Using building non-compliance to rescind a Contract for Sale

The warranty is:

[The Vendor warrants that:] there is no matter in relation to any building or structure on the land (…included in the sale of the land) that would justify the making of any upgrading or demolition order or, if there is such a matter, a building certificate has been issued in relation to the building or structure since the matter arose,
(cl 8 and Schedule 3 Part 1 - 1(d) Conveyancing (Sale of Land) Regulation 2010)

This warranty was examined in the decision of Cooper v King [2019] NSWSC 86 Supreme Court of New South Wales by Emmett AJA (18 February 2019).

The facts

On 4 May 2017, Victoria King entered into a Contract for Sale to purchase a house at Glencoe Street, Sutherland for a price of $1,080,000. She paid $54,000 of the deposit on entry to the Contract for Sale and agreed to pay the balance of the 10% deposit of $54,000 on completion, or if she was in default under an essential term of the Contract.

The property was advertised as having four bedrooms and two bathrooms with a “floor plan” that had lower-level self-contained accommodation. This was the plan on the real estate agent’s website:

Two days before the completion date of the Contract set under a Notice to Complete, the purchaser served a “Notice of Rescission” asserting that the vendors were in breach of the building compliance warranty because there were “several non-DA approved buildings/structures” on the land “that would justify the making of an upgrading or demolition order”. They were the bedroom, living area, kitchenette and bathroom accommodation on the lower level which were described as “separate self-contained accommodation” on the real estate agent’s website.

The vendors’ solicitors replied, enclosing a building certificate issued by Sutherland Shire Council dated 19 January 1989. In the building certificate, the Council certified that it would not make an order or take proceedings “requiring the demolition, alteration, additional rebuilding of, to the building”. The certificate contained a note that the lower ground floor area had been assessed as “non-habitable rooms”.

Completion did not take place. The vendors terminated the Contract, forfeited the deposit paid and demanded payment of the balance of the deposit.

The purchaser commenced proceedings for return of the deposit paid relying on a breach of the building compliance warranty and representations made as to use. The vendors counter claimed the deposit paid and the balance deposit payable.

Building compliance warranty

The Court found that the purchaser’s assertion of breach of the building compliance warranty failed through lack of evidence:

the Buyer simply asserts a breach of the implied warranty without identifying the illegal structure or illegal building work that would justify the making of a demolition order or an upgrading order. (judgment, paragraph 80)

I am not persuaded there has been any breach of the implied warranty under the Conveyancing Act. (paragraph 81)

The Court gave these reasons:

1. The purchaser could have made an application for a Building Certificate under clause 12 of the Contract, which would have resulted either in the issue of a certificate or a refusal with reasons. The purchaser had not made an application.
    
2. No demolition order was recorded on the Planning Certificate attached to the Contract.
    
3. No building work had been carried out upon the property after the Building Certificate was issued in 1989. As to the note on that certificate that the rooms on the lower level were “non-habitable”, the Court said:
   Even if there is a restriction as to how the lower level rooms can be used, such as dual occupancy, it does not follow that the building or the building work is illegal and therefore a matter affecting the Property that would justify the making of a demolition or upgrading order. (paragraph 81)
    
4. There was no evidence that the purchaser would not have entered into the Contract had she been aware of the matter to satisfy the pre-requisite for rescission under cl 16(4) of the Conveyancing (Sale of Land) Regulation 2010

Comments:

• The warranty applies to structures, not to their use. Unlawful use or lack of a DA approval for use from the local Council is not a breach of the warranty.
• If a purchaser desires to rely upon the building compliance warranty to rescind a Contract, then they should apply to the Council for a Building Information Certificate. If the application is refused, the reasons for refusal will provide the necessary evidence.
• Conversely, a vendor should disclose in the Contract any non-compliances of which they are aware to gain the protection of cl 16(3) of the Conveyancing (Sale of Land) Regulation 2010, which prevent a purchaser from rescinding the Contract if they are aware of the non-compliances. Disclosures for garages and under house areas modified as accommodation without Council approval are common examples of disclosures.
• In this case, the vendors’ conveyancer did not disclose the non-compliance in the Contract, which opened the door to the purchaser’s action.
• The warranty cannot be excluded: under s 52A(4) Conveyancing Act 1919, a provision in a Contract which purports to exclude or modify the building compliance warranty is void.

Representations as to use

The purchaser asserted that several “dual occupancy representations” were made by the real estate agent. They were that the property could be used as a dual occupancy, and that the upper and lower levels could be separately rented.

The Court found that no representations were made by the real estate agent, and that if any were made, they were not relied upon.

The Court noted that the purchaser was an experienced purchaser of real property who would have either confirmed what she had been told or made her own enquires before entering into the Contract. She did neither.

The evidence was that the purchaser planned to demolish and build a duplex on the land.

The Court upheld the effectiveness of the additional provision in the Contract in which “the Buyer acknowledged that she did not rely upon any warranty or representation made by the Sellers or any person on behalf of the Sellers except as expressly provided in the Contract” to extend to any representations made by the agent.

The disclaimer on the floor plan that it was for “illustrative purposes only” and “does not constitute part of any legal documents” was also relevant.

The Court noted that the Australian Consumer Law did not apply to the representations made in the advertising material because the vendor’s conduct was not ‘in trade or commerce’:

Ordinarily, where a person sells his home, whether by private treaty or by auction and whether the person conducts the negotiations personally or through a real estate agent, the person would not be said to be undertaking those activities in the course of a trade or business or in a business context. … There is nothing about the character of the Sellers, such as being engaged in commercial activities, or the transaction being motivated by business reasons, as distinct from personal reasons, to suggest that the Contract was a transaction that occurred in trade or commerce. (paragraph 74)

Comment: Only when a representation is compelling, will a purchaser be able to clear the many hurdles they face in asserting a misleading representation.

Outcome

As to the Court’s discretion under s 55(2A) of the Conveyancing Act 1919 to relieve against forfeiture of the deposit, the Court stated that the facts did not support any assertion that it would be unjust or inequitable for the vendors to forfeit the deposit and for the balance of the deposit to be ordered to be paid.

The court ordered the deposit be paid to the vendors, that the purchaser pay the balance of the 10% deposit and the legal costs of the vendors and the real estate agent.

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