You cannot sell land you don’t own

The Western Australian Supreme Court of Appeal recently handed down the decision of Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75, where it found, among other things, that off the plan contracts, entered into in breach of s13 of the Sale of Land Act 1970 (WA) (Act), were unenforceable by sellers, but enforceable by purchasers.

This case was an appeal from the earlier decision in Midstyle Nominees Pty Ltd v Jordon [2013] WASC 85.

Section 13 of the Act essentially applies to the sale of:

• five or more lots in a broad acre subdivision or proposed subdivision; or
• two or more lots in a strata subdivision or proposed strata subdivision.

A person shall not sell any of such lots unless they are the registered proprietor, or presently entitled to become the registered proprietor of the land.

Critical issues

The critical issues that the Court of Appeal considered were:

• whether Parliament intended that a contract, made between a would-be vendor and a would-be purchaser in contravention of s13(1), be illegal and unenforceable; and
• if Parliament intended that a contract would be illegal and unenforceable, is the contract unenforceable only by the would-be vendor and, if so, does the contract remain unenforceable by the would-be vendor even if one of the conditions in s13(1) is satisfied after the contract was made?

The Court highlighted that the general rule at common law is that a contract is illegal and void if the making of the contract is expressly prohibited by statute.  However, the general rule is subject to any contrary intention manifested in the statute.

The Court found that the prohibition in s13(1) is directed towards would-be vendors who “shall not sell” any lots in the subdivision or proposed subdivision unless one of the conditions in s13(1) is satisfied.

The term “sell” is defined widely in s11 of the Act, to include:

• for valuable consideration:
  • assign an interest in;
  • assign the benefit of a contract relating to; or
  • confer a right to purchase; to acquire an interest in, or to acquire the benefit  of a contract relating to; and
• offer, hold one’s self out or advertise as being willing, or agree to sell or, for valuable consideration, to do as mentioned in the paragraphs above.

In analysing s13(1) of the Act, the Court of Appeal found that:

• the prohibition in s13(1) is concerned with the making of a contract and not with its performance.
• Parliament decided to forbid a would-be vendor, who is engaged in a relatively large sub-division project, from conferring a right to purchase or agreeing to sell, unless one of the conditions in s13(1) was satisfied at the time the contract is made.
• The fact that the text of s13 is silent in relation to the legal consequences of a contract being made in contravention of s13(1), indicates that the contract is unenforceable by the vendor and remains unenforceable by it even if one of the conditions is satisfied after the contract was made.
• The absence of any exceptions to the prohibition in s13(1) point against the contention that a would-be vendor, who has entered into a contract in contravention of s13(1), may enforce the contract or may enforce it if one of the conditions of s13(1) is satisfied after the contract was made.

In the Court’s opinion, when a would-be vendor makes a contract with a would-be purchaser for the sale and purchase of a lot, in contravention of s13(1), the contract is illegal and unenforceable by the would-be vendor.

Importantly, the prohibition is not confined to restricting sales.  It also extends to activities preceding the formation of a contract, including advertising by a seller that it is willing to sell.

Enforceability of the contract by the buyer?

In light of the above, the Court of Appeal found that when a would-be vendor makes a contract with a would-be purchaser for the sale and purchase of a lot, in contravention of s13(1), the contract is enforceable by the purchaser.  This was because, among other things, the prohibition in s13(1) is not directed to a would be purchaser, and s13(1) does not expressly or impliedly prohibit a purchaser from offering or agreeing to purchase any lots in a subdivision or proposed subdivision to which the provision applies.

The impact of this decision, from a developer’s perspective, is that there is now clarity on the previously murky position that the developers found themselves in as to whether or not presale contracts entered into in contravention of s13(1) were unenforceable.

Historically, some developers who have entered into contracts to buy development sites have sought for the seller to sign presale contracts on the basis that the presale contracts could then be assigned to the developer at settlement.  It appears that these complex arrangements are still required.  Existing arrangements may need to be reviewed from a contractual enforcement point of view given this recent decision.

Developers should continue to adopt a most prudent approach to preselling, and should review any presale contracts currently in play in light of this decision.