Appeal Court Rules Against Off-the-plan Developer

Tim O’Dwyer

OPINION
by Tim O’Dwyer M.A., LL.B
Solicitor
Consumer Advocate
watchdog@argonautlegal.com.au

In August 2003 XYZ Holdings Pty. Ltd. entered into 11 off-the-plan contracts for the sale of apartments in a 20-unit residential building at a coastal town.   Settlement was due 14 days after the establishment of the Community Title Scheme for the building.  A “sunset clause” in each contract entitled either party to terminate if the project did not complete by 31^st December, 2005.

By September 2004 XYZ’s solicitors had written to the buyers’ solicitors:

Buying off the Plan?

“As construction costs have increased significantly and the residential market has experienced a down-turn, our client is unable to obtain satisfactory construction finance to proceed with this development.  Accordingly our client proposes that the contract be terminated by mutual agreement.”

Five buyers accepted this proposal.  The other six were not happy and, in July 2005, sued XYZ for breach of contract.  They later argued in court that, by not proceeding with the development,  XYZ committed an “anticipatory breach” of each contract.

XYZ responded that, despite the contracts’ December 2005 “sunset date”, nothing obliged it to establish the Scheme by then. Rather XYZ would use “reasonable endeavours” in that regard (which it had)  but, without construction finance, further steps to establish the Scheme “would have been futile”.

The trial judge ruled against the buyers because they did not establish that XYZ had not used its “best endeavours” to complete.

On appeal the buyers submitted that the trial judge had not considered two contract clauses which “unconditionally and expressly” obliged XYZ to build the apartments.  One clause stated (in part):  “The seller shall construct a multi-storey building …substantially in accordance with the plans…”

The other stated (in part):  “…the seller will ensure the building is constructed in a proper and workmanlike manner.”  The Appeal Court found these contractual promises by XYZ were “express and unequivocal” and not conditional upon the availability of construction finance.  “Best endeavours” or “acting reasonably” could not be implied.

While another contract clause enabled XYZ to extend the sunset date if unavoidable delays occurred, the Court disagreed with the judge’s interpretation that this impliedly meant XYZ could reasonably seek mutual termination of the contracts as it had.  Such an interpretation would make the contract “illusory” –  giving XYZ a discretion whether or not to perform the contract.

This interpretation was also inconsistent with the express obligations on XYZ to build by the sunset date.  Although no term expressly obliged XYZ to establish the Community Titles Scheme, such action was nevertheless necessary for the contract to make sense.  Because the mutual promises/obligations to pay the price and convey title depended upon the Scheme’s establishment, no parties could benefit from the intention of the contracts – unless the Scheme was established.

The Court therefor implied into each contract a term whereby XYZ was responsible to do “all things reasonably necessary” to establish and register the Scheme by 31^st December, 2005.

One thing particularly necessary to achieve this end was that the building be constructed in time.  As a result the Court ruled that not building at all would be a breach of contract.

Because XYZ was contractually obliged to complete the building and establish the Scheme, the Court found there had been a “clear repudiation by anticipatory breach of the contracts”.

So the buyers’ appeals were upheld.

The Court proceeded to award damages – in December 2011 – not only for incidental costs but also for the differences between the August 2003 contract prices (ranging from $355,000 to $595,000) and the apartments’ market values as at the 31^st December 2005 sunset date.

For this purpose the Court accepted a report from a valuer who firstly assessed the value of each apartment, if built in accordance with the contracts, as at June 2005.  These assessments were then reduced by 6% to reflect December 2005 values. This approach was taken, the report explained, because the local market had declined that much in the second half of 2005.  The result was that the final values of the six apartments as at 31^st December 2005 ranged from $578,100 to $799,000.

This illustrated a now-rarely-seen example of where off-the-plan properties increased in value between contract date and completion date.  Needless to say, both dates here preceded a more recent downturn in property prices.

(A version of this article first ran in Australian Property Investor magazine.)