[+] Size Matters: Court Decision Puts Victorian Developers on Notice

A recent Victorian Supreme Court decision ruling in favour of purchasers of an off-the-plan residential development has caused unrest among developers.

The decision found that a variation in the size of a lot, less than the 5 per cent tolerance rule, materially affected the lot in question—entitling the buyer to rescind an off-the-plan contract.

“I think the 5 per cent tolerance rule is fundamentally misunderstood,” SLF Lawyers property partner Brendan Hoogenbosch says.

“Firstly, it isn’t a rule. The purported rule is distilled from the courts comments in Buckley v Drk, which favoured 5 per cent as opposed to 2 per cent or 10 per cent, but the court ultimately determined the matter on an objective basis.”

SLF Lawyers represented the plaintiffs Sylvain Jean-Marie Taupenas and Edwin Alvarez Velasquez against the defendants, Longboat Holdings.

“In our matter, the defendants relied on Birch v Robek & Anor, which referred to Buckley and its application in respect of a suburban allotment of approximately 700sq m—but in the very next paragraph of Birch, the court noted that in smaller apartments, any difference in size could be expected to have a much larger impact.”

Buyers rescind after 4.4pc amendment

The case involved two similar off-the-plan contracts for residential apartments in West Footscray, Victoria. The purchasers sought to rescind the contract upon receiving an amended plan from the developer.

There were five changes reducing the lots by 4m, down to 91m from 95m, or 4.4 per cent. The main issue from the plaintiffs was that the master bedrooms were reduced in size.

The other material issues raised by the plaintiffs, which the judge viewed in their favour, were the size of the light court (reduced from original plan), the creation of a council reserve (previously common property) and exclusion from common property.

On a material change to the size and location of one of the assigned car park spaces, the judge ruled in favour of the developer.

The practicality of the 5pc rule

“I think there is very little utility in the purported 5 per cent rule,” Hoogenbosch says.

“First, it appears to be void under section 14 of the Sale of Land Act 1962; second, the purported rule to the extent it can be relied upon does not apply to multi-storey apartment buildings—at best it applies to a regular suburban lot and even that is doubtful.

▲ Longboat Holdings’ Eternity development at West Footscray: Two purchasers sought to rescind their contract upon receiving an amended plan from the developer.
▲ Longboat Holdings’ Eternity development at West Footscray: Two purchasers sought to rescind their contract upon receiving an amended plan from the developer.

“Third, these matters are always determined on an objective basis; and fourth, amendments to owners’ corporation common property, as in this case, and lot liability and entitlement, also in this case, have been held to materially affect the lot sold, even though those changes did not alter the boundaries or size of the lots in question—in these cases it is difficult to see how the 5 per cent rule could possibly apply.”

Purchasers have rights to rescind an off-the-plan contract under the Sale of Land Act 1962. This right comes into play where a change to the proposed plan of subdivision will materially affect the lot to be purchased.

The act requires vendors to notify purchasers in writing of amendments to the plan within 14 days of the amendments being made. A purchaser then has 14 days to rescind the contract if the amendments will materially affect the lot to be purchased.

“The issue is that amendments to the plans are often required—and all too often notification is not given,” Hoogenbosch says.

“This is because there is no penalty for failing to comply with the notification requirements, but there are risks that a developer will lose its sale if it does. In this case, notification of the amendments to the plan were known by our clients early on and we wrote to the developer about them, but formal notification of the amendment to the plan was not given until just before registration.

“The right to rescind is only enlivened after the notification of the amendment is given and as such the purchasers had to wait in order to exercise their rights to terminate.

“Had our clients been formally notified earlier, the vendor could have set about marketing the property prior to its completion and might have even been able to secure a further sale with settlement to occur on or about the same time as the rest of them.”

Court decision ‘won’t change anything’

As for agents, they will continue to be the middle party in all the discussions.

▲ Longboat Holdings’ Eternity development at West Footscray: Legal experts say the decision to end two buyers' contracts is only a positive for buyers.
▲ Longboat Holdings’ Eternity development at West Footscray: Legal experts say the decision to end two buyers' contracts is only a positive for buyers.

“The court decision is good because purchasers know that the 5 per cent tolerance is not being taken advantage of,” Castran Gilbert director Michael Lang says.

“They know now they can get protection from the court system.

“But it also works for the developer in that it forces them to have a deeper consideration rather than carte blanche to work within 0 to 5 per cent tolerance rate.

“The reality is that it hasn’t changed anything. It is a case-by-case basis.”

Lang said the biggest issue was the lack of communication between the two parties and if they had initiated dialogue earlier then court action could probably have been avoided.

“It is better to say to the purchaser at the time that the plans may change, which may or may not have an effect on whether the sale goes ahead,” Lang said.

“It is how you prepare and how you frame it. You should never wait until the building is complete.

“If there is an issue there may be some way we can work it out.”

Should developers be worried?

For developers, professional and clear communication with off-the-plan purchasers is essential, so there is no misinterpretation when it comes to the final plan.

Written communication clearly stating any changes is a must

“From a developer’s perspective my main view is that an issue you need to talk to the purchaser before it goes to court,” Oz Property Group director Raghav Goel says.

“The ruling is a wake-up call. The Sale of Land Act is continuously amended. I think the main change I can see is that developers and solicitors working together to ensure formal communication goes out.

“Plans change so it is about how that change is handled. Developers need to ask themselves what have they promised the purchaser? It is one thing to settle, another issue to make sure that they are happy.

“If the purchaser is not happy, it is not a good outcome.

“Dreams can change if plans change.”

▲ Longboat Holdings’ Eternity: Oz Property Group director Raghav Goel says the ruling is a wake-up call.
▲ Longboat Holdings’ Eternity: Oz Property Group director Raghav Goel says the ruling is a wake-up call.

The final word

Developers need to be circumspect about making changes to plans and informing purchasers at the last minute. Early and clear communication will, hopefully, avoid court cases.

Hoogenbosch believes that the outcome is only a positive for buyers.

“I think that this is a positive move for off-the-pan sales and can only have a positive impact on confidence for buyers to enter into these type of contracts,” he says.

“As this matter showed, the inclusion of special conditions aimed at curtailing the rights of a purchaser to terminate the contract where a material change to the plan has been made are not enforceable at law.

“I don’t think you will see a removal of these types of conditions from contracts, as they can have a deterrent effect on a purchaser exercising their rights—but ultimately these conditions will not stand up should a purchaser pursue the matter.”

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Article originally posted at: https://www.theurbandeveloper.com/articles/developers-material-change-can-terminate-contracts-victoria