the completed building is not exactly as promised. Below is an article I published in a recent edition of the Australian Property Law Bulletin. While written for legal professionals, our readers and clients are likely to find this useful in showing how simple things sometimes transform into persistent headaches. Reach out too if anything jumps out. And please enjoy.

Errors, misdescriptions, Flight  v  Booth,  off- the-plan  sales, draft strata plans, rescission, repudiation, termination, completion, merger etc, etc — all packed  into two recent cases

Two people, same city, both purchasers, similar contracts, both off-the-plan, both buying strata lots including car parking — one lot with one car space, and the other lot allowing parking for two cars. When the time for completion arrives, one lot has no parking at all. The other lot has parking for one car, but not two. One purchaser does not complete but rescinds, is sued, and walks away with her deposit. The other purchaser completes then sues for the car space or damages. This plaintiff gets neither, and I suspect a costs order. Why the difference?

Kalathas v 89 Ebely Street Pty Ltd [2021] NSWSC 490

In 2017, Ms Kalathas and 89 Ebely Street Pty Ltd exchanged contracts for an off-the-plan retail strata lot. The draft strata plan showed the lot including a car space. Completion would follow the strata plan’s registration.

Sensibly, and because the lot required building, the contract dealt with contingencies, allowing differences between the registered strata plan and the draft strata plan. Differences were either “Minor Strata Variation[s]”, such as changing lot numbers or reducing the lot’s area by less than 5 per cent, or other variations, presumably major or substantial variations. The judgment does not explain the contract’s purpose in this distinction. One utility is these clauses, by the parties agreeing what is a minor variation, limit a purchaser’s recourse to contractual rescission rights and common law rights, such as the principle in Flight v Booth. Flight v Booth, addressed below, concerns a purchaser’s rescission where a vendor proposes conveying something materially different from the land described in the sale contract. In Ms Kalathas’ case, any “Minor Variation” would not qualify as being materially different. The clause prevents an argument.

The contract further curtailed rescission rights, expressly explaining that the purchaser could not “rescind, terminate or delay completion” because of differences between the strata plan in draft and as registered. These words suggest that no matter what the difference between draft and registered strata plans, the purchaser remained compelled to complete. The purchaser may have had rights to make a pre-completion claim under, for example, clause 7 of the sale contract, but not to prevent completion entirely.[1]

Clause 7 claims present their own complications. The clause permits a purchaser’s claim, if made before completion, but if the claim’s value exceeds the con- tract’s value by a prescribed percentage — often reduced to 1 per cent — the vendor can rescind. This creates a dilemma for the purchaser — they may want to complete and want their claim compensated. However, if the purchaser makes the claim, power shifts to the vendor who can now rescind. The purchaser may instead elect to complete with the defect — which arises in Ms Xu’s case considered below.

Back to the story — February 2020 the strata plan is registered. Ms Kalathas’ lot, called lot 1 on the draft strata plan, became lot 3 on the registered plan. The vendor set completion for 23 April 2020. The car spot was also missing, but the purchaser did not notice at this stage.

On 23 April 2020, Ms Kalathas did not complete, not because of the missing car spot — which arose later — but because of her contention that changing lot 1 to lot 3 was significant, and completion should be delayed. Apparently, Ms Kalathas’ bank needed a new loan application, which had become problematic as the 2020 COVID-19 lockdowns impacted her business.

The next day, 24 April 2020, the vendor issued a notice to complete, appointing 8 May 2020 for completion. Ms Kalathas, was now aware of the missing car space, and considered the vendor’s notice to complete as trying to force her into accepting the lot despite it substantially differing from the contract — there being no car space. Alternatively, Ms Kalathas considered the vendor as only offering to complete in a manner substantially inconsistent with the contract — which required the car space.

On 28 April 2020, Ms Kalathas notified her rescission of the contract, and alternatively terminating by accepting the vendor’s alleged repudiation. These were both based on the vendor refusing to convey what the contract required — the car space.

The vendor responded by contending it could rectify any error by providing a car space. This was said to prevent the purchaser’s rescission right or for their being a repudiation capable of acceptance. The vendor promised to provide the car space if the purchaser were to complete within a reasonable time. The vendor later argued that even if its conduct was prima facie repudiatory, this was caused by its mistaken understanding, and the purchaser was obliged, but failed, to alert the vendor to this before accepting the repudiation.

Ms Kalathas, unpersuaded, commenced proceedings including for the deposit’s return. Her action succeeded, but before examining why, consider a similar situation with a different outcome.

Xu v Lindsay Bennelong Developments Pty Limited [2020] NSWSC 1692

In May 2016, Ms Xu and the vendor exchanged contracts for an off-the-plan residential lot being a 3 bedroom penthouse with two bathrooms and a single car space allowing tandem parking for two cars.[2] Tandem parking is where two cars share a single space, front to rear. One car is parked in by the other, but at least both cars can park safely in a designated spot in the garage. As with Ms Kalathas’ contract, Ms Xu’s contract dealt with contingencies including differences between the registered strata plan and the draft strata plan. Some differences would be deemed “Minor Variations”, such as changing lot numbers or reducing the lot’s area by less than 5 per cent. The contract prevented Ms Xu from making a claim, rescinding, refusing performance or terminating for Minor Variations. If the registered strata plan contained differences not within the definition of “Minor Variations” and if these also “detrimentally affected the property to a substantial extent”, Ms Xu’s only remedy was rescission. This sounds harsh. The vendor explained its necessity — the clause acknowledges that in off-the-plan developments things often need to change. If a purchaser considered the change unsatisfactory, and so long as substantial detriment existed, the purchaser could rescind. Equally, and because the vendor did not have a rescission right in the same circumstance, the purchaser could also decide to complete. Indeed, a purchaser may decide to do so if property values have increased.

You probably guessed what happens — in July 2019, Ms Xu was notified of the strata plan’s registration. While her lot had a parking spot, it only allowed, and was only sized for, one car. Completion was scheduled for 1 August 2021, with Ms Xu having 7 days from notification of the plan’s registration to rescind if the difference between the draft and registered plans was more than a minor variation. Ms Xu did not do so, instead saying completion would not occur until she received a second car park.

The vendor issued a notice to complete. Ms Xu, not wanting to lose the sale — via vendor termination, vendor rescission, or her rescission — chose to complete, but purported to reserve rights to sue for a second car space. After completion, she sued for specific performance to receive a second car space, or alternatively damages.[3]

Seeking specific performance after completion is conceptually difficult. The contract has completed, money paid and title transferred, yet one party seeks having the completed agreement specifically performed. The performance would presumably involve the vendor finding some other land and transferring this to Ms Xu as a car space. Issues such as merger come to mind. One way Ms Xu endeavoured to avoid this was contending an entitlement to one lot — the home unit — and separately to have two car spaces transferred to her. This suggested the provision of the lot was separate from the provision of the parking, which was not accepted.

The vendor contended Ms Xu had agreed to limit her rights over differences between draft and registered plans to rescission, again explaining this supplied her with appropriate safeguards when buying off-the-plan. The vendor also argued that if a purchaser wants to make a claim under clause 6 of the standard contract — this must occur before completion. A vendor, if a purchaser’s claim is made, may obtain the opportunity to rescind, return the purchaser’s deposit, and not complete. A purchase cannot fetter the vendor’s opportunity by completing and later trying to claim damages.

Flight v Booth also arose in this case. Assuming the vendor only proposed conveying something materially different from the land as described in the contract, the principle in Flight v Booth allows a purchaser to rescind regardless of special conditions about consequences of errors etc — considered further below. However, since Ms Xu had completed, Flight v Booth no longer had application — its temporal scope, as an authority applicable pre-settlement, had ended.

Ms Xu did not obtain her relief. Upon learning of the difference between strata plans, Ms Xu could have rescinded or potentially contended the vendor’s notice to complete was repudiatory — and the court did not consider losing one car space as a minor variation. Ms Xu could have also made a clause 6 claim, but this would have enlivened the vendor’s right to rescind, or as she in fact did, Ms Xu could have done nothing and completed. The consequence of the contract giving a rescission right, and limiting recourse to that right, resulted in Ms Xu’s claims being defeated by merger on completion.

A comparison of the strategies and outcomes in Kalathas and Xu

First, how do clauses limiting a purchaser’s right to rescind for changes between draft and registered strata plans affect the application of the principle in Flight v Booth? It is a matter of degree. If a vendor is unable to convey the property as agreed in the contract, a purchaser is able to rescind the contract if the purchaser can prove the difference is material and the purchaser would not have entered into the contract. Even though off-the-plan contracts purport to give a vendor latitude in terms of changes to the property, these contractual provisions are still subject to the overriding requirement for the vendor to deliver substantially what was bargained for. This means that rights arising under the principle in Flight v Booth can be exercised even if the purchaser has other remedies such as claims under clause 6 or 7.

Ms Kalathas exercised their right to terminate, but not Ms Xu. A purchaser is not able to rely upon this principle after completion on the basis the act of completion is acceptance of the property with the defect.

Secondly, repudiation. If a vendor proposes to deliver at completion a property that is substantially different to the one described in the contract enlivening a purchaser’s right under Flight v Booth, and a vendor issues a notice to complete, a potential repudiation by the vendor arises. Kalathas explains the conduct will be repudiatory even if the vendor could actually convey what the contract requires, but is refusing to do so. Also, and particularly where there is an experienced, legally rep- resented, developer, the purchaser’s ability to accept repudiation will not be conditional upon the purchaser first informing the vendor of its “mistaken” contractual understanding in issuing the completion notice. Instead, the purchaser can accept the repudiation.

Neither Ms Kalathas nor Ms Xu relied upon repudiation, in the sense of being awarded loss of bargain damages. Ms Xu did not attempt this, and Ms Kalathas did so as an alternative, considered below.

Thirdly, notices with alternative termination bases. Ms Kalathas’ termination notice contended firstly rescission and alternatively repudiation. The court applied Flight v Booth, and Ms Kalathas escaped the contract and recovered her deposit. The court also said Ms Kalathas’ termination was effective as an acceptance of the vendor’s repudiation. However, the remedy remained refunding the deposit, not loss of bargain damages. What if the notice had been the other way around? Repudiation first, rescission as an alternative. Would damages have been awarded? Put another way, does specifying one right as an alternative to another right mean if the court finds the first contended basis for termination is made out, it will not consider the second basis, even if this has a greater level of compensation? As explained below, I expect the court would have only granted Ms Kalathas her deposit back irrespective of what came first in her notice: Rescission or accepting repudiation.

Fourthly, and this from a vendor’s perspective. If the vendor cannot convey what the contract requires, and this enlivens a purchaser’s right under Flight v Booth, what does a vendor do if the purchaser doesn’t exercise those rights? The vendor cannot deliver what the con- tract requires — which makes Flight v Booth available to the purchaser. But if the purchaser does not rescind, is there a stalemate: A purchaser being able to resist completing but a vendor not able to force completion without the vendor repudiating and then facing loss of bargain damages? To my mind, no. The vendor issues a notice to complete. If the purchaser completes, then the outcome in Xu follows — the land has been conveyed and the purchaser’s claim is effectively merged on completion. This may not reflect a purchaser’s lack of strategy. If the land’s value has increased, the purchaser may wish to complete with something less than the proposed land to keep the sale. The alternative, rescind ing, or making a clause 7 claim and enlivening a vendor’s ability to rescind, risks leaving the purchaser with a refunded deposit while gifting the vendor the upswing in land value.

Conversely, if the vendor issues a notice to complete, and the purchaser instead of completing purports to accept the vendor’s repudiation, the outcome would be limited to, at least under the special conditions in Kalathas and Xu, to rescission and refund of the deposit. Also, if the notice is issued, but the purchaser did nothing and did not complete, the vendor would act on the notice to complete and terminate. The vendor would retain the deposit — and this potential loss would often be motivation enough for the purchaser taking one of the 2 courses above. There may also be an argument over whether a vendor with a right to terminate, but not able to perform, can claim substantive damages — which is not now being considered. What seems more relevant is given Kalathas and Xu, those contracts’ special conditions, by limiting purchaser recourse to rescission, can supply an additional vendor protection — closing out the stalemate by limiting the purchaser to a refund of the deposit where repudiation is asserted.

As with most property and contractual disputes, things are not straightforward, and decisions made under time pressure, with notices ticking away, can have consequences. These decisions give guidance on how special conditions can clarify approaches to, and remedies following, errors and misdescriptions and changes between draft and registered strata plans. Done well, they can give balance to the agreement.

Author: Bede Haines

  • This article was originally published by LexisNexis Australia in the Australian Property Law Bulletin. Bede is also a member of the Bulletin’s Editorial Panel.

[1] Law Society of New South Wales Contract for the Sale and Purchase of Land (various editions).
[2] Ms Xu was primarily suing the third defendant, TFM, who acquired the land from the first defendant.
[3] Not addressed here is a misleading or deceptive Australian Consumer Law claim.

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