Harvey Fields Private Estates Pty Ltd v 33 Malcolm Street Pty Ltd [2012] WASC 218 (Malcolm Street Case)
Introduction
This is the first case to be decided in Western Australia on the issue of notifiable variations in respect of off the plan strata sales.
It is, therefore, a very important case for those in the property industry.
For the first time we have some clear guidance on this important issue.
Part V of the Strata Act
Part V of the Strata Titles Act (1985) WA (Strata Act) contains a number of provisions to protect buyers of strata lots off the plan. A developer is required to disclose:
certain information in the off the plan sale contract; and
“notifiable variations” in relation to the development as and when those changes occur.
A buyer has the right to terminate its sale contract if the developer fails to comply with these disclosure requirements.
Even if a “notifiable variation” is disclosed by the developer, a buyer can terminate the sale contract within seven working days if it can establish that it has been “materially prejudiced” by the variation.
The Malcolm Street Case is the first case to consider the term “materially prejudiced” under the Strata Act.
Facts of the case
Two buyers sought to terminate off the plan contracts to buy units in the “Scene Apartments” development on the basis that the unit entitlements were varied.
The developer disclosed to the buyers an amended schedule of unit entitlements which varied from the schedule of unit entitlements attached to the contract as follows:
for buyer one, the unit entitlement (as a percentage of the aggregate unit entitlement in the strata scheme) of the lot being sold had decreased from 5.1% to 3.696%; and
for buyer two, the unit entitlement (as a percentage of the aggregate unit entitlement in the strata scheme) of the lot being sold had decreased from 2.6% to 2.393%.
Each buyer sought to terminate their sale contract within the seven working day window provided in the Strata Act. The question to be determined by the Supreme Court was whether each buyer had been “materially prejudiced” by the change.
The buyers claimed to have been materially prejudiced by the change given it reduced each buyer’s:
voting rights at meetings of the strata company if a poll was called; and
share in the common property and the land subject of the strata scheme if the strata scheme was terminated.
Findings in relation to “materially prejudiced”
Justice Kenneth Martin considered case law interpreting similar legislation in Queensland and made a number of comments in relation to when a buyer will be “materially prejudiced”:
Material prejudice is to be assessed objectively but, nevertheless, having regard to the buyer’s realistic particular circumstances. The showing of material prejudice by a purchaser will require a demonstration of a degree of disadvantage by a purchaser which is substantial or of much consequence or ‘to an important extent’… [at paragraph 113].
To demonstrate material prejudice it is not necessary for a purchaser to show, to an objective standard, that had the purchaser been notified of the correct information, the purchaser would never have entered into the contract of sale in the first place. That threshold is set at too high a level. The perfect test is whether or not the purchaser has suffered a substantial disadvantage, not whether the contract would have been entered into or not [at paragraph 115].
Justice Martin accepted that a reduction in unit entitlements prejudiced a buyer’s voting rights and share in the land, the subject of the strata scheme if the strata scheme was terminated.
In considering whether the reductions to the unit entitlements were large enough to cause the buyers to be “materially prejudiced”, Justice Martin placed weight on the fact that the sale contract authorised 5% variations to the floor area of the apartment. In his view, this indicated that the parties had agreed that 5% variations were material.
Given the unit entitlements had been reduced by 27.53% and 7.96% respectively, Justice Martin concluded that the buyers had both been “materially prejudiced” by the change.
Error by valuer in calculating unit entitlements
It came to light that the valuer had erroneously prepared the updated schedule of unit entitlements based on a comparison of the areas of the lots in the strata scheme (and not the value of the lots). In fact, the unit entitlements should not have changed at all. However, this was discovered some time after the erroneous schedule of unit entitlements had been disclosed to buyers.
Justice Martin confirmed (citing a similar case in Queensland) that the buyers were entitled to rely upon the information provided by the developer (whether this information was correct or not) and exercise their rights under the Strata Act accordingly.
Manner of disclosure of notifiable variations
Justice Martin also commented that simply providing buyers with updated versions of the strata plan, by-laws etc, did not constitute adequate disclosure of the notifiable variations. In order to comply with the requirement to provide buyers with “full particulars” of notifiable variations, the developer must specifically bring to the buyer’s attention those notifiable variations (ie, by identifying for the buyer what has changed in the updated document).
Lavan Legal comment
In recent years, many buyers have sought to terminate off the plan sale contracts based on:
a failure by the developer to disclose (adequately or at all) changes to developments; or
the fact that disclosed changes caused the buyer material prejudice.
From a developer’s perspective, it is critical (particularly in a falling market) that changes to the development are limited as far as practicable and that all notifiable variations are disclosed properly and on time.
The Malcolm Street Case provides useful guidance on when a buyer may be able to terminate a contract on grounds that it has been materially prejudiced by a change to the development. The Malcolm Street Case also demonstrates the importance of scrutinising the accuracy of all materials disclosed to buyers as notifiable variations and ensuring that the buyer’s attention is adequately drawn to these variations in the disclosure.
