A decision in the Supreme Court in NSW, Mr Zhang and Ms Liu v VP302 SPV Pty Ltd and Ors1, serves as a reminder to those involved in off the plan property sales to exercise caution when making representations to potential buyers that predict or give an opinion regarding future matters. Representations of this kind that are made without a reasonable basis and that induce a party to enter into a contract could result in the contract being set aside.

Background

In September 2003, Mr Zhang and Ms Liu purchased a four-storey terrace for $1,070,000 off the plan from a company named VP302 SPV Pty Ltd (Developer) and paid a deposit of $107,000. The Developer had engaged a real estate agent to market the property development in which the terrace was located.

The agent placed an advertisement on behalf of the Developer claiming, amongst other things, that the development was “acclaimed by Sydney Morning Herald to be the number one district amongst three areas which is going to double in value in five years” (Representation).

By July 2005, the Sydney property market had fallen substantially from its 2003 level and Mr Zhang and Ms Liu had not completed the purchase. The Developer issued a notice requiring them to complete but Mr Zhang and Ms Liu refused to comply with the notice, claiming that they had been misled into entering into the contract. They sought a refund of their deposit, which the Developer refused to provide. The agent released the deposit to the Developer.

Mr Zhang and Ms Liu commenced legal action to recover the deposit and cancel the contract on various grounds including that they had been induced to enter into the contract by the Representations. Under the Trade Practices Act, as the Representation was in the nature of a prediction and was made on behalf of the Developer, the Developer was responsible for proving that it had a reasonable basis for making the Representation. If the Developer was unable to show that it had reasonable grounds, then the contract could be set aside.

The Developer defended the claim by arguing that the Representation was mere ‘puffery’, meaning the sort of enthusiastic statements often seen in advertising that are not meant to convey anything meaningful. The Developer also argued that if Mr Zhang and Ms Liu had relied on the advertisement, then that reliance was unreasonable. The Developer did not lead evidence that there was a reasonable basis for the prediction that values of the development would double in five years and instead relied on a newspaper article as the basis for the Representation.

The Court’s finding

The Court found that:

  • The Representation was not ‘puffery’ because it was capable of being proved correct or incorrect.
  • The information contained in the newspaper article on which the advertisement was based, was well out of date (by about 18 months) by the time the advertisement was published.
  • The newspaper article, when considered as a whole, did not support the Representation.
  • Mr Zhang and Ms Liu had relied on the Representation in deciding to enter into the contract. The fact that they may have been naive in doing so did not alter the Court’s decision.

Consequently, the Developer was found to have engaged in misleading or deceptive conduct in contravention of the Trade Practices Act and Fair Trading Act by its agent causing the advertisement to be published without having a reasonable basis for making the Representation which it contained. The Court ordered the contract to be set aside and the deposit to be refunded.

What does it mean?

The Court’s decision highlights the need to have reasonable grounds for making predictions about matters such as the future value of property developments, rental prospects and the performance of surrounding areas.

Otherwise, any contracts entered into on the basis of such predictions could be set aside.

To avoid your contracts being set aside, you must ensure that at the time that it is made the person making the prediction (whether that is you or your agents):

  • is qualified to make the prediction
  • has made all reasonable inquiries into matter the subject of the prediction
  • believes that the prediction is true
  • keeps record of the materials supporting the prediction, and
  • relies on up to date and credible materials if making a prediction based on those materials.