Contract for the Sale of Land – Dispute About a Penalty Clause

The recent case of Blanco v Wan [2021] NSWSC 273 involved a contract for the sale of land where the purchaser agreed to pay $205 000 (10% of the price) by instalments as a deposit. The purchaser paid $80 000 soon after exchange, and the remaining 125 000 was payable ‘on or before settlement’ or ‘upon default.’

The purchaser failed to complete the contract, so the vendor terminated it and sought to recover the $80 000 paid as well as the unpaid $125 000. The court held that the initial $80 000 was a deposit, and hence the principles concerning penalty provisions did not apply. The $125 000 was not a deposit because it was not payable at a time when it would be an earnest of performance, and that in substance it was a penalty. The amount was held to be extravagant and disproportionate to the interest of the vendor sought to be protected.

Separately, the purchaser claimed that the contract should be set aside as being unjust under the Contracts Review Act 1980 (NSW). However, this claim failed because there was no material inequality of bargaining power and because the purchaser had an adequate appreciation of the contract’s terms, and it did not operate in an unconscionable, harsh, or oppressive manner.

Offers, Acceptance and the Intention to be Legally Bound by Contract

The recent case of Hillam v JPSF Pty Ltd [2017] NSWSC 1510, considered whether a binding oral agreement existed between the parties in an agreement for a lease.

The Applicant in this case, Hillam, sought a declaration and order that a valid and binding lease existed by way of oral agreement with the respondent, and that the lease had been partly performed.

The court considered the fact that the only meeting between the applicant and respondent was when the applicant met with the LJ Hooker agent of JPSF on the premise. The agent made an offer for a new lease to the applicant, but the court found that this offer did not amount to an oral agreement because the agent had no legal authority to make any oral offer of lease to Mr Hillam. Nevertheless, a ‘Proposed Lease’ was received by the applicant. However, it was not executed until such time when the offer to lease had been withdrawn by the respondent.

The Court held that the parties had not intended to enter binding legal relations, whether oral or written, and as there was no execution of a formal lease document, there was no contract. The application was dismissed. This case demonstrates the importance of ensuring all elements of contract formation are satisfied to have a binding contract.

Build-to-rent Planning Controls

The new State Environmental Planning Policy Amendment came into effect on 12 February, that establishes a definition of build-to-rent, and which mandates minimum lifespans for BTR developments.

Build-to-rent is classified as a ‘development for the purposes of multi-dwelling housing, residential flat buildings or shop top housing where the proposed development is to be built on land zoned B3 Commercial Core, B4 Mixed Use or B8 Metropolitan under the Act, and will contain at lease 50 dwellings occupied, or is intended to be occupied by individuals under residential tenancy agreements, with all buildings containing these dwellings located on the same lot of land.’

Moreover, a Consent Authority must be satisfied that no part of the build-to-rent development will be subdivided, in order to grant consent for the construction or use of a BTR building. The criteria for these developments must be met for a 15-year minimum period, and indefinitely for the Zone B3 Commercial Core.

The amendment clarifies that any requirement to dedicate land or pay a monetary affordable housing contribution that would apply to a ‘build-to-sell’ development will also apply to a build-to-rent development. Lastly, there are new guidelines under which BTR developments can get land tax concessions. Further details of the Amendment are available here.

Recent Case on Equitable Set-off’s

A set-off is a legal procedure where two competing claims are ‘netted’ against each other. Rather than both sides of a dispute being entitled to obtain judgement against each other, their claims are set-off with the result that there is either a single amount payable by one party to the other or no amount payable at all.

In the recent case of Goldsmith v AMP Life Limited [2021] a tenant sought compensation under a lease relating to redevelopment works carried out by the landlord at a shopping centre. Before the redevelopment work commenced, a new lease was negotiated where the tenant would relocate its business in the shopping centre. The tenant owed the landlord rent under the second lease, and the question was whether the right of compensation under the first lease could be set-off against the debt under the second lease. The Court accepted this argument as both claims arose out of a continuing relationship affected by the landlord’s renovation of the shopping centre.

The Court of Appeal summarised the principles for determining whether an equitable set-off is available. Firstly, there must be a sufficient connection between the two claims. Secondly, to be sufficiently connected, one claim must ‘impeach’ or ‘go to the root’ of the other claim, so that it would be unfair for one claim to be allowed without accounting for the other. Thirdly, a set-off can arise where the claims are based on different legal instruments between the same parties.

Make Good Obligations Under Leases

In the wake of Covid-19, many tenants will not be renewing their leases and vacating premises, which is why it is important that they understand and uphold their end of lease or make good obligations.

Generally, make good clauses include the obligations such as to remove all tenant’s property from the premises including all signage and fix any damage caused, to reinstate the premises to the same configuration as the commencement of the lease, or to return the premises to a base building standard, to service all air conditioning units, to refurbish or redecorate the premises and in lieu of performing make good obligations paying the landlord a sum of money calculated on an agreed basis or as determined by the landlord.

Make good clauses may require the tenant to return the premise to a standard as articulated in a condition report. Importantly, any works required under the make good clause will likely have to be performed by the end of the lease period. If a landlord is unable to rent premises because a tenant failed to perform their make good obligations, the tenant may be liable for damages and ordered to account for the landlord’s lost income.

Case Demonstrating the Requirement for Contracts for the Sale of Land to be in Writing

The recent case of Irvine v Dowling [2021] NSWSC 119 considered the writing requirements of an agreement to purchase an Estate property, and the entitlements of three siblings in relation to their father’s estate. Dowling was the registered proprietor of a Property of the estate, which she held on trust for herself and her siblings as beneficiaries of the estate. Dowling claimed that she was entitled to buy the Property as the highest bidder pursuant to a written Agreement between the three siblings that the property should be sold to the highest bidder by a private auction between themselves using written bids. Subsequently, the siblings agreed orally to a process of verbal bids (the Verbal Bid Agreement).

Another sibling, Irvine, commenced proceedings to have Dowling removed as executor due to her delay in administering the Estate. The case required the application of s 54A(1) of the Conveyancing Act 1919. Dowling claimed that she was entitled to purchase the property and that she had been ready, willing and able to complete that purchase.

The parties agreed that the written Agreement was valid and binding. It was a valid under s 54A because the successful bidder was required to enter a written contract to buy the property on specified terms. However, the Verbal agreement was not enforceable as it was a ‘purported variation’ because it sought to change the bidding method of the agreement but was not in writing (as required under s 54A). The Court held that while Dowling’s delay had been a breach of the Agreement, no party had purported to accept that breach and terminate the Agreement. She was thus required to pay interest to do Equity to the Estate.

Owners Corporation Changes coming this year

Various amendments are due to be made to the Owners Corporation Act 2006 which will take effect from 1 December this year. The amendments are aimed at creating more transparency between Developer’s and their nominated Owners Corporation Manager. They are listed below.

Firstly, there will be five tiers of Owners Corporations (OC) that will be based on the number of residential lots within a development – each with differing obligations and potential exemptions.

Secondly, Developers will have an obligation to act in the best interest of the OC for a period of 10 years after registration of a plan of subdivision, rather than 5 years.

Thirdly, Developers will be obliged to disclose their relationship with the OC manager and any financial transactions or benefits of the relationship to the members.

Fourthly, Developers cannot initially appoint themselves or their associates as the OC Manager if they hold a majority vote amongst the owners of the lots, they must not cast a vote in respect of resolutions regarding defects.

Fifthly, if the OC has incurred additional costs due to a lot owner’s use of the lot and the set annual fee does not adequately cover these costs, an additional annual fee, including additional fees for excess insurance claims can be levied by the OC.

Sixthly, OC managers will be able to pass ‘interim resolutions when there are no votes against a resolution, but a special resolution is unable to be passed where there is low attendance at meetings.

Lastly, common seals are no longer required, and signatures of just two separate lot owners will suffice.

These additional obligations for Developers under the Amendment Act emphasise the importance of acting honestly and in the best interests of the OC.

Height of Building – a Common Issue in Development Applications

The Standard Instrument Local Environmental Plan is the form that control on development height usually takes, and it states that ‘The height of a building on any land is not to exceed the maximum height shown for the land0000000 on the Height of Buildings Map. ‘Building height’ for that purpose, is taken to mean either the vertical distance from ground level (existing) to the highest point of the building, or the vertical distance from the Australian Height Datum to the highest point of the building (excluding communication devices, antennae, satellite dishes, masts, flagpoles, chimneys, or flues). The precise ‘ground level (existing)’ can be difficult to calculate, particularly where there is no soil or garden on the suite area around the building, or where excavation below ground has occurred. These sorts of issues are particularly relevant in development applications where view loss might occur.

The leading case on determining ‘ground-level (existing)’ on sloping land or land that has been completely excavated is Better v Council of the City of Sydney [2014] NSWLEC 1070. In that case the plaintiff sought consent for a residential building on a site where an existing building already occupied the entire site, and there was no longer any ‘ground’ for determining the existing ground level, and there was an existing part-basement excavated into one part of the site. The Commissioner found that once the existing building is demolished, the ground levels of that prior building would no longer be discernible or relevant as a starting point for measuring the height of any new building, and that it would be conceivable that surrounding properties could have starkly different height limits arising from the same development standard. The Court preferred the approach that the existing ground level could be determined by extrapolating the ground levels on the footpath across the site to measure the vertical distance to the highest point of the building, as it resembled the overall topography of the site, and would remain relevant once the existing building was demolished.

Update to the NSW Security of Payment Regime

This is a reminder that in 2020, the NSW government introduced the Building and Construction Industry Security of Payment Regulationthat removes the ‘owner occupier construction contracts’ as being immune from the application of the Building and Construction Industry Security of Payment Act for residential building work, according to the Building and Construction Industry Security of Payment Regulation 2020 (NSW) Sch 2.

As of 1 March 2021, residential builders and contractors including architects and consultants, can use the Security of Payment regime to resolve disputes and recover progress payments from owner occupiers, and the regime will apply to owner occupier contracts entered into on or after this date.

Most building disputes in NSW worth less than $500 000 end up in the NSW Civil & Administrative Tribunal, but the changes to the Security of Payment regime mean that if a builder’s progress claim is disputed by the homeowner, the builder can apply for an independent adjudication of the disputed payment claim instead of commencing proceedings through NCAT. Hence, if a builder succeeds with independent adjudication, they will obtain an enforceable determination against the homeowner in a much quicker way than via a hearing at NCAT.

Homeowners should become aware of the seriousness of the clause, and Builders and Contractors should be aware of the opportunities to pursue claims directly against relevant owner occupiers of residential property.

Case Illustrating the Exercise of an Option to Renew a Lease

The case of Stonewall Hotel Pty Ltd v Papantoniou [2017] NSWSC 964 considered whether an option to renew a commercial lease was properly exercised and whether a notice of exercise was properly served on the respondents. In this case, the first and second respondents were lessors of premises leased by the applicant, and the lease contained two options for renewal of the terms of the lease.

The lessor challenged the validity of the applicant’s service of notice to exercise the first and second options to renew the lease in 2010 and 2015, respectively. The lessee had served the first notice of exercise to renew the lease upon the lessor’s solicitor. Whilst there was no provision in the lease that expressly provided for service upon the solicitor, there was a provision that allowed for service in accordance with s 170 of the Conveyancing Act. The court held that service of the notice to exercise the first option was adequate notice to the lessor, even though the notice was sent to the office address of the respondent’s solicitor rather than to the Lessor directly. The evidence showed that the firm of solicitors were the effective agents of the lessor, and that they thereby had actual authority to receive a notice of exercise. Thus, the service upon an agent was an effective service upon the principal under the general law.

The second option to renew the lease, in 2015, was exercised by a notice of exercise sent over email. The lessors disputing the valid service had, in fact, received the notice of exercise of the second option sent by email. That exercise, too, was a valid and adequate exercise in accordance with general law. The plaintiff was thus entitled to a new lease.