Contracts for the sale of land

Contracts for the sale of land

Where property is being bought and sold, a contract is very important.  Approximately 80 percent of conveyancing transactions deal with the purchase and sale of the family home. Vendors often sell their current home and use the proceeds towards the simultaneous purchase of a new home. Frequently, this chain of events is repeated with six or more vendor/purchaser sets. Each contract is drawn mindful of the conditions in a previous contract. Settlements are linked and usually reliant upon each other. 

Contracts in these circumstances must be capable of being relied on with certainty. If one contract fails, it is not only the settlement of that particular contract that may be affected. It could have a domino effect, bringing down six or more dependent transactions.

Contracts for the sale of land are required to be in writing and signed by the party against whom the contract is to be enforced. An agreement not complying with these requirements may still be a contract but will not be enforceable. A purchaser may make an offer to the vendors to buy their house. They could negotiate terms and conditions and come to a satisfactory verbal agreement. This agreement might still be a contract between the parties. However, because it does not comply with section 126 of the Instruments Act 1958 it will not be enforceable. 

The contract must establish details of the parties, the property, the price to be paid, and the promise made. This agreement can be contained in one document or in a number of documents, such as a series of letters between the parties and/or their respective representatives. The Instruments Act requires only “the party to be charged” to sign the contract. This means, for example, that if the purchaser is seeking to enforce a contract, then the purchaser must prove that the vendor signed that contract and vice versa. If a vendor signed a contract and a purchaser did not then, although the purchaser could legally enforce the contract against the vendor, the vendor would be unable to enforce the contract against the purchaser. This is because the purchaser did not actually sign any document.

A contract may be signed by the party, or by a person authorised in writing by the party to sign on behalf of the party. This authority may be in the form of a Power of Attorney or may be simply a written authority given by the party to another person. A corporation may sign by using its common seal or may authorise a director or agent to sign on behalf of the corporation. A sole director of a corporation may sign on behalf of the corporation. While multiple director corporations would usually have two directors sign, one director may have the apparent authority to do so.

The contract in a conveyancing transaction is a primary or source document. It sets out the rights, obligations, and duties of the parties. These are the terms of the contract. A contract for the sale of land is an executory contract, meaning that its terms – the parties’ promises to each other – are to be performed over a period of time, usually 30 to 90 days from the day of sale. The culmination of a conveyancing transaction is a process known as settlement. This is where the parties exchange the balance of purchase money for title documents. These documents, once registered, will enable the purchaser to become the proprietor of the property – the subject matter of the contract.

The “standard” contract

As mentioned above there is no longer a prescribed contract set out in regulations. It has to a large degree been replaced by the 2019 Law Institute Victoria/REIV contract. This will now be the basis of most contracts for the sale of real estate in Victoria. When presented with a contract there is no guarantee that it will be in this form. It is important to check this. Older forms of contract are still in use and there are alternative ones.

The contract consists of:

  • Notices required under sections 31 and 9AA(1A) of the Sale of Land Act 1962
  •  Information about the approval of the contract and copyright
  • A disclaimer
  • Execution
  • Table of contents
  • The particulars of sale
  • Provision for any special conditions agreed to between the parties
  • The general conditions of sale (GC).

Notices

Section 31 of the Sale of Land Act requires that a conspicuous notice be given to a prospective purchaser advising the purchaser that, in certain circumstances, the contract may be terminated three clear business days after the day of sale. If this notice is not included in the contract the purchaser may rescind at any time before settlement.

Contracts for the sale of lots on an unregistered plan of subdivision require additional notice to the purchaser to be displayed in a conspicuous place. The requirements are set out in section 9AA(1A) of the Sale of Land Act.

Failure to include the notice in the contract does not give the purchaser

any rights but may make the vendor liable to a penalty.

Approval and copyright

The reason for the approval information is to confirm that estate agents can use this form without breaching section 10 of the Legal Profession Uniform Law (Victoria). The Law Institute and REIV assert their copyright in the contract.

Disclaimer

The contract is a precedent document, and no more. It is up to the user of it to understand its content and application and suitability for use in particular circumstances. 

Execution

In addition to providing a place for the parties to sign, this page has other functions. They are warnings, rules, and definitions. It also includes the operative words whereby the parties agree to sell and buy and sets the time frame for acceptance of an offer. There is an acknowledgment that a person whose signature has been obtained by an estate agent has received a copy of the contract. This is required under section 53 of the

Estate Agents Act 1980.

Warnings

Estate agents are effectively warned not to use the contract for an “off the plan” sale unless it has been prepared by a legal practitioner. That is because such sales will require some amendments to the standard contract and agents are not entitled to prepare these. 

There are also warnings to purchasers that a document is a binding contract that should be read before signing and that they should have received a vendor statement.

Rules

As the contract contains a number of parts they need to be ranked in order of priority. The particulars of sale are paramount. Any special conditions take precedence over general conditions. These rules are important when interpreting the contract.

There are also rules about signing as an attorney, company director, or agent.

Definitions

Four terms are defined. The “property” is the land and the goods. The meaning of “vendor statement” and “business day” is linked to the Sale of Land Act. The expression “DAY OF SALE” is the date by which both parties have signed the contract. 

Table of contents

There is now a table of contents. This is very useful. If a number of special conditions are to be added to the contract it would be a good idea to set them out under that heading.

Particulars of sale

This is effectively the variable data that needs to be added to the contract.  It will generally be populated from data inputted to a conveyancing software package. The information required is set out below. 

Vendor’s estate agent Insert name, address, email, telephone numbers, fax number, office reference.  If no agent has been appointed then insert “Not applicable” or remove or delete this section.

Vendor Insert the name, address, and email of the vendor. In the case of a corporate entity, an ABN or ACN should be added.

Vendor’s representative Insert name, address, email, telephone number, fax number, office reference. 

Purchaser’s estate agent This is a new particular and is designed to include buyers’ advocates who are often engaged now. If there is not one then this section should be deleted. If there is, then the same data that is required for the vendor’s estate agent is to be added.

Purchaser Insert the name, address, and email of the purchaser and add an ABN or ACN if applicable.

Purchaser’s representative   The same information required for the vendor’s conveyancing practitioner should be added here.

Land  The land description is generally provided by title reference. The table allows for this. It provides the alternative of referring to the title information in the vendor statement. It is preferable for the table to be completed as the vendor statement no longer forms part of the contract. The land includes all improvements and fixtures on it.

Property address Insert the street address or other description of the land.

Goods Insert details of the goods to be sold with the property. Where a good is to be specifically excluded from the transaction it is often prudent to stipulate this exclusion in this section. 

Payment Insert the purchase price being paid for the property. Show the amount of the deposit being paid and by when it is to be paid. Be careful not to create a terms contract by specifying the deposit to be paid by more than two separate payments after the contract is signed. Remember the restrictions on the amount of deposit that can be required. In a prescribed contract of sale under section 9AA of the Sale of Land Act no more than 10 percent deposit can be required. Where the contract is also a major domestic building contract under section 137E of the Building Act no more than 5 percent deposit can be required.

Deposit If the parties have agreed that the deposit can be paid by deposit bond or bank guarantee, checking the appropriate box invokes the condition in the contract that provides for this.

GST Unless the box is checked, the price is inclusive of GST. Checking the box brings the condition in the contract relating to it into operation. Checking the other boxes will specify that the provisions for “farming business”, “going concern” or the margin scheme apply.

Settlement  Insert a date for settlement. If the contract relates to the sale of land that is the subject of an unregistered plan of subdivision, then settlement is due on the later of the nominated date or fourteen days after the vendor advises the purchaser that the plan has been registered.

Lease  This really relates to possession. Unless the box is checked then the purchaser is entitled to vacant possession at settlement. Otherwise,  it is subject to a lease the details of which can be described by checking one of the relevant boxes. It is advisable to attach a copy of any written lease to the contract.

Loan The parties can agree that the contract is conditional on the purchaser obtaining approval of a loan. In that case, the box is checked and the details of the loan completed

Terms contract Terms contracts are not very common, but there are consequences if one is created. They will be dealt with in more detail later. The contract contains conditions that will assist compliance with the legislative requirements. The box needs to be checked for them to apply.

Reports  Some purchasers ask for time to obtain reports about the buildings on the land or pest infestation. The contract includes conditions about that and if the relevant box is checked they are activated.  It is permissible to entirely delete reference to those parts of the Particulars that are not relevant to a particular transaction, for instance: GST, subject to registration of a plan, subject to lease, subject to a mortgage. These deletions will substantially simplify the particulars. 

The general conditions of sale

Following is an explanation of each of the general conditions in the prescribed contract. 

Contract signing 

1. Electronic signature

This is a new condition and recognises that contracts are often signed electronically. This can involve the use of a digital signature or an image of a handwritten signature. It goes on to provide that contracts can be exchanged electronically and specifically by email.  A hard copy signed contract must be supplied if requested. Failure to do so does not, however, affect the validity of the electronic contract.

2. Liability of signatory

This makes an individual signing on behalf of a company personally liable under the contract.

3. Guarantee

General condition 3 applies where the purchaser is a proprietary company. Rather than prescribe a form of guarantee, the condition leaves it up to the vendor to nominate a suggested form of guarantee after the contract has been exchanged.

4. Nominee

It is no longer necessary for the words “and/or nominee” to be added after the name of the purchaser in the particulars of sale. The condition makes it clear that notwithstanding the nomination the purchaser remains personally liable for compliance with the contract.  

Nomination is, in truth, no more than a direction to the vendor as to who should be named as transferee in the transfer of the land. The vendor’s only concern is to be sure that the vendor fulfills its contractual obligations by transferring to the named purchaser or a purchaser nominated by the named purchaser. Any nomination must be made no later than fourteen days before the due date for settlement.

Title

5. Encumbrances

General condition 5.1 spells out that the purchaser buys the property subject to any encumbrances shown in the vendor statement other than mortgages or caveats, any reservations in the Crown Grant, and any lease referred to in the particulars of sale.

Reservations in the Crown Grant include such things as:

  • the right to share the profits from minerals extracted from the land;
  • the right to resume any part of the land at a future date for a specific public purpose;
  • a depth restriction limiting the grantee’s ownership to a specific depth, which was usually 50 feet. 

Restrictions are usually set out in full on the face of a Crown grant and, unless removed, will flow through to the later titles.

General condition 5.2 applies where a property is sold subject to an existing lease and has the effect that the purchaser indemnifies the vendor against all lease obligations to be performed on the part of the landlord after settlement.

6. Vendor warranties

First comes the warranty to the effect that there has been no amendment of the general conditions. 

Next, it is provided in General condition 6.2 that the warranties in General conditions 6.3 and 6.4 replace the purchaser’s right to requisition and make inquiries. This is arguably superfluous but was included to provide a ready answer to a demand for answers to requisitions. 

The warranties given by the vendor in General condition 6.3 are absolute and the ones in General condition 6.4 are expressed to be limited to the knowledge of the vendor. In broad terms, the warranties address all matters which were the proper province of requisition on the title in the strict sense of that term.

General condition 6.5 makes allowance for any contrary provision in the contract itself or disclosures in the vendor statement.

Finally, General condition 6.6 sets out the warranties required by section 137B(2)(d) of the Building Act 1993. That section applies in the case of an owner-builder selling a recently constructed or renovated building and satisfies the obligation to set out the warranties required by section 137C in the contract. By “boiler plating” these warranties the vendor avoids the possibility of failing to include them. 

7. Identity of the land

Identity clauses have long been found included in contracts for the sale of land in Victoria by way of special conditions. General condition 3 provides that an omission or mistake in the description, measurements, or area of the land does not invalidate the sale and further that the purchaser cannot make any objection or claim for compensation for any alleged misdescription or deficiency in area or measurements, or

require the vendor to amend the title or pay any costs of amending the title. However, such a condition will always be subject to the common law principle to the effect that a significant discrepancy will justify avoidance of the contract by the purchaser, and the associated “rule of thumb” that a 5 percent or greater diminution in the area is likely to be considered significant.

8 Services

This provision attempts to strike a balance between the obligations of the vendor and the expectations of the purchaser in relation to the connection of services to the property.

9. Consents

This effectively makes the contract conditional on obtaining any consent or license required for the sale. 

10. Transfer

If a paper transfer of land is required, the purchaser must deliver it to the vendor at least seven days before the settlement date. The vendor is under an obligation to initiate any forms required by the State Revenue Office. The parties must cooperate in completing the forms. 

There is no particular penalty for failure to provide documents within the prescribed time limits. Any penalty will depend upon whether such failure reasonably results in the settlement being delayed.

The condition provides that delivery of the transfer is not acceptance of title. In view of the fact that there are no requisitions now, this would seem superfluous.

11. Release of security interest

The Personal Property Securities Act 2009 (C’th) now covers all secured financing involving personal property. Personal property security interests are registered on a single national online Personal Property Securities Register (PPSR). This condition entitles the purchaser to request a release of any security interest to which any part of the property is subject. It is not likely to have much application to residential conveyancing. 

It was mentioned earlier that there can be problems searching the PPSR where the vendor is an individual as the date of birth is required. The standard contract now contains a special condition that obliges the vendor to provide this information.

12. Builder warranty insurance

In practice, such detail is commonly sought by purchasers but, in the absence of this specific contractual requirement, it is doubtful whether the vendor has any obligation to provide information regarding any builder’s warranty insurance. This only requires the vendor to provide what is in the “vendor’s possession”. In other words, the vendor does not have to obtain the information for the purchaser.

13. General law land

This condition applies in the rare event that the contract relates to old law land, not under the Transfer of Land Act. If, however, there is a provisional title for the land, the vendor must undertake the conversion prior to settlement. The condition is silent about the consequences of the vendor not doing this. It is unlikely that the purchaser could refuse to settle as it is probably not an essential term of the contract.

Money

14 Deposit

The provisions in relation to the deposit were previously contained in two general conditions. There is now a specific provision in relation to it. General conditions 14.1 and 14.2 ensure compliance with the requirements of the Sale of Land Act in respect of normal sales and those off the plan.

General condition 14.3 recognises that vendors are often in a situation of relying upon a release of the deposit in order to fund, in whole or in part, the deposit on a replacement property. Whilst the early release of deposits is dealt with in section 27 of the Sale of Land Act, the mechanism provided for it is far from perfect. Specifically, a purchaser may attempt to thwart an early release by stating that the purchaser is not satisfied with the particulars provided by the vendor under the section and giving reasons which are perhaps specious.

General condition 14.3 gives the vendor some leverage by having the purchaser agree that the deposit ought to be released to the vendor provided that debts secured against the property do not exceed 80 percent of the sale price. In working out the 80 percent any amounts that are be deducted for GST or capital gains tax are to be included in the debt.

One of the prerequisites for releasing the deposit is that the purchaser has or is deemed to have accepted the title. Since the requisition process has been removed from the contract, this concept is no longer relevant. Accordingly, the standard contract now incorporates a special condition that clarifies when the purchaser is deemed to have accepted the title. The condition allows payment of the deposit into court if it is reasonable to do so. This would occur if there were a dispute about whether the deposit should be released or refunded.

There is also a provision for how payment can be made.

15. Deposit bond

The vendor may agree to the deposit being paid by way of a deposit bond. If that is the case then the appropriate box in the particulars of sale needs to be checked. If it is then the provisions of this condition apply. They set out the mechanics of how the deposit bond is delivered and the requirements for the vendor to make a claim against it.

16. Bank Guarantee

This is an alternative to a deposit bond. Once again the vendor must agree and the box checked in the particulars of sale.

17. Settlement

General condition 17.1 requires the purchaser to pay the balance and the vendor to make a title on settlement.  The condition also ties in with the particulars of the sale in terms of whether vacant possession or receipt of rents and profits is to be given to the purchaser at settlement.

General condition 17.2 requires settlement to take place between the hours of 10.00 a.m. and 4.00 p.m.

18. Electronic settlement

The effect of this condition is that settlements must be conducted electronically unless the parties agree otherwise or it is not possible to do so. It deals with matters such as:

  • requiring all parties to be enabled to deal electronically; 
  • the setting up of the electronic workspace;
  • nominating the time for settlement;
  • delivery of keys;
  • determining when settlement has occurred;
  • failed settlement; and
  • recovering mistaken payments.

Electronic settlements are conducted through an electronic lodgment network operator or ELNO. To date, there has only been one, PEXA, but others may come into the market. General condition 18.5 sets out the business rules for determining which ELNO is to be used if there is more than one. 

19. GST

This is designed to implement the elections made by the parties in the particulars of sale. The default position will be no additional GST, so the vendor needs to make sure that the correct decision is made at the time that the contract is entered into.  

There are some circumstances in which GST will be payable even if the contract does not provide for it. They are set out in General Conditions 19.2 (b), (c), and (d). Basically, they are where GST is payable as a result of the use made of the property by the purchaser.

In order to collect the GST at settlement, the vendor must provide a tax invoice, unless the margin scheme applies.  It is also important for a purchaser to be aware of the GST implications.

In that case, the price for a property purchased for development purposes included GST. The purchaser expected to obtain an input tax credit but the Tax Office disallowed the claim. The purchaser claimed the GST from the vendor on the basis that it was not part of the purchase price but paid on account of GST. The court did not support this, stating that the price in the contract was not dependent on whether the GST included in it was payable by the vendor or claimable by the purchaser. 

So, if you are acting on a purchase where the price includes GST  and the purchaser expects to obtain a credit, make sure this will occur.

If there is doubt, seek to negotiate a position where the GST component of the price is held in trust until it has been resolved.

20. Loan

This condition relates to the purchaser’s finance if a lender is nominated in the particulars of sale.

Where this condition applies, it provides that if the purchaser does not exercise the right to end the contract within two days of the approval date then the contract will become unconditional. Even if the finance has not been approved, the contract will become unconditional if appropriate steps are not taken within the stipulated timeframe.

A purchaser can only terminate the contract under the finance clause if the purchaser:

  • has made immediate application for the loan;
  • had done everything reasonably required to obtain approval of the loan;
  • serves written notice ending the contract on the vendor on or before two business days after the approval date;
  • provides evidence of the rejection or non-approval of the loan; and 
  • is not in default under any other condition of the contract when the notice is given.

It is vital when acting for the purchaser to ensure that the relevant notice is given within the specified timeframe. 

In some cases, a purchaser will seek an extension of the approval date. It is possible that while waiting for an answer to a request for an extension, the two-day period could expire and the contract becomes unconditional. It is, therefore, important when requesting an extension of the approval date, it is specified that if this extension is not granted that the request is to be taken as a notice of termination of the contract. Equivocal language must not be used as an invitation to the vendor to treat the contract as ended unless an extension is granted has been held to entitle the vendor to presume that the contract was unconditional even though no extension of time for approval was granted. 

However, confirmation of termination in the absence of an extension is irrevocable, and this may be contrary to what the purchaser wants. It is important to obtain clear concise instructions from the purchaser client before sending a notice to the vendor. 

The purchaser must not be in default under any other condition in the contract when the notice is served. While it might seem unlikely that a purchaser in this situation could be in default, it can happen unintentionally. The contract often provides for the payment of a 10 percent deposit. Where the contract is subject to finance, sometimes only part of the deposit is paid, with the intention that the balance will be paid when finance is approved. Unless the contract makes provision for the deposit to be paid in parts, the purchaser will be in default by not having paid the full deposit. It is not likely that a purchaser will lose the right to rely on the finance clause simply because of a failure to pay the full deposit. 

Sometimes the balance of the deposit is aligned to be payable on the original date stipulated for approval of finance. In this case, ensure that the deposit is paid on the date or prior approval for an extension of time for payment has been obtained. A situation can arise where the purchaser is required to pay the balance of the 10 percent deposit so that the contract can be terminated and the deposit refunded.

If negotiating a contract on behalf of a purchaser, always ensure that a suitable clause is included requiring the balance of the deposit to be paid upon approval of finance.

The subject to finance condition is for the benefit of the purchaser only and failure to satisfy that condition would not allow the vendor to bring the contract to an end. In a rising property market, a vendor may erroneously attempt to rely on this condition to terminate the contract because another purchaser has been found who will pay a higher price for the property. A vendor who adopts this course of action will encounter difficulties if the purchaser under the first contract wishes to proceed.

When a contract is subject to finance, it is important that great care is taken to ensure that the purchaser’s rights are preserved and the right to terminate for non-approval is not lost through inadvertence. Diarise the relevant dates and ensure that you have clear and timely instructions from the client regarding the progress of their loan application.

21. Building report

This is an optional condition and only applies if the relevant box is checked in the particulars of sale. Basically, it enables the purchaser to end the contract within fourteen days if a building inspection report reveals a major building defect.

22. Pest report

This is also an optional condition and only applies if the relevant box is checked in the particulars of sale. It enables the purchaser to end the contract within fourteen days if a pest inspection report reveals a major infestation affecting a building on the land.

23 Adjustments

General condition 23 addresses the mechanics of adjusting outgoings, rent, and other income at settlement. This is dealt with in more detail later.

24. Foreign resident capital gains withholding

Where the vendor is a foreign resident, the purchaser is required to withhold an amount on account of capital gains tax and remit it to the Tax Office. Information about this appears below. This condition sets out the process to be followed. It starts from the position that all vendors are foreign residents unless a clearance certificate is supplied.

25. GST withholding

Laws requiring GST to be withheld at settlement in some circumstances came into effect on 1 July 2018. Where it applies, the purchaser is responsible for paying the Tax Office up to 1/11th of the sale price where the property is new residential premises or potential residential land. The vendor is required to give notice to the purchaser of all residential premises whether new or old and whether the vendor is registered for GST.

This applies to all transactions where the contract is signed and settled after 30 June 2018. If there is no contract, settlement after that date will trigger the requirements. Regardless of when the contract is signed, it applies to all transactions settled after 30 June 2020.

This condition ensures compliance with the requirement.

New residential premises are defined as property that has not previously been sold as residential premises or result from the construction of a new building to replace demolished premises on the same land. It does not apply in the case of substantial renovations.

Potential residential premises refer to land that can be used for residential purposes but does not have any residential buildings on it.

Where applicable the vendor must include in the notice:

  • the names and ABN of the vendor;
  • the amount of GST to be withheld;
  • when the purchaser is required to pay the amount to the Tax Office.

The amount to be paid is usually 1/11th of the sale price set out in the contract. Adjustments are not taken into account. If the margin scheme applies, the amount is 7 percent but the Tax Office can determine that it will be 9 percent.

Payment must be paid at or prior to settlement. From a practical point of view, it will invariably be at settlement. If the settlement is conducted electronically the fund’s transfer can occur at settlement. Otherwise, it can be a bank cheque handed over at settlement, then sent to the Tax Office by the purchaser. Alternatively, the purchaser can hand the bank cheque to the vendor. Provided that the purchaser retains evidence of this, there will no liability if the vendor fails to remit it to the Tax Office.

Transactional

26. Time & cooperation

General condition 26 makes the time the essence of the contract, which means that contractual obligations must be performed in accordance with the timelines established by the contract. Any deviation from these timelines will constitute a breach of the contract. It introduces an obligation on the parties to be reasonable, prompt, and efficient. It will be interesting to see how this is applied in practice. If the date for performing an action under the contract is not a business day, then the date is extended until the next business day. 

27. Service

This deals with the service of notices and allows a demand, notice, or document required to be served under the contract to be served by or on a legal practitioner or conveyancer acting for the parties. There is a specific provision in relation to cooling off notices. It allows them to be served on the estate agent even where the agent’s authority has expired.

28. Notices

General condition 28 applies to all post-contract notices affecting the property, other than notices relating to periodic outgoing. So it will allocate liability to the purchaser for post-contract notices relating to such things as special levies. This condition does not catch expenses such as quarterly service charges and owners corporation fees, nor annual expenses such as rates and taxes. Nor does it apply to non-apportionable outgoings such as utility connections. As a general rule notices requiring action supported by a legislative penalty for non-compliance are governed by this condition.

Examples are:

  • removal of fire hazard;
  • removal of noxious weeds;
  • town planning breach;
  • requirement that property be connected to a sewerage system;
  • requirement that plumbing works be performed;
  • requirement that a fence be erected.

If compliance before a settlement is required, the purchaser may enter the property for this purpose.

29. Inspection

This general condition allows inspection of the property by the purchaser or by a person authorised by the purchaser either with the purchaser or instead of the purchaser. The inspection is to take place during the seven days preceding, and including the settlement day.

30. Terms contract

This general condition is designed to satisfy the requirements of the Sale of Land Act if the contract is a terms contract as defined by the legislation, as opposed to a conventional cash contract. It also sets out the obligations of the purchaser while money remains owing. These relate primarily to insurance and maintenance of the property.

31. Loss or damage before settlement

The condition requires the vendor to deliver the property and goods to the purchaser at settlement in the condition that they were in on the day of sale, fair wear and tear excepted. There is a requirement that the purchaser must not delay settlement in the event the purchaser takes the position that one or more of the goods are not in the required condition, but may claim compensation after settlement. 

The vendor is not required to improve the property – only to deliver it to the purchaser in the condition it was in on the day of sale. If there has been some minor deterioration in the property between the day of sale and settlement, this may be covered by “fair wear and tear”.  Provided there was no element of vandalism or accidental damage involved, this would be covered by normal household maintenance and create no additional liability for the vendor.

If the damage to the property is beyond fair wear and tear but is nonetheless minor, the purchaser is not entitled to delay settlement.  Where the damage is more substantial, the purchaser may require the vendor to reinstate the property prior to settlement. This places the vendor in breach of contract and unable to rescind or claim penalty interest until the breach has been remedied by the property being reinstated.

General condition 31.4 provides another option. It applies where the purchaser is alleging that the property (not just the goods) is not in the condition required by the contract. The purchaser may nominate a sum, up to $5,000, to be held by a stakeholder pending determination of the dispute following settlement. The nominated amount is to be deducted from the amount due to the vendor and paid by the purchaser to the stakeholder prior to settlement, however, the purchaser must, at the same time, deposit an equal amount (up to a maximum of $5,000) from the purchaser’s own funds with the stakeholder.

This process does not resolve the dispute, but rather isolates it so that the transaction can proceed to settlement. The parties will need to decide on a dispute resolution process after settlement, either a court or arbitration, and the stakeholder will disburse the funds in accordance with that determination.

This general condition is designed to be of assistance to both vendor and purchaser by providing an optional process designed to facilitate the resolution of disputes that often threaten the settlement process. It has, however, been interpreted by the Supreme Court in a way that would indicate that if one of the parties wishes to exercise the option provided by the condition then the other party is compelled to participate in the process.

The purchaser of residential property has a right of rescission under section 34 of the Sale of Land Act. This section allows a residential purchaser the right to rescind the contract if the house is destroyed or made unfit for habitation prior to settlement. It is, however, prudent practice to advise both parties to arrange their own insurance cover from the day of sale.

Section 35 of the Sale of Land Act enables the purchaser to rely on any insurance policy held by the vendor. The vendor is not obliged to retain any or sufficient insurance over the property. The legislation merely provides that any existing insurance can be relied upon by the purchaser.

Section 35 has certain limitations, including:

  • the insurer can avoid liability to the purchaser if it can be established that a prudent insurer would not have insured the purchaser;
  • an insurer can terminate its liability to a purchaser by giving notice of its intention to cancel the policy;
  • neither the vendor nor the purchaser is obliged to notify the insurer of the existence of the purchaser and hence its potential liability. Without this notice an insurer cannot be deemed to have accepted, or take steps to terminate a liability it has no knowledge of;
  • most insurance companies are only liable to a purchaser if theyare liable to a vendor. If the vendor fraudulently failed to disclose a relevant fact when applying for cover, the policy could fail.

If General condition 31 is deleted from the contract, the risk will pass to the purchaser on the day of sale. Care should be taken in these circumstances to comply with the disclosure requirements of section 32(2)(g) of the Sale of Land Act. This requires a vendor to disclose particulars of insurance where the risk is not remaining with the vendor until settlement. Therefore, details of any insurance policy held by the vendor should be disclosed pre-contractually in the vendor statement.

Again there is no obligation on the vendor to insure, merely to disclose any existing insurance.

32. Breach

This condition requires payment of compensation and interest by a party who breaches the contract. It provides that the breaching party must pay to the other party on-demand compensation for any reasonably foreseeable loss to the other party resulting from the breach, and any interest due under the contract as a result of the breach. It may be

difficult to establish the extent of the vendor’s foreseeable losses. In an effort to establish foreseeability, full disclosure of the vendor’s future expenses could be made contractually. An appropriate special condition would give the purchaser notice of specific and foreseeable costs likely to be incurred by the vendor, in addition to those generally referred to in this condition, should the purchaser default.  

The vendor has an obligation to deliver the property to the purchaser at settlement. If this obligation is breached, the purchaser may suffer loss. This condition entitles the purchaser to compensation for reasonably foreseeable losses. These appear to be restricted to the costs and expenses directly attributed to rearranging settlements. The criterion is that losses must have been reasonably foreseeable and disclosed to the vendor at the time of entering the contract. In practice, this would be difficult to achieve.

Legal costs are a reasonably foreseeable consequence of a breach. If either party defaults, they will be required to pay the other the reasonable legal costs occasioned by the breach.

Default

33. Interest

The penalty rate changes from time to time. If the rate changes during a default period, both rates of interest must be applied for the period during which each is current. The effective rate is published in The Age in the law list on Mondays.

A purchaser cannot require a defaulting vendor to pay penalty interest. The condition provides that the interest is to be “computed upon the money overdue”. As there is no money due from the vendor to the purchaser, there is nothing on which interest can be calculated. 

Where there is the default in payment of the deposit money or any part of it, the vendor is entitled to charge penalty interest during the breach period. It is sometimes argued that, as the deposit is held by a stakeholder the vendor does not get the benefit of it and, therefore, should not be entitled to the penalty interest. This view is incorrect. Penalty interest is payable on any money that is overdue under the contract.

Where there is the default in payment of the balance of purchase money, the correct procedure is to calculate the exact amount due on the settlement date. This would include an adjustment of all outgoings. Usually, calculations are based merely on the difference between the purchase price and any deposit paid. This will not normally make a significant difference in the interest due, but occasionally it will.

Where a purchaser buys a rented property, the vendor will normally receive the rent until settlement. If a settlement is delayed, the vendor is still entitled to penalty interest in addition to receipt of the rent on the property. This is because the interest payable is a penalty, not compensation for any loss incurred.

The purchaser may be in possession of the property and paying rent to the vendor. In these circumstances, if settlement is delayed, the purchaser must continue to pay rent in addition to any penalty interest claimed. This is because the rent is payable for possession of the property whereas the interest is a penalty for not settling on time.

The condition now specifies that penalty interest is payable on settlement.

34. Default notice

A defaulting party must cure the default within 14 days of service of a notice. Therefore, it is the date of service rather than the date of the notice which causes time to run.

There is no prescribed or statutory form of default or rescission notice. The notice must merely comply with the requirements of General conditions 34 and 35. It is important that these requirements be strictly adhered to as courts have refused to enforce inadequate rescission notices. A suggested form of rescission notice appears in Appendix 8.

The defaulting party has fourteen days from the date of service of the notice to remedy the breach, pay the costs and any interest associated with the rescission notice in order to cure the breach. Where the breach is not remedied, the contract is automatically at an end at the expiration of fourteen days from the date of service of the notice of rescission. It is common conveyancing practice, although not technically necessary, to confirm this with the defaulting party in writing. 

Some vendors issue rescission notices as soon as there has been a default by the purchaser. Careful consideration should be given before a notice of rescission is served as it may not be the most appropriate remedy available to a vendor given all the circumstances. The vendor must be in a position to settle – ready, willing, and able – before being entitled to rescind the contract. A vendor who cannot give possession of, or title to, the property is not in a position to settle.

If the vendor rescinds the contract, the vendor is entitled to costs on the rescission notice and penalty interest until the date the rescission is effected. The most common reason for rescission by a vendor is because a purchaser has failed to pay the balance of the purchase price on the due date. The vendor can rescind but it may be that a short extension to the contract and payment of penalty interest is more appropriate. Where the purchaser has failed to pay the balance of the deposit it may be more appropriate to demand interest rather than rescind.

The purchaser may refuse to pay because the vendor has committed a significant breach of the contract. The vendor may not be able to deliver the title to or possession of the property at settlement. If a vendor could not fulfill an essential term of the contract, the vendor would not be in a position to settle. If a vendor is not in a position to settle – ready, willing, and able to settle – the vendor is not entitled to rescind the contract. However, if the purchaser refuses to settle and the vendor is ready, willing, and able to do so, then the vendor is entitled to rescind the contract.

Where the vendor defaults, careful consideration should always be given before a rescission notice is served on behalf of the purchaser as it may not be the most appropriate remedy available to a purchaser given all the circumstances. Where the vendor is in breach of an essential term of the contract an aggrieved purchaser may either seek a court order for specific performance of the contract or serve a notice of rescission.

The purchaser must be in a position to settle – ready, willing, and able – before being entitled to rescind the contract. A purchaser must be able to tender the amount due on the settlement date before being in a position to settle. A purchaser can rescind the contract if the vendor is unable to transfer a title to or give possession of the property to the purchaser.

In order to prove the ability to settle, a purchaser will often “tender” the balance of the contract price to the vendor. Tender is a process whereby the purchaser calculates the exact amount owing to the vendor as at the date the tender is made. This includes preparing a full statement of adjustments.

A letter, email is often sent prior to the act of tendering. If the vendor indicates that either the vendor will not require a formal tender or that the vendor would be unable to settle even if a formal tender were made, then it will not be necessary for the purchaser to make formal tender.

It will not always be necessary to go through some sort of tender process. If it is quite clear that the vendor will not be in a position to complete the contract then the purchaser may be excused from tendering.

The purchaser may offer to tender on terms to which the vendor does not agree. If the vendor advises the purchaser that the terms of the proposed tender are not acceptable, the purchaser is not obligated to tender and this omission will be excused.

If the purchaser elects to rescind the contract because of a vendor’s breach of an essential term of that contract, the purchaser is entitled to a refund of any money paid, together with the costs relating to the rescission notice and any interest claimed.

The purchaser has a charge on the land until payment. A purchaser who has paid a deposit has an equitable interest in and a lien or charge over the land pursuant to General Condition 35.3(b) in respect of the amount so paid until it has been refunded. Where a purchaser’s interest under the contract of sale is protected by a purchaser’s caveat, it should be withdrawn after rescission and replaced with a caveat in respect to the lien or charge to ensure the purchaser’s interest remains protected until the matter is resolved.

The two main reasons for a purchaser rescinding a contract are the vendor’s inability to transfer title or to give possession.

The vendor may be unable to transfer title to the property on the settlement date for a number of reasons.

If the vendor is unable to make title, the vendor is in breach of an essential term of the contract and the purchaser provided the purchaser is in a position to settle, can issue a notice of intention to rescind the contract.

The other most common reason for the vendor being in breach is the vendor’s inability to give possession of the property at settlement. If the vendor or a tenant of the vendor were still in possession of the property at the settlement date, then clearly the purchaser cannot be required to settle, and the vendor is in breach of an essential term of the contract. The purchaser could serve a notice of rescission and claim damages. It is also possible that an action for the specific performance of the contract could be taken. This is an application to the Supreme Court for an order requiring the offending party to a contract to comply with its requirements.

Even though the obligation to give possession is an essential term of the contract there can be degrees of compliance. If the vendor substantially complies with the obligation, then the purchaser must settle. If the property has basically been vacated but the vendor has left some goods on the property or a small amount of rubbish, the purchaser cannot refuse to settle. The purchaser must settle and then claim damages from the vendor for breach of contract.

An action for damages post-contract is usually of little value. Often the amount of the costs involved far outweighs the claim. However, in the majority of conveyancing transactions, both parties are anxious to settle because of contingent obligations. Negotiation is often the best course of action.

The same thing applies where there has been minor damage to the property or the goods. The purchaser cannot refuse to settle or hold back money. The only recourse is to settle and sue for damages after settlement. It is unwise to refuse to settle as the purchaser will be in breach of an essential term of the contract, giving the vendor the right to serve a notice of rescission.

If the contract is rescinded by the vendor under General condition 35, the vendor is entitled to the deposit and the stakeholder is required to pay the deposit to the vendor. Where the purchaser rescinds, the purchaser is entitled to the deposit and the stakeholder is required to pay the deposit to the purchaser. Where the deposit has been paid into a special purpose bank account, both parties must sign to withdraw it.

The money should be paid to the aggrieved party who rescinded the contract.

Sometimes both the vendor and the purchaser will claim to have rescinded the contract and a stakeholder will be placed in an invidious position, not being sure as to what to do with the deposit. If an agent holds the deposit, it would be prudent for the agent to transfer the deposit to the solicitor for the vendor, if any. In these circumstances, the deposit should be transferred intact and the agent makes separate arrangements for payment of commission and expenses. It would also be prudent for the agent to notify the purchaser’s conveyancing practitioner that this course of action has been adopted.

If the money is held in the vendor’s solicitor’s trust account, it would be prudent for the practitioner to confirm with both parties that the deposit will continue to be held at stake pending resolution of the dispute. If this course is not adopted, the purchaser could be justified in applying to have the deposit paid into court.

35. Default not remedied

General condition 35 provides for forfeiture of the deposit (but only up to 10 percent of the price) and makes it clear that the deposit is forfeited whether or not it has been paid. In this way, the whole or any part of the deposit which is unpaid at the point of forfeiture may be recovered from the purchaser even though the contract is at an end.

Additionally, if the vendor rescinds the contract then the vendor may, within one year:

  1. retain the land and sue for damages for breach of contract; or
  2. resell the land in such manner as he or she sees fit and recover any deficiency in the price on the re-sale and any resulting expenses by way of liquidated damages.

The vendor may also retain any part of the purchase price paid pending determination of damages and may apply for that money in satisfaction or part satisfaction of those damages.

These rights are in addition to any common law rights the vendor may have a claim for damages under this condition, when combined with common law rights, enable a vendor to claim a wide range of damages including:

  • any deficit between the contract and resale prices;
  •  expenses incurred in reselling the property;
  • loss of use of the contract consideration;
  • some of the holding costs on the land.

A vendor who did not resell the property within the stipulated time frame of 12 months may be deemed to have elected to retain the property. Damages would therefore be based on the losses established using the valuation as a benchmark. Where a resale took place outside the prescribed period of 12 months, a vendor may still be able to justify this if it can be established that, given all the circumstances, the property was sold within a reasonable time.

The vendor’s obligations in relation to a resale of property are akin to a mortgagee’s duty of care while exercising the power of sale conferred by section 77 of the Transfer of Land Act. In this regard, the vendor is obliged to take any appropriate action necessary to mitigate losses.

The purpose of any resale is to place the vendor in the position the vendor was in pre-contractually. The vendor is entitled to require the removal of a purchaser’s caveat upon rescission. If the purchaser does not voluntarily lodge or hand over a withdrawal of caveat, the vendor can lodge an application for removal under section 89A of the Transfer of Land Act.

General condition 35.4(e) provides that the vendor must take into account the amount forfeited in calculating damages.

Special conditions

As well as the particulars of sale and general conditions, a contract of sale will often contain special conditions. The standard contract has been refined to the stage now that special conditions will not be required to be added to a contract for a conventional residential sale. They may be needed for more complex transactions. They can be for the benefit of either or both parties to the transaction or because of the particular circumstances surrounding that transaction.

Special conditions have priority over the general conditions of the contract.

A significant number of special conditions that are added to contracts are superfluous. This can be because the subject of them is already adequately dealt with in the general conditions or because the condition is merely a restatement of the law. Before adding special conditions, stop and think about whether they will serve any purpose. If not, leave them out.

If required, the special condition should set out:

  • exactly what is to be done;
  • who is to do it;
  • by when it must be done; and
  • what happens if it is not done.

If it is not clear on any of these it will not be effective and could, in fact, be detrimental.

Following is an explanation of some common special conditions added to contracts. The superfluous ones mentioned above are not covered. 

Registration of plan

Section 9AE(2) of the Sale of Land Act provides that where a lot on an unregistered plan is sold, the purchaser may withdraw from the contract if the plan has not been registered within eighteen months. The right to terminate lies with the purchaser, not the vendor, if the plan is not registered within the stipulated timeframe. A special condition in the contract often specifies a period other than eighteen months and also gives the vendor the right to terminate if the plan is not registered within this timeframe. Section 2 of the Sale of Land Act now defines these as “sunset clauses”.

The exact definition is –

  • “sunset clause” means a provision of a residential off-the-plan contract that provides for the contract to be rescinded if–
  1. the relevant plan of subdivision in respect of the lot has not been registered by the sunset date; or
  2. an occupancy permit has not been issued in respect of the lot by the sunset date;
  • “sunset date” means a date that is–
  1. specified in a residential off-the-plan contract as the latest date by which the relevant plan of subdivision must be registered or the occupancy permit must be issued; or
  2. an extension of the date referred to in paragraph (a) that is determined in accordance with the terms of the contract;

Sections 10A, 10B, 10D, 10D, 10E, and 10F now regulate the use of sunset clauses by vendors. They can only rescind the contract in accordance with these sections. This applies to contracts entered into on or after 23 August 2018.

A vendor can only rescind with the consent of the purchaser after providing information about the reason for the delay and why the vendor wants to rescind. An inconsistent condition in a contract will be of no effect.

Where a purchaser will not agree to the contract being rescinded the vendor may make an application to the Supreme Court for an order that the contract is rescinded.

Sometimes, between the date of the contract and the plan being registered, amendments need to be made to the plan or discrepancies are discovered. These may have an impact on the enforceability of the contract. Contracts will often contain a special condition entitling the vendor to make changes to the plan. However, any rights a vendor may have in this regard are tempered by legislation.

Section 9AC of the Sale of Land Act requires the vendor to notify the purchaser in writing of any amendment to be made to the plan. If these amendments materially affect the land then the purchaser may elect to withdraw from the contract within fourteen days of receiving the notice. There have been some cases that provide guidance in determining whether an amendment to a plan will materially affect a lot.

This includes:

  • it is to be determined objectively, taking into account the facts and circumstances;
  • the reason for the amendment is not relevant;
  • the amendment need not be detrimental but is more likely to be material if it adversely affects the purchaser’s interest; and
  • whether the purchaser has purchased more than one lot on the plan.

Prior to obtaining a statement of compliance, the surveyor is required to give a notice in relation to marking out of boundaries. Section 9AHprovides that if this notice discloses a significant discrepancy the purchaser may refuse to proceed with the contract. This right is lost if the purchaser has on-sold the property or if more than eighteen months have elapsed from the day of sale.

Section 10 also relates to amendments to plans between the day of sale and registration of the plan. It provides that where any amendment that restricts or limits the use of the lot is made then the purchaser may withdraw from the contract. If the amendment to the plan results from a requirement of a referral authority, the purchaser does not have the right to withdraw from the contract. Section 10(2) allows for a special condition restricting these rights by providing that they do not apply in respect of the final location of an easement.

Building works to be done – “off the plan”

Quite often a property is sold “off the plan” involves the construction or completion of the building. If this is the case, under section

137E of the Building Act a person must not enter a contract to sell a home if that home is to be or is in the process of being constructed and the contract provides that construction will be completed prior to a settlement unless:

  • the home is being constructed under a major domestic building contract;
  • the contract of sale of land provides that the home will be constructed under a major domestic building contract; or
  • the contract for the sale of land is a major domestic building contract.

The expression “major domestic building contract” has the same meaning as it does in the Domestic Building Contracts Act, which basically means any contract for the carrying out of building work for a price of more than $16,000. One of the requirements in relation to major domestic building contracts is that the builder must be a registered builder. The purpose of section 137E is, therefore, to ensure that no one other than a registered builder can enter into a contract to sell a property that provides for the building works to be completed between contract and settlement unless such building works are to be undertaken by a registered builder. If a vendor who is not a registered builder wishes to sell a property on this basis, then that vendor must engage a registered builder to carry out the works.

Where the vendor is a registered builder, it is possible for that vendor to enter into a contract for the sale of land which provides for the completion of works. The problem is that this then becomes a building contract and must comply with the requirements in relation to building contracts. It is difficult to comply with the Sale of Land Act requirements in relation to “off the plan” sales and the requirements in relation to building contracts under one contract. There are different cooling-off periods and different provisions in relation to the amount of deposit that can be paid. It also gives rise to jurisdictional problems if there should be a default under the contract. It is, therefore, advisable not to enter into this type of contract. An alternative approach to overcome this problem is for the vendor to sell the property as it is and then enter into a building contract to complete the other works. A special condition is often incorporated into contracts for the sale of properties in this situation.

Where the vendor is not a registered builder but rather engages a registered builder to construct the works, then the special condition provides that the vendor has, or will, enter into a major domestic building contract with a registered builder and section 137E is satisfied.

Works affecting the natural surface of the land

Section 9AB of the Sale of Land Act requires a vendor selling “off the plan” to provide details of any works affecting the natural surface level of the land. Accordingly, if the land is to be filled, the vendor is required to provide information about this. This is important for a purchaser as it may affect the type of building that can be constructed. A clause is often inserted in the contract whereby the purchaser acknowledges that the land may be filled and agrees to make no objection requisition or claim any compensation in this regard.

Excavation for roads or services, landfills, and contouring of the land are all types of works that would affect the natural surface level of the land. If these works are to be carried out after certification of the plan but before the contract is entered into, or if they are being carried out, or are proposed to be carried out, at the time the contract is entered into, the vendor must provide details of them in the contract. Any engineering plans relating to the work lodged with the council or referral authority should be attached to the contract.

Where this work is carried out or is proposed to be carried out after the contract is entered into but before registration of the plan, the vendor must provide details of them and the engineering plans to the purchaser as soon as the vendor becomes aware of them. This must be done in writing.

Conditional on sale of another property

This condition is used where the sale is conditional on the purchaser selling another property. Usually, the equity from the purchaser’s property will be required to complete the current contract. The condition specifies timeframes, consequences, and sometimes the proof required by the vendor where the property is not sold on time.

Conditional on obtaining approvals – planning, building, etc.

The sale may be subject to approval being obtained for a specific use of the property. Examples are planning permits to use the land in a certain way or a building permit to build a certain type of structure.

Foreign Investment Review Board approval

The Foreign Acquisition and Takeovers Act 1975 (C’th) imposes restrictions on non-residents of Australia purchasing a property. Quite often some provision will be made in relation to this. It normally involves the purchasers warranting that they are not restricted by this legislation from purchasing the property or that the purchasers have obtained any necessary consents in relation to the purchase.

If the purchaser is prohibited from purchasing the property under the Foreign Acquisition and Takeovers Act or if the necessary consent has not been obtained from the Foreign Investments Review Board, this does not affect the validity of the contract. It is still enforceable by the vendor even if consent is not given. It could, however, open the purchaser to penalties and forfeiture of the property. In many cases, the purchaser will be required to sell the property at a loss due to the forced nature of the sale.

It is, therefore, vital for purchasers to ascertain whether there are any restrictions imposed on them under this legislation. If the consent of the Foreign Investments Review Board is necessary, then the contract should not be signed until that consent has been given or, at the very least, it should be expressed to be conditional on that consent is obtained.

Deposit investment

Sometimes there is a lengthy period between payment of the deposit and final settlement, especially with “off the plan” sales. The parties often agree for the deposit to be invested. This condition will deal with payment of the interest in situations where the contract is rescinded, avoided, or completed.

Environmental – contamination, asbestos, etc.

Before land or buildings can be developed there may be requirements to remedy any current contamination to a certain level. Although there is no specific requirement to disclose contamination or the presence of asbestos pre-contractually, if a vendor is aware of them, reports and details will often be provided in the contract to avoid being caught under the trade practices principles. A clause should be included to absolve the vendor from any liability that may flow from the contamination.

Mortgagee sale

In mortgagee sales there can be a number of special conditions. They include the vendor (mortgagee) giving details of its capacity to deal or sell the land and also specifically excluding any goods owned by the mortgagor from the sale.

Purchaser’s access

If the land is a lot on an unregistered plan of subdivision, section 9AB of the Sale of Land Act entitles the purchaser to access the lot for any purpose connected with its proposed development. In a conventional sale, sometimes a purchaser will require access to the property for a specific purpose. When drafting this special condition, it is important to take care that access is restricted to a specific time for a specified purpose or purposes, such as measuring the dwelling for drapes, carpets, or other improvements. This will ensure that possession is not deemed to be given and the contract inadvertently turned into a terms contract.

Vendor to assist with applications, etc.

An example of a situation where this type of clause would be inserted is where an application for a planning permit was required to be made by the purchaser. The vendor would be required to sign this application and may also need to provide some additional details and information not known to the purchaser.

Executor sale

Sometimes an executor named in the will of the deceased will enter into a contract of sale prior to the grant of representation is obtained.

In this circumstance the contract will be entered into “conditional upon the vendor obtaining a grant of probate” and a special condition will attest to this. It is in order for an executor to take this course of action as the grant of probate merely formalises the executor’s appointment made in the will of the deceased. However, this right is restricted to cash contracts and an executor cannot enter into a terms contract. This is because the legal personal representative is not “presently entitled to become the registered proprietor” as required under section 29B of the Sale of Land Act.

An administrator is not able to enter into any contract of sale prior to the formal grant of administration is made. There is no will to initiate the appointment and an administrator does not come into being until appointed by the formal grant of representation.

Owners corporation

Section 66 of the Owners Corporation Act imposes an obligation on the subdivider to convene the first meeting of the owner’s corporation. The difficulty with this provision is that it does not contain any sanctions or penalties for a subdivider who fails to comply with its requirements.

Accordingly, many developers do not comply. This means that once the sales are settled, the purchasers are left to organise the owner’s corporation themselves. This can cause considerable confusion and often results in the owner’s corporation never actually functioning. This is a most unsatisfactory position, especially in relation to public risk insurance for common areas. It is, therefore, important for a purchaser to ensure that there is a condition in the contract requiring the vendor to comply with his or her obligation under the Act.

Guarantee

As the contracts are often signed by a director on behalf of the company rather than under the company seal, General condition 2 imposes liability for the performance of the contract onto such a person signing on behalf of the company. A company search should always be obtained to ensure the party or parties signing the contract have the authority to do so.

General condition 3 entitles the vendor to require directors who have not signed the contract to sign a guarantee.

Additionally, a form of guarantee could be attached to the contract and a special condition in the contract can require this to be signed by all directors at the time that the contract is signed.

By incorporating these types of guarantees, the vendor is able to take action against the individuals involved with the company as well as the company if the purchaser defaults under the contract.

Adjustments

Where the property is being sold “off the plan” it will not be rated separately.  There will be one assessment for all the lots on the plan. Consideration needs to be given to the way in which rates are to be adjusted. The contract should contain some provision for this otherwise it will lead to unnecessary disputes. It will often provide for the total rates to be apportioned on the basis of lot liability, area, or some other formula.

This condition should also deal with liability for supplementary rates, back rates, and special land tax.

Land adversely possessed

Section 42(2)(b) of the Transfer of Land Act makes any land included in any folio of the Register or registered instrument subject to any rights subsisting under any adverse possession of that land. Adverse possession is continuous possession as a trespasser as against the registered proprietor of the land for a period of at least fifteen years.

Establishing possession will usually involve fencing or otherwise securing the land. With small pieces of possessory land adjoining the land to which the adverse possessor holds the title, the possessory land is often fenced into the titled property. A party in adverse possession can make an application under section 60 of the Transfer of Land to become registered proprietor of the adversely possessed land. In this regard, the applicant can rely on the possession of a third party provided the applicant can show the assignment of those possessory rights.

Sometimes, especially where a small area of “possessory land” adjoins the land to which the vendor is the registered proprietor, the vendor will also sell the vendor’s right title and interest, if any, in the land adversely possessed. Special conditions will include a stipulation that the vendor’s rights to certain parts of the property sold are possessory rights only and usually will give an undertaking to formally assign these rights to the purchaser.

Adverse possession cannot be claimed against the Crown or a municipal council. Nor can a member of an owner’s corporation make a claim for any part of the common property.

Creation of restrictive covenant

A plan of subdivision can create a restrictive covenant. However, it is more common for these to be created on the initial transfer of the new lot. The condition requiring this should also provide for compliance with the terms of the covenant prior to the purchaser taking the transfer.

This is because there could be a lengthy period between the day of sale and the date upon which a transfer is lodged for registration and it is important to bind a purchaser upon contract.

The process for creating a restrictive covenant has changed. It is now necessary for the covenant to be contained in a Memorandum of Common Provisions. Information about this can be found at.

https://www.propertyandlandtitles.vic.gov.au/__data/assets/word_doc/0021/116940/CIB-175-FINAL.docx

Positive covenants

At common law, a restriction on the use of land must be capable of being satisfied by complete inaction. Therefore, without the benefit of a statutory right, a covenant requiring some positive action is not capable of being registered on title. Sometimes, especially when the land is part of a new subdivision, the developing vendor will insert a clause whereby the parties agree contractually to a positive action being taken by the

purchaser in relation to the use of the land, usually within a specified period from the day of settlement. These positive actions are usually an endeavor to enhance and add value to the subdivision within a short timeframe. There could be a condition that construction of a dwelling is commenced or completed within a certain timeframe and that the purchaser will not sell the property without the written consent of the

vendor until a dwelling house has been erected.

Sometimes, in order to ensure compliance, contracts with these positive requirements also contain an irrevocable option for the vendor to purchase the property back from the purchaser upon certain terms and conditions and giving the vendor the right to lodge a caveat to protect this interest.

Section 173 agreements

An agreement under section 173 of the Planning and Environment Act is sometimes required to be entered into by the vendor under the terms of the planning permit relating to a subdivision. In these circumstances, it is prudent to not only attach a copy of the planning permission to the vendor statement but also to acknowledge the impending agreement in a special condition and confirm that the land is being purchased subject

to its provisions.

Stamp duty – land and building packages

There are a number of reasons why people buy “off the plan”. One reason is the potential savings in stamp duty. Stamp duty is only payable on the contract price less the amount paid in respect of construction costs after the date of the contract. The earlier in the construction phase of the building that it is purchased, the greater the savings in stamp duty.

This concession now has some limitations. It is only available where the property is to be used as the principal place of residence if the purchaser and the land component are worth less than $550,000.

Sections 21 and 22 of the Duties Act allow the purchase price to be apportioned between the value of the property at the time of the contract and the value of the work required to complete construction.

The contract should contain a condition, which sets out these respective values to ensure that the purchaser pays stamp duty on the lesser amount.

Annexures to the contract

There could be a number of annexures to a contract of sale, including:

  • engineering plans;
  • existing lease(s) over the property;
  • building plans;
  • environmental audit reports;
  • service agreements;
  • form of guarantee required.

These are often referred to in the body of the contract and identified by number. Their contents form part of the contract and it is important to read them carefully and explain them clearly to the client.