As market and liquidity conditions continue to change so too does the focus on the integrity of contracts, especially presale commitments, in projects - both existing and those looking for funding.

Background

Most Australian jurisdictions have consumer protection legislation that impacts on the sales process for projects sold off the plan or otherwise. Increasingly these legislative measures are the focus of contract termination disputes driven by the challenging market conditions. Compliance can offer an escape route on site acquisitions or commitments and review of obligations against consumer protection legislation is fast becoming part of mitigating exposure.

Moreover, in a market where liquidity is short, the sale of a property holding may not be the best strategy in an insolvency or work out arrangement and the banks and others are looking at the viability of holding assets or developing them. It’s fair to assume that sales processes will be scrutinised by multiple law firms acting for the developer, the new equity participant (who may be a bank), the lender, the administrator / receiver and the constructor.

PAMDA

Nowhere is reliance on consumer protection legislation to found contract terminations more prevalent than in Queensland with its rigid consumer protection regime in which form well and truly triumphs over substance.

In Queensland, the Property Agents and Motor Dealer’s Act (PAMDA) regulates transactions based on the characterisation of property rather than the nature of the parties to transactions and catches acquisitions and sales of residential sites as well as end product sales.

In combination with other legislation, PAMDA provides a web of potential pitfalls and termination events and anyone involved in the development of property assets (not just residential product) needs to have a process for contract risk management in place. In other jurisdictions many of the same sorts of issues are coming before the Courts and there are lessons for all developers and those involved in the contract process in these decisions.

In the key PAMDA case of 2008, Hedley Commercial Property Services Pty Ltd v BRCP Oasis Land Pty Ltd1 (Hedley’s Case) – now under appeal with judgement reserved at the time of this article - his Honour Justice Fryberg was scrutinising a transaction involving a put and call option deed between 2 commercially sophisticated parties. The parcel of land in central Cairns was suitable for high-rise development.

Before the time for exercising its option expired Hedley claimed that it was entitled to withdraw from the Deed under PAMDA. BRCP denied that Hedley could escape the deed and purported to exercise its option under the Deed. Hedley’s Case contains a withering and often caustic review of PAMDA and a detailed analysis of numerous anomalies posed by the legislation for parties to transactions governed by PAMDA.

Hedley’s Case demonstrates that the status of the property from a planning perspective and every step in the process leading to execution and delivery of signed contract documents is open for examination as a source of a termination right for contracts.

The case centred on whether the property was residential property or not. Ultimately the Court found it was not, based on the exclusions in the definition in PAMDA of residential property. PAMDA did not apply and Hedley’s withdrawal was defective. To ascertain whether a transaction is regulated involves an exhaustive examination of the approvals history and status of a site. The need to conduct such an examination hardly aids commercial efficacy and expediency.

PAMDA creates a two phase process for issuing of contracts. The first phase involves issuing proposed relevant contracts and delivery in a specified manner before the buyer signs. The second phase involves the execution of the proposed relevant contracts and the subsequent delivery of the executed and now relevant contract to the buyer with the intended triggering of the statutory cooling off period.

In each phase there are process requirements which, if not met, can be fatal to enforceability and create termination or withdrawal rights that may be retained throughout the contract term.

The problem with PAMDA is it attempts to regulate the mode in which a contract is delivered (including how to fax or email it), how a direction to the warning statement must be given and when parties become bound. In doing so it distorts the common law principles that apply to offer and acceptance in commercial transactions. Consider the Court’s comments: “On any view, s 365 is a confused mess. No construction of it can be devised which conforms with the canons of interpretation and the accepted theory of the law of contract. It is impossible to define the statutory intent with any sense of confidence.”

In each phase PAMDA requires that a direction is given to the warning statement and contract. Ambiguity as to whether a direction given in phase 1 would also satisfy the requirements for a direction in phase 2 has been eliminated - there is a requirement for multiple directions. This has been a significant trap as a simple failure to repeat the direction means that until it is given the buyer has a right to withdraw from the contract and the statutory cooling off period won’t commence.

In the first phase, when the seller is issuing contracts (as is normally the case for off the plan sales), a mistake in complying with the detailed delivery requirements can be corrected – however this will involve reissuing of the document package. By contrast once the parties have signed documentation, there is no ability to correct a process error that has occurred in the first phase and the contract essentially remains voidable at the purchaser’s election. This is so notwithstanding that the noncompliances may be of a technical or minor nature.

No other consumer protection legislation for residential property in the country delves into the process of document preparation and delivery to the same extent that PAMDA does.

The judgement in Hedley’s Case provides a number of insights as to how these many and various process requirements should be addressed and in some cases indicates it may be impossible to satisfy them.

The true impact of the PAMDA regime on transaction integrity is now coming into the open as the number of claims being made on settlement of off the plan sales rises dramatically. Securing pre-sales contracts in Queensland involves examination of the physical steps taken to produce and arrange execution of contracts and to deliver them to the parties. This can undo contracts retrospectively, with serious implications for existing funded projects and new projects.

As his Honour Justice Fryberg concluded in vivid terms:

“Unless the magic words are written or the magic spell is cast, the buyer is not bound. Well may it laugh at the seller who failed to learn all the details of the PAMDA book of incantations.”

Hedley’s Case also examined the extent to which statutory rights might be waived by parties to contracts and termination rights might be lost. Had it been necessary to find so, the Court in Hedley’s Case would have come to the conclusion that the right to withdraw from the option deed had been lost because of the relevant party’s conduct in affirming to a Government authority (for another purpose) that it was bound by the option. Nonetheless, there are comments in the judgment that suggest limitations to this doctrine in the face of an express statutory reservation of the right to withdraw or terminate at any time up to settlement of the contract.

Other Jurisdictions

This theme has also been examined in New South Wales in Tudor Developments Pty Ltd the Makeig2 where the Court addressed rights to avoid contracts under the Home Building Act 1989.

The NSW Court of Appeal referred to PAMDA and relevant Queensland decisions and determined that an express prescription of a right to terminate up to settlement excluded general common law principles of estoppel relating to the conduct of the parties that might otherwise limit the statutory right.

In considering similar arguments in the decision of the full court of South Australian Supreme Court in Astill v South Esplanade Developments Pty Ltd3, the New South Wales Court of Appeal indicated that it preferred the dissenting position in that case to the effect that a statutory right to terminate under consumer protection legislation was not to be prescribed or limited by common law principles of estoppel.

Conclusion

These decisions show that the Courts are reluctant to limit termination rights in consumer protection legislation relating to land contracts and that generally a strict view is taken on compliance. This is particularly true in Queensland, where legislation may extend to transactions that do not immediately appear to be the intended subject of regulation, including dealings between commercial parties for the acquisition of disposal of development sites.

Sellers and buyers (whether developers or not) are also faced with a minefield of technical requirements that can be the death of contract pre-commitments to projects. A review of PAMDA is likely in the near future and it is hoped this will help in navigating the minefield.