By Tim O’Dwyer
There are, in my experience, three immutable rules of real estate, which can all lead to the end of a contract. The first is that sales-persons move fast. The second is that solicitors move slowly. And the third, frequently the reason for the first two, is that clients can change their minds about apparently binding property deals.
Frequently real estate consumers – particularly buyers, but more particularly investor-purchasers (novices and veterans alike) – can experience changes of heart early in the piece, part-way through contracts or even as settlements loom large. The solicitors attending to the conveyancing in these purchases will be expected to speed up and play drastically different roles when clients’ instructions take a sudden U-turn. Solicitors are asked to abruptly change from mild-mannered conveyancers into ruthless “contract killers.”
“Help! Get us out of this contract,” demand clients who have had serious second thoughts about yet-to-be-settled contracts. In these not unfamiliar circumstances clients unhesitatingly call upon their solicitors to help them escape their contractual obligations – by finding and taking advantage of whatever legal loop-holes may be available .
This is pretty easy if your cold-footed residential property buyer clients are still safely within any statutory cooling-off periods. You simply pull the cooling-off plug, remind your clients they may be liable for cooling-off penalties and everything comes up roses. Except for the property owners and estate agents who lose out and must try to secure another sale. Tough luck too for sellers who might have their own second thoughts about proceeding with signed-up sales. Sellers have no cooling-off rights!
What if any cooling-off period has passed (or was waived initially), and there are no obvious escape routes?
Many conveyancing solicitors, when asked to go beyond the straight forward cooling-off path, will decline any legal challenge to get clients out of their contracts. These solicitors will prefer to remain comfortable “contract completers”. Some may be reluctant to incur the ire of client-referring real estate agents and others who stand to lose financially if contracts crash. Other solicitors may not feel competent or experienced enough to begin to extract their clients from done deals. Anxious clients are often quickly, quietly, even secretly but not inappropriately passed to professional “contract killers”.
These sharp-eyed specialists must speedily secure their new clients’ instructions (including of course payment of funds into trust accounts), review the history of the transactions and consider all documents and correspondence before methodically searching for statutory loopholes, contractual let-outs and any other available exits.
Needless to say, apart from cooling-off or persuding sellers to agree to cancellations, more often than not reluctant buyers will be advised there is no escaping their contractual obligations.
During and after the Global Financial Crisis developers across the nation increasingly faced the risk of terminations of long signed-up off-the-plan contracts. Four years ago The Courier Mail newspaper reported on a millionaire entertainment venue operator’s bid to get out of a $9.28 million purchase contract entered into some years earlier for a sub-penthouse in a $850 million complex on the Gold Coast. Days later a mortgagee bank appointed receivers for the development company involved.
As multi-million dollar projects like this neared completion, apparently binding contracts made in happier days might be undone by swift-and-sure-footed contract-killing teams made up of smart property lawyers, astute litigation lawyers and razor-sharp barristers.
These lethal legal eagles frequently act for buyers whose financial circumstances have unexpectedly deteriorated. Many buyers, even those in secure financial positions, may discover their lenders are no longer willing to provide funds for settlements of long-term contracts. Why? Because prices agreed to in the past and before construction began may exceed by huge margins current market values. Properties may be worth considerably less as settlements approach than when the parties first contracted. According to The Australian newspaper investors who bought into the above twin-towered Gold Coast project took losses on settlement of up to $1million: “One apartment owner…was aware of people who had settled on apartments located on the 44th floor for $3.5million and had since sold for $2.5million.”
In a absence of protective subject-to-a-satisfactory-final-valuation clauses, devastated buyers will find that enormous drops in the value of off-the-plan properties give no legal grounds in themselves for getting out of now over-priced purchases.
Then there are cold-footed buyers with no real funding or valuation worries, but who want out because other things have changed – such as relationships broken down or better investments are on the horizon. An investor, who contracted to buy a number of existing units and the management rights at a holiday resort, told his solicitor only days before completion he did not wish to proceed with what was a fairly-priced purchase. His reason? A messy divorce with a costly property settlement was in the wind. The solicitor found a loop-hole, terminated on that basis but needed a Supreme Court ruling to vindicate his action when the seller resisted the termination. A pre-contract disclosure statement had not been signed by the seller, and the court held that the seller’s solicitor’s signature on a covering letter did not suffice.
Underlying non-legal reasons for buyers’ terminations are rarely relevant to the courts’ decisions.
While buyers’ lawyers may purport to validly kill their clients’ contracts, it is not uncommon as we have seen for unhappy sellers to seek redress in court. Conversely, when sellers won’t accept buyers’ terminations and claim forfeiture of not insignificant deposits, buyers will be obliged to initiate legal proceedings themselves.
One such buyer needed a court order to escape a contract for an almost-completed fourth-floor unit on Queensland’s Sunshine Coast when the unit’s balcony views were more of roof-tops than of rolling swells. The buyer relied successfully on a special contract condition requiring “uninterrupted ocean views”. After inspecting the unit the judge found it provided no such views.
More than a few developers have lost contracts (and subsequent court cases) when buyers successfully terminated on the basis of sales-persons’ unfounded and misleading promises about future values. One Gold Coast investor won on this ground by producing two witnesses who had been told the same porkies by the real estate sales-lady involved.
Nevertheless in another case the judge believed the evidence of the developer’s salesman over that of luxury apartment buyers who unsuccessfully alleged misrepresentations by the salesman about anticipated “filtered or through-tree” river views.
The same developer won again in court when an off-the-plan buyer in the same complex tried to withdraw on the basis that the balconies would be smaller than originally promised.
This determined developer successfully pursued several loop-hole-looking buyers in the courts over contracts for apartments in the same complex. But not all actions were won. In one case the backing-out buyer claimed to be “materially prejudiced” by the inadvertent omission of a closed circuit television security system from an assets list in a Disclosure Statement. Although the system would be (and ultimately was) installed, the court decided for the buyer.
On the other hand the wife of a well-known sportsman lost her case badly against the same developer. After unsuccessfully alleged misleading and deceptive conduct, she was ordered to complete her $2.16million contract, pay interest of more than half a million dollars and incur indemnity costs of almost a hundred thousand dollars. Luck finally smiled on this lady when the river flooded her apartment shortly before she had to comply with the court’s specific performance order. An appeal court eventually ruled that she had a statutory right to rescind her contract because the property had become “unfit for occupation”.
Funnily enough the same flood washed new clients up at my office. They were buying a river-front home which had been significantly inundated and severely damaged. While this million dollar plus home was clearly “unfit for occupation”, the buyers preferred to negotiate a reduced-price arrangement with their seller rather than exercise their rescission rights. So there was no court case. Instead a deal was reached between the parties, their contract was amended and settlement proceeded satisfactorily. The buyers subsequently claimed on the flood insurance which they took out shortly before the river rose.
Occasionally a buyer escapes an unwanted contract in reliance on a hitherto untested technicality. When this happens – and there are wider implications across the property industry – governments may quickly legislate to close the loop-hole. Existing contract disputes may be excepted if the particular issue has already been legally raised. A few years ago radical amendments to Queensland’s Property Agents and Motor Dealers Act, the contract killers’ favourite “book of incantations” (as one Supreme Court Judge described it) clearly resulted from real estate and property industry pressure. After the Queensland Court of Appeal held that a developer’s off-the-plan contract had been validly terminated because the wording of a clause did not comply strictly with a statutory consumer-protection formula, all hell broke loose at the big end of town. An army of developers, aware that their unsettled contracts contained similar defective terms, successfully lobbied the Queensland Government to change the law not only quickly but also retrospectively.
A similar developer-friendly, property-industry-and-revenue-protective, retrospective change was effected in Victoria when a Tribunal ruled that a developer’s standard contract was unenforceable because the deposit clause breached the law. Most of the State’s off-the-plan contracts would have been at risk without the urgent legislative relief the government helpfully provided.
Sometimes buyers, genuinely aggrieved after finding they’ve been lied to or discovering properties have flooded, are termite-infested or include illegal structures, still go ahead. They settle their contracts then go to court. One such buyer successfully sued for damages, post-settlement, the estate agent who mislead him about waterfront-access to a multi-million-dollar Sydney Harbour home.
Similarly years after sales of units in an upgraded Canberra hotel settled, out-of-pocket buyers sued the marketing agent and developer for rescission of their contracts and/or damages. The ACT Supreme Court however found nothing in the project’s promotional brochure constituted misleading conduct.
Sales contracts often contain an innocuous-looking “time of the essence” term. Don’t be fooled. This enables sellers who have changed their minds to “ambush” unsuspecting buyers, cancel contracts and forfeit deposits. Fail to meet a time limit and you may be in breach of contract. By the same token, buyers with second thoughts may “dry gulch” sellers who miss a critical deadline. More than a few developers lost sales when their constructions were fatally delayed
Acreage or development site sellers may want to crash contracts after discovering they sold too cheaply to developer buyers. In one case the sellers, with such a contract in place, actually entered into a second contract with a different buyer for a much higher price – subject to the successful termination of the first contract. The sellers’ subsequent termination of that contract was, naturally enough, not taken lightly by their buyer who took the matter to court. The due lodgment date for a council application fell over Christmas when the council was closed. Despite the buyer’s last-day slipping of its application into a mail slot in the front door of the council chambers, the court found for the sellers on the basis that the application was not “lodged” in time.
At this juncture I should confess my own considerable contract-killing activities. Most terminations of clients’ recently-entered-into contracts succeeded with few ever going to court. Many rescued folk were novice property investors stitched-up by cold-calling marketeers, and signed up into over-priced off-the-plan contracts or house-land packages by lawyers in cahoots with the crooks .
Occasionally I am belatedly sought out by investors wanting out of long-done-off-the-plan deals. I mostly provide only cautious preliminary advice to these people before passing them onto more skilled and court-wise contract-killing colleagues.
How the property wheel turns! This year The Australian newspaper reported not only, how a celebrity chef contracted to pay almost a million dollars for a two-bedroom, two-bathroom, fourth-level apartment to overlook Brisbane’s botanic gardens, but that most of the 147 apartments in the 40-level tower (where construction has not commenced) sold out “prior to its launch”. How many of those eager beaver buyers may later call for contract killers?
If you need help with contracts and legal advice, feel free to contact us at Mitchell Solicitors today.