The Queensland Supreme Court recently ruled that the purchasers of an 'off-the-plan' penthouse apartment on the Gold Coast were not permitted to terminate their contract and recover the deposit.(1)
The husband and wife purchasers negotiated to purchase a penthouse apartment in Oracle Tower 2 for A$5.5 million. The developer's plans indicated that the building was to contain two penthouses, each occupying half of Level 40 (which contained the living areas and bedrooms) and a substantial portion of Level 41 (which contained a pavilion, swimming pool, spa and raised recreation deck). There were also plans for a lift to operate between Levels 40 and 41.
The applicants tentatively agreed to purchase the unit subject to substantial modifications, one of which related to exclusive internal lift access between Levels 40 and 41. The modifications were agreed to by the developer (although they were to be made at the applicants' expense), following which the applicants paid a preliminary deposit of A$55,000.
Before executing the contract, the developer provided a statutory disclosure statement accompanied by a community management statement (CMS) specifying the relevant bylaws for the development. Bylaw 50 of the CMS provided that the occupiers of the two penthouses would be entitled to usage of the lift. The CMS also made reference to an out-of-date plan number identifying the penthouse. After the contract had been entered into, the developer passed into receivership. The applicants were notified of this fact, of the settlement date and of the establishment of the community titles scheme. They sought to terminate.
The applicants submitted to the court that they were entitled to terminate the contract and recoup their deposit on two grounds:
• The contract was entered into under common mistake.
• The last disclosure statement provided to the applicants was 'inaccurate' within the meaning of the Body Corporate and Community Management Act 1997 (Qld).
The applicants argued that the contract was entered into under the common mistake of the parties that the proposed Bylaw 50, which related to the exclusive use of the penthouse lift, would be a valid exclusive use bylaw, when in fact this was not the case under the act. Section 177 of the act has the effect of prohibiting bylaws providing exclusive use to common property infrastructure. Justice Fryberg held that the developer did not warrant the validity of the proposed bylaw; nor did the law presume the validity of proposed bylaws, despite the registration of the CMS with the Land Titles Registry. The existence or validity of the proposed bylaw was held not to be a fundamental part of the consideration for the contract and failed to deter the due performance of the contract.
Inaccuracy of disclosure statement
The applicants further submitted that the amended disclosure statement provided by the developer was 'inaccurate' within the meaning of Section 217 of the act, as it contained an inaccurate reference to the lots. Section 217 provides that a purchaser may terminate where information within the disclosure statement is inaccurate, even where rectified by any further statement. Justice Fryberg held that the error was indeed contained within the CMS which, under Section 213 of the act, did not form part of the disclosure statement. It was held that the purchasers were not deprived of the benefit of Bylaw 50 and indeed would not have been subject to any material prejudice due to the error in the CMS.
This decision highlights the need not only for buyers to be vigilant before executing contracts, but also for developers to provide accurate disclosures when selling their properties. Given the recent amendments to the act, which came into effect in 2011, buyers can terminate contracts under Sections 217 and 217A, for proposed lots where:
- the CMS does not contain (or contains inaccurate) descriptions of how interest and contribution schedule lot entitlements are to apply to the scheme;
- the registered CMS differs from that most recently received by the buyer; or
- information contained in the disclosure statement most recently advised to the buyer is inaccurate.
Section 213 was also amended to provide that a buyer can terminate if a disclosure statement does not accurately contain the requirements as set out in Section 213(2) of the act. Buyers must be able to show that they would be materially prejudiced, should the developer not comply with these requirements.
This 'material prejudice' test was discussed in Wilson v Mirvac Pty Ltd ( QSC 87), in which the court noted that:
- the test is objective with regard to each buyer's circumstances;
- the prejudice must be proportionate to, and have a relationship with, the inaccuracy; and
- the legislation should be construed in the buyer's favour.
Buyers must consider carefully whether they have been materially prejudiced before bringing an action for termination. The buyer must provide written notice of the termination no later than the latest of three days before the date of completion of the contract or 14 days after the buyer has been given notice that the scheme has been established or changed.
The Queensland Labour government recently announced a policy to reduce the amount of red tape in relation to the formation and carriage of property contracts within the Queensland residential market. This policy aims to provide a more streamlined approach to the purchase of residential property, whereby a single contract only will be required, as opposed to the multiple current requirements for each sale, including warning statements, sustainability declarations, disclosure statements, pool safety declarations and the sale contract. These changes could increase the attraction for investment in the Brisbane property market, due to a simplification of the conveyancing process. Likewise, they may result in fewer avenues for buyers to attempt to terminate contracts due to technical failure to comply with requirements such as disclosure statements, as outlined in the case at hand.
However, until such reforms occur, developers must remain vigilant when providing disclosures to prospective buyers. In turn, buyers must define their allegations precisely when bringing claims for termination under the act, as the courts appear reluctant to uphold terminations based merely on technical breaches of legislation.
For further information on this topic please contact Nick Prove or Jordan Smith at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email ([email protected] or [email protected]).