The recent County Court of Victoria decision in Birch v Robek1 (Birch) highlights potential risks to developers and purchasers arising from the disparities between accepted methods of measurement for residential developments, with the purchaser in that case being entitled to avoid her off-the-plan apartment contract as a result of the apartment being built smaller than she had expected.
While the decision in Birch turned on its particular facts, the expert evidence agreed by the parties and accepted by the Court noted the potential disparity between four different, but valid, methods of measurement used for residential property:
- Property Council of Australia (PCA) Method of Measurement Residential: measures to the median of walls adjoining other lots and to the external faces of external walls or walls adjoining common property.
- Title: based on the title boundaries as shown on the plan of subdivision, which in Victoria may be specified on a plan of subdivision as either the internal surface, median or external surface of boundary walls.
- Internal finished surface: measures from the internal face of boundary walls but does not include the area taken up by any wall between the interior of an apartment and any external balcony area.
- Useable floorspace: similar to the internal finished surface method but does not include the area taken up by internal walls.
The circumstances surrounding the unfortunate turn of events in Birch also highlight why a uniform method of measurement for residential apartment developments is a hot topic being actively pursued by property industry bodies and major banks for legislative review.
Birch v Robek – outline of key facts
The purchaser, Birch, contacted the developer’s selling agent in early 2011 and indicated that she wished to purchase an off-the-plan apartment, which needed to have a minimum internal area of 40m2 so as to satisfy the requirements of her financier, ANZ, to finance 80% of the purchase.2
Soon after, Birch inspected the developer’s display suite and was given a sales brochure showing the layout of the proposed apartment which stated in bold that the internal area of the apartment was to be 40.5m2. That measurement was also shown on the architectural plans included in the off-the-plan contract. As is industry practice, the measurement was calculated in accordance with the PCA Method of Measurement Residential, although this was not stated on the brochure or the architectural plans.3
In February 2011, Birch signed an off-the-plan contract for the proposed apartment at a purchase price of $359,000. She examined the contract plans closely, while still within the cooling off period, and satisfied herself that she would proceed.4
Moving forward to October 2012, ANZ carried out its valuation in accordance with the conditions of Birch’s financing, which valued the apartment at $330,000 and recorded the area of the apartment as 32m2 (based on useable floorspace). On this basis, ANZ was unable to provide the finance Birch required.
On the due date for settlement, Birch purported to rescind her contract and sought the return of her deposit. The developer, Robek, rejected Birch’s rescission and purported to rescind for the purchaser’s failure to settle. Birch subsequently commenced proceedings to recover her deposit and Robek counterclaimed for loss on resale, following the sale of the apartment to a third party in August 2013 for $265,000.5
The expert evidence agreed by the parties and accepted by the Court was that the area of the apartment as constructed (excluding the balcony area) using the four accepted methods of measurement were:
- PCA Method of Measurement Residential (as used for the architectural plans and sales brochure): 39.3m2 (3% less than the area of 40.5m2 stated in the contract and sales brochure).
- Title (which in this case was from the internal surface of the boundary walls): 34.9m2 (13.8% less than 40.5m2).
- Internal finished surface: 33.8m2 (16.5% less than 40.5m2).
- Useable floorspace (as used by ANZ’s valuer): 32.6m2 (19.5% less than 40.5m2).
Not what she bargained for – Flight v Booth
The Court held that Birch was entitled to avoid the contract on the basis of the common law principle in Flight v Booth6 because she would ‘not, in reality, [be] obtaining the property which was really the subject matter of the contract’7. The apartment described in the architectural plans included in the contract did not accurately describe what she would be getting on title. This difference in size, the Court held, was such that the purchaser would not have entered the contract had she known the true area based on title measurement.8 General disclaimers and a specific contractual provision noting that ‘internal measurements may be taken using various methodologies which may produce different outcomes’9 could not overcome the divergence between the apartment as constructed and the ‘subject matter of the contract10.
There were a number of factors which suggested that the difference in size was sufficiently substantial to allow the purchaser to rescind the contract:11
- the contract suggested a variation in area of more than 5% was a significant difference (up to 5% may not be significant)
- the apartment was already relatively small, such that any difference in size could be expected to have a much larger impact
- the purchaser was unable to visually inspect the apartment before purchasing and therefore had to rely on the information provided in the contract of sale.
Misleading conduct – Australian Consumer Law
While the Court’s decision was based on the common law principle in Flight v Booth, the Court went on to suggest that Birch would also have been entitled to the return of her deposit under the Australian Consumer Law on the basis of misleading conduct.12
The representations as to size in the sales brochure, taken in the circumstances ‘as a whole’, were misleading. Importantly, the ‘internal area’ specified in the sales brochure was to be ‘understood in accordance with the ordinary concept of that term as understood by the world at large, namely, as areas measured with reference to the plaster interior walls of the apartment. This is because [the brochure] was addressed to purchasers buying a one bedroom ‘off-the-plan’ apartment at the lower end of the property market. It was not addressed to surveyors or developers who might have a particular understanding of accepted industry practice [in relation to methods of measurement]‘13.
Interestingly, had the basis of the method of measurement been expressly noted or the plan of subdivision drawn by the developer’s surveyor with the title boundaries at the median of walls adjoining other lots and the external faces of external walls or walls adjoining common property, the conduct may not have been misleading.14
Sale of Land Act 1962 (Vic) – Section 9AC rescission rights
While the plan of subdivision in Birch had been amended and notice of that amendment was given to the purchaser under section 9AC of the Sale of Land Act 1962 (Vic), the amendment was relatively minor. The issue in dispute was the size of the apartment as represented in the architectural plans and sales brochure, both of which fall outside of section 9AC of the Sale of Land Act 1962 (Vic). As such, section 9AC was not considered by the Court in any detail.
Developers need to be vigilant to minimise risks, particularly those that can potentially undermine the bankability and delivery of off-the-plan developments. To minimise risks, developers should:
- ensure off-the-plan contracts are drawn and compiled by an experienced legal team with an eye for detail, including consistent provisions regarding area and the method of measurement used
- have any sales and marketing material including sales books and sales scripts reviewed by an experienced legal team with a good knowledge of potential risks and claims
- provide sales agents and staff with appropriate direction as to representations that can (and cannot) be made about off-the-plan apartments, particularly regarding area.
Until a uniform method of measurement is adopted by financiers and developers (by industry practice or by legislative change), the risks presented by the disparities in methods of measurement for residential property will remain a hot topic.