Avoidance of off the plan contracts – Recent developments

The Strata Titles Act 1985 (WA) (Act) is a largely untested consumer protection legislation notorious for imposing upon developers disclosure requirements which are vague and onerous.

In Strzelecki Holdings Pty Ltd v Jorgensen1, the court addressed the following matters:

  • What constitutes a “notifiable variation” under section 69C of the Act.
  • Whether the contractually agreed permitted variation in the floor area of the lot being sold can reduce a vendor’s disclosure obligation under the Act.
  • Whether the termination of a contract extinguishes the purchaser’s right to avoid the contract under section 69D of the Act.

This case is particularly pertinent to developers as the off the plan apartment market stalls and purchasers start looking for ways to avoid their contracts.

Background

Mr and Mrs Jorgensen entered into an off the plan sale contract to purchase an apartment from Strzelecki Holdings Pty Ltd (Strzelecki) at The Oceanic Retreat in Mandurah. The use of the apartments at The Oceanic Retreat was restricted to short-term accommodation due to the tourism zoning of the property.

Adverse market conditions soon made it difficult to sell short term accommodation apartments and Strzelecki was successful in lifting the short stay restrictions on the remaining 14 apartments (out of 56) to be sold by an amendment to the development plan.

The strata plan registered at Landgate (Registered Plan) ultimately differed from the strata plan in the Jorgensens’ contract (Contract Plan) in the following respects:

  • the Registered Plan, unlike the Contract Plan, contained an endorsement which restricted only the use of those apartments already sold by Strzelecki to short stay accommodation (i.e. 42 of the 56 apartments);
  • a 266m2 portion of the basement car park previously shown as common property on the Contract Plan was designated as forming part of strata lot 57 in the Registered Plan; and
  • the area of strata lot 14, the Jorgensens’ lot, in the Registered Plan was increased from 92m2 to 98m2.

The changes above were not notified to the Jorgensens but were subsequently discovered by them through their own investigations.

The Jorgensens did not settle under the contract and Strzelecki issued a default notice, terminated the contract due to the Jorgensens’ default and subsequently began proceedings claiming damages and entitlement to the Jorgensens’ deposit.

The Jorgensens claimed that they were entitled to avoid the contract in accordance with section 69D(1) of the Act as Strzelecki had failed to disclose notifiable variations to them. Strzelecki denied that the changes were “notifiable variations” and also claimed that the Jorgensens’ right to avoid the contract was precluded by Strzelecki’s purported termination of the contract.

Statutory provisions

Section 69C(1) and (2) of the Act requires the vendor of a strata lot (built or proposed) to inform the purchaser of “full particulars of any notifiable variation” as soon as the vendor becomes aware of the variation.

Under section 69C(3), a “notifiable variation” includes when the registered or proposed strata plan is varied in a material particular or the registered strata plan differs in a material particular from the proposed strata plan.

If the vendor fails to notify the purchaser of a variation in a “material particular” as soon as it becomes aware of that variation, the purchaser has ‘a right to avoid the contract by notice in writing given to the vendor before the settlement of the contract’ pursuant to section 69D(1). If the purchaser elects to avoid the contract, it is entitled to a refund of its deposit paid under the contract in accordance with section 69E.

Notifiable variations

On appeal, the Court of Appeal of Western Australia found that:

  1. the additional endorsement of the use restriction on the Registered Plan was not a “notifiable variation” as it is not a difference in a “material particular”. This is because the use restriction was contemplated within the contract provisions and the change of use only affected the balance 14 lots which were unsold at the time of registration;
  2. the increase of the Jorgensens’ lot by 6m2 (approximately 7.7%) was not a “notifiable variation” as a change of 7.7% was not a change to the strata plan in a material particular. This is discussed below; and
  3. the transfer of 266m2 of common property to strata lot 57 was the only notifiable variation which Strzelecki was obliged to notify the Jorgensens of. It was a change to a material particular of the strata plan.

The Court found that the Jorgensens were entitled to avoid their contract and have their deposit refunded as Strzelecki had failed to disclose the notifiable variation to the Jorgensens. This was the case notwithstanding the fact that the Jorgensens were not materially prejudiced by the transfer of 266m2 of common property to strata lot 57.

      Change in the area of the strata lot – Can you contract out of your disclosure obligations?

      The Court found that the increase of the Jorgensens’ lot by 7.7% was not a change to the strata plan in a “material particular” and therefore did not need to be disclosed to the Jorgensens.

      In coming to this conclusion, the Court placed reliance upon special condition 7 of the contract which provided that the Jorgensens:

      “…must not make any objection, requisition or claim for compensation nor terminate this Contract in respect of any variation in the actual floor area of the property as shown on the Strata Plan as registered with [Landgate] of less than TEN PER CENT (10%) to the floor area of the Property shown on the Proposed Strata Plan.”2

      While variations of this extent can sometimes be considered a change in a material particular, in this case the Jorgensens’ contract pre-approved any changes of less than 10% to the floor area of the property.

      Whilst it is not possible to contract out of the disclosure provisions in the Act,3 the Court explained that the variation provision in a contract is relevant in determining the “objective significance of the change” which the parties have agreed to in the contract. The Court referred to the Harvey Fields case4 where a variation of 7.34% was considered material and therefore constituted a notifiable variation as the contract in that case provided for a 5% threshold for changes to the floor area.

      The contract provision authorising 10% variations to the floor area of the property was clearly beneficial for the seller in this case. However, caution should be exercised by developers in adopting such a robust variation provision in contracts to which the unfair contract term provisions of the Australian Consumer Law may apply.5 There is a risk that such a provision may be considered unfair on the basis that it goes beyond what is reasonably required to protect the vendor’s legitimate business interests with the result that the provision could be declared void.

      Does termination under the contract prevent exercise of rights under the Act?

      Strzelecki also argued that it had already validly terminated the Contract and as such, there was no contract for the Jorgensens to avoid.

      However, both the trial judge and the Court of Appeal found that Strzelecki’s purported termination of the Contract, albeit valid, did not preclude the Jorgensens’ from exercising their statutory right to avoid the Contract under section 69D of the Act.

      Once the Jorgensens exercised their right to avoid the Contract, the ‘rights and liabilities of the parties were no longer to be determined by reference to the Contract. From the point of avoidance, the parties’ rights and obligations were to be determined as if they had never entered into the Contract’.6 From the point when the Jorgensens’ right to avoid the Contract was exercised, the Jorgensens were no longer liable to pay damages claimed by Strzelecki for breach of the terms of the Contract. The Jorgensens were also entitled to the refund of their deposit.

      Conclusion

      This case illustrates the extent and pervasiveness of the protections afforded by the Act to purchasers. In particular, it highlights the importance of developers being vigilant in notifying purchasers of any variations which may be considered to be “notifiable variations” under section 69C of the Act. As was the case here, the cost of failing to comply with the obligations under section 69C of the Act can mean that the entire contract is avoided.

      As demonstrated in this case, developers will also benefit from incorporating a realistic objective threshold in relation to potential variations to strata lot areas. Clear drafting in this respect will set an “objectively significant threshold” which may aid a court in determining whether a certain variation constitutes a “notifiable variation” that is required to be disclosed to a purchaser.

      02 February 2017
      Property Updates
      AUTHOR
      Peter Beekink
      Partner
      AUTHOR
      Tim Morgan
      Partner
      SERVICES
      Property and Leasing


      FOOTNOTES
      1 [2016] WASCA 177. 2 Above n1 at [64] 3 Strata Titles Act 1985 (WA) s 70A 4 Harvey Fields Private Estates Pty Ltd v 33 Malcolm Street Pty Ltd [2012] WASC 218 5 Competition and Consumer Act 2010 (Cth) sch 2 pts 2,3 6 Above n1 at [101]