Contracts for sale and the right to terminate – Check the facts first

The recent decision of CPPIB Credit Investments v Ren1  is a reminder of the need to carefully consider all terms, facts and circumstances prior to exercising a right to terminate a contract for sale.

The case

In April 2018, Ms Xia Kong and Mr Xin He entered into a contract for sale regarding a property in Warrawee, NSW (Contract).   Pursuant to the Contract, Ms Kong sold the subject property to Mr He for $11.5 million.   A deposit of $1.15 million was paid.

The circumstances surrounding the Contract were unusual.  The Contract was signed by Ms Kong as sole vendor.   However, on the certificate of title to the property, Ms Kong owned the property together with Jerry Ren as joint tenants.   Jerry Ren and Ms Kong were previously married but had since divorced.  As part of the divorce arrangements, there was a court order that Mr Ren transfer his interest in the property to Ms Kong.  

The Contract contained a warranty that Ms Kong was solely entitled to the whole of the legal and beneficial title to the property (Title Warranty).  It also gave Ms Kong an additional two months to arrange settlement if there was any restriction or impediment to settlement resulting from the discrepancy between the certificate of title and the beneficial ownership.

As expected, there were some complications associated with the settlement process. 

On 12 June 2018, Mr He’s lawyers sent a notice of rescission to Ms Kong’s lawyers.  Ms Kong’s lawyers disputed this notice and re-booked settlement.   Eventually, there was a revised settlement date and all parties attended settlement except for Mr He’s representatives.   At settlement, Ms Kong had everything required to pass title to Mr He.

Following on from Mr He’s failure to attend settlement, Ms Kong’s lawyers served a notice on Mr He to complete the Contract. The notice stated that in default of settlement, Ms Kong ‘will be entitled to terminate the contract’.  Ms Kong subsequently terminated the Contract and kept the deposit.

Mr He brought the matter to court, arguing (amongst other things) that the Contract was validly terminated by Mr He, that Ms Kong was in breach of the Title Warranty and also that he was entitled to relief against the forfeiture of the deposit.

The decision

The first issue was whether there was a breach of the Title Warranty and whether Mr He had a right to terminate the Contract.

The court considered the Title Warranty in its contractual and factual context.  On construction of the Contract and the title search attached to the Contract, it was clear that the parties knew that Ms Kong was not the sole registered proprietor.  The Contract contained a regime for Ms Kong to overcome impediments and only entitled Mr He to rescind if two months had elapsed.  Mr He’s termination ignored this regime.  

Interestingly, the Court had regard to the proposition in Bell v Scott,2 that a vendor need not have good title at the time of sale, as long as good title can be procured and given at the time of completion.  

Mr He was aware of the defects in Ms Kong’s title and the notice given by Mr He’s lawyers was a call upon Ms Kong to make good her title (as opposed to a termination of the contract).  The court ultimately found that Mr He’s purported termination of the Contract was invalid.

The second issue was the forfeiture of the deposit.  The Court considered the nature of the deposit, the terms of the Contract regarding forfeiture of the deposit and the actual circumstances in which the deposit was forfeited.  

In this case, Ms Kong, the outgoing mortgagee and the other relevant parties agreed to do what was required to enable settlement to occur and attended settlement with the documents required to transfer the property.   Further, Ms Kong’s subsequent notice to complete gave Mr He an opportunity to settle.

The Court reiterated that courts are not easily moved to return a deposit paid as an earnest for performance, and subsequently forfeited in accordance with the express terms of the contract.  Relief is only provided where there is an unjust and inequitable consequence of forfeiture of a deposit.

Ultimately, it was found that Mr He jumped the gun in rescinding the contract. He was required to comply with the relevant provisions in the Contract regarding termination and did not do so.  Also, his actions were inconsistent with seeking the remedy of rescission. As a result of Mr He’s failure to complete, Ms Kong suffered a substantial loss in respect of interest accrued on the loan secured by the mortgagee. Ms Kong was entitled to the deposit paid and the interest accrued on the deposit.

The impact

Parties should exercise care when terminating a contract. Because the courts are reluctant to return a deposit that is paid as an earnest (or security) for performance, it is important for a purchaser to carefully comply with the terms of the contract when seeking to terminate the contract.  Any party considering termination should be advised to give proper consideration to the terms of the contract, the relevant facts and surrounding circumstances.

31 October 2018
Property Updates
AUTHOR
Peter Beekink
Partner
AUTHOR
Jennifer Tropiano
Senior Associate
SERVICES
Property and Leasing


FOOTNOTES

[1] [2018] NSWSC 1568

[2] (1922) 30 CLR 387. Note: The general position in Bell v Scott is subject to express statutory provisions to the contrary. For example the Sale of Land Act 1970 (WA), contains a prohibition on entering into a contract for the sale of lots in a subdivision or proposed subdivision unless the vendor is the registered proprietor or another relevant exemption applies.