Property Lessons FiveYears After the 2011Flood

by Tim O’Dwyer

What do you do when a property you have contracted to sell is damaged (by flood or fire for example) before settlement? What do you do if you are the buyer of that property? These critical questions arose for more than a few sellers and buyers across Queensland during the State’s extensive flooding of December 2010 and January 2011.

These questions are still of concern to all involved in selling, buying or renting a home in the Sunshine State.

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In one instance , the buyer and seller of a flood-damaged property could not agree on what to do. So they took the matter to court. Queensland’s Court of Appeal in the case of Dunworth v Mirvac ultimately ruled that a woman buying a $2.155 million river-front apartment in Mirvac Queensland Pty. Ltd’s up-market Tennyson Reach development had validly terminated her 2007 off-the-plan contract because of significant damages caused to the apartment by the January 2011 flooding. Despite quite technical legal arguments raised by the seller/developer’s Queen’s Counsel and Senior Counsel during two hearings the appeal court finally found for the buyer. Even before the flooding took place, every apartment in Mirvac’s complex of high-rise buildings had dropped drastically in value from the 2007 off-the-plan sale prices. Needless to say values on most, if not all, flood-affected Queensland properties dropped just as drastically folowing the floods.

Tennyson Reach, flooded in 2011.

Tennyson Reach, flooded in 2011.

After Mrs Dunworth had earlier attempted to escape her by now over-priced purchase contract on the basis of alleged false, misleading and deceptive representations by Mirvac – particularly regarding the apartment’s elevation –  Mirvac obtained a Supreme Court order obliging Mrs Dunworth to settle the contract (and pay some $500,000 interest) by 8th February, 2011. Less than a month before that date, along with thousands of other Brisbane and Ipswich properties on or near the river, the Brisbane River flooded this ground-floor apartment (as it had similarly in 1974 inundated the land on which Mirvac had built more than 30 years later).

Although Mirvac generously offered on 24th January 2011 to restore the extensively damaged and apparently uninhabitable apartment to original condition at its own cost over a period of four months (and waive its right to default interest), Mrs Dunworth rejected this offer. Instead, she promptly purported to rescind the contract in reliance on Section 64 of Queensland’sProperty Law Act 1974. This Section permits such a buyer’s action where, before the “date of completion” of a residential contract, the property is so damaged as to be “unfit for occupation”.  (Similar provisions exist in Queensland’s Residential Tenancies and Rooming Accommodation Act 2008 whereby both landlord and tenant have the right to terminate the tenancy.)

The High Court of Australia denied Mirvac's application to appeal.

The High Court of Australia denied Mirvac’s application to appeal.

Because her contract was still subject to the earlier specific performance order Mrs. Dunworth applied to the Supreme Court firstly for a declaration that she had validly cancelled the contract, and secondly for a dissolution of the extant order. Mirvac in turn applied for that earlier order to be varied by replacing 8th February 2011 with 8th June 2011, and thus secure itself sufficient time for the apartment to be cleaned and restored. In court Mirvac’s lawyers pointed to the shortness of time available to respond to Mrs Dunworth’s application and the absence of a full report on the extent of damage. Whether the property was rendered unfit for occupation by the time the notice of rescission was given, whether the damage was able to be rectified and how long restoration would take were all matters which would require evidence to be tendered to the court. These were, in the primary judge’s opinion, matters “strongly arguably relevant to the assessment of unfitness”.

The judge decided that Mirvac ought to be given the opportunity to lead evidence on these matters at trial, and found there were legal questions and related factual questions about the application of Section 64, including the date at which unfitness must be established, the meaning of unfitness and the relevance, if any, of the damage being capable of repair. “In my view,” the judge said, “there are matters which should go to trial”.

Accordingly the judge ordered the settlement variation sought by Mirvac to 8th June 2011 without prejudice to Mrs Dunworth’s right to maintain that she had validly terminated under Section 64. The proceedings were to be placed on a court list for a later trial.

Mrs Dunworth promptly took her case to the Court of Appeal.

On appeal Mirvac conceded that the apartment had been unfit for occupation at the time of rescission. Hence the only major legal question to be answered was whether Section 64’s “date of completion” could include a “date for completion” ordered by a court against a defaulting buyer. Section 64 applied in either case, the court held. No ruling was given otherwise on the interpretation of this Section, although the court noted that it “gives no right to a vendor to maintain the contract in order to attempt to repair the damage”. The possibility of restoration did not preclude rescission, the court explained, “where the premise of the provision has been met.”

While Mrs Dunworth was at last off the contractual hook, their Honours hinted (with hindsight) how developer Mirvac could have fared better: Mirvac might have initially terminated for breach of contract when its buyer did not settle on time after the apartment was completed. In pursuing a legal enforcement of the contract Mirvac had clearly not taken into account the risk of a major flood, the likelihood of resulting damage and a consequent Section 64 rescission.

While Mirvac had – with only one previous loss – successfully sued some other recalcitrant Tennyson Reach buyers, it accepted Mrs. Dunworth’s ultimate win neither philosophically nor graciously. Rather, this company sought leave from the High Court to hear an appeal from the Court of Appeal decision. Leave to appeal was refused.

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Meanwhile, a four-year-old, three-level Chelmer home not far from Tennyson Reach was one of many other Queensland properties which flooded in January 2011 while under contract. With few exceptions, the contracts on those properties were cancelled and sales crashed. Invariably buyers’ finance was declined, or Section 64 of the Property Law Act was invoked without objection by sellers.

With the downstairs family-room at this Chelmer home having been completely submerged and wrecked, and a metre of water having laid waste to much of the second floor level, the owner/seller found herself  - like many others – without flood insurance. But her buyers were finance-approved. Settlement of this now unconditional contract was due in February – only weeks after the muddy waters would recede to reveal the extensive devastation caused to the house, pool and yard. The property’s pontoon had, incidentally, already joined a flotilla of others in far away Moreton Bay.

The Brisbane River in flood at Chelmer, 2011.

The Brisbane River in flood at Chelmer, 2011.

Her buyers, a professional couple from New South Wales, knew nothing about Brisbane’s earlier 1974 and 2010 floods and consequently they had made no flood enquiries before committing to this $3 million-plus property on the beautiful and (then) benign-looking Brisbane River. Although their local suburban solicitor had reviewed the contract before signing, he added no protective flood clause, undertook no subsequent flood search for his trusting clients and (like the seller and her real estate agent) volunteered nothing about the flooding which had undoubtedly occurred previously over at least part of the block. Nor was there any seller/agent disclosure about the likelihood of future river flooding. (No matter that 12 months earlier the then Queensland Labor Government’s Fair Trading Minister, Peter Lawlor (a former solicitor), informed me that the Bligh Labor government had no intention of legislating to make such flood disclosure compulsory in residential property sales.)

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By the way, was it karma that the buyers’ solicitor’s own office would also soon be flooded? As would the home of then Queensland Labor Premier Anna Bligh’s own mother! Interestingly, in January 2012 the Premier had belatedly announced that her government proposed to discuss with the Queensland Law Society and the Real Estate Institute of Queensland “the potential to incorporate flood mapping data” into standard residential sale contracts “pending the recommendation of the Queensland Floods Commission of Inquiry”. Still holding my breath on any such contract reform – as the Inquiry made no such recommendation.

It was clearly karma that, two days before the Brisbane River raged, the buyers took out timely flood insurance –prompted by prolonged wet weather and a standard clause in their purchase which provided that the property was at their risk – as it had been since they signed up two months earlier.

The obviously distraught buyers met with the seller (and her non-practising lawyer husband) to view the soggy state of the property and to discuss what to do. The buyers were taken aback when the seller, apparently encouraged by her understanding of the risk clause, said she intended to do nothing. Rather the buyers, it was calmly suggested, should complete the purchase then make a claim on their insurance.

With their solicitor’s office still closed from the floods, the buyers needed speedy legal advice on their predicament and contacted me. Could they cancel because of the flood damage despite the risk clause? Could they cancel also because of what their post-flood investigations had revealed otherwise?

After giving this anxious couple some encouraging preliminary advices I quickly secured a barrister’s opinion on two issues. Firstly, could my clients cancel because of the seller’s and her agent’s misrepresentation (by silence) about flooding, and/or by their deceptive mis-description of a storeroom as the property’s suitably-appointed “family room”?  (The room in question showed in the Brisbane City Council’s approved dwelling plans only as “storage” – a designation relevant to the Council’s 1974 flood-height requirements for habitable room floor levels of new homes.) Secondly, was Section 64 of the Property Law Act applicable to this property and sale contract?

The floods caused extensive damage to property.

The floods caused extensive damage to property.

The barrister was cautiously confident on both issues, but felt (as Mirvac’s lawyers and a Supreme Court judge would later feel) that Section 64 might not be as clear in meaning as it appeared. If the seller here disputed any rescission by the buyers, as her solicitor had already foreshadowed she might, a costly court battle was likely to ensue. And, depending on the result, later damages suits might be necessary against a negligent solicitor and/or misleading agent.

My clients nevertheless wanted to buy a home, not a precedent-creating court case or three. (At this time Mrs Dunworth’s rescission had not occurred, nor had her legal proceedings commenced.) While acknowledging the value of the legal advice they had received, my clients remained uncomfortable about future flooding and unhappy about the family/storage room situation, but still rather liked the idea of river-front living. So they resolved they should settle the contract and make their insurance claim afterwards – provided the purchase price could be renegotiated down and more time be allowed to enable the completion of their presently on-hold finance arrangements.

I then formally indicated by fax to the seller’s solicitor that my clients were considering terminating the contract for misrepresentation (and under Section 64), but proposed a “without prejudice” conference between the parties to explore other possibilities.

An amicable meeting followed (without lawyers present apart from the seller’s husband) where my clients made it clear they had obtained some high-powered legal advice, but gave away nothing about their barrister’s Section 64 reservations. Anyhow, common sense prevailed and a deal was done: the price would be substantially reduced (by $150,000) and the completion date extended by two weeks. The sale settled satisfactorily and the buyers’ insurance claim proceeded surprisingly smoothly.

Apart from the not-unexpected post-settlement hassles of locating, engaging and dealing with trades-people, the buyers were happier but much wiser. The seller was probably pretty happy too.

MORAL: River-front properties will always be flooded sooner or later.

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