In the recent case of Midstyle Nominees Pty Ltd v Jordon, the WA Supreme Court considered the legal consequences of a developer entering into an off the plan contract in breach of section 13 of the Sale of Land Act 1970 (WA) (Act).
This is an important decision for developers, as it is the first case to determine the legal consequences of pre-selling lots earlier than allowed under section 13 of the Act.
Section 13 of the Act prohibits developers from entering into contracts for the sale of lots in a proposed subdivision before becoming, or being presently entitled to become, the registered proprietor of the land the subject of the subdivision. For the purposes of the Act, a developer becomes “presently entitled” to become the registered proprietor of land when it has lodged a transfer of land form at Landgate.
The Act does not state whether a contract entered into in contravention of section 13 is unenforceable or voidable. It only states that the developer may be fined $750 in respect of each breach of the section.
Buyers entered into off the plan contracts for the purchase of lots in the proposed Aqueous Apartments development at Mandurah Quay. The contracts were conditional on the developer becoming the registered proprietor of the land the subject of the proposed subdivision.
At the time of entering into the contracts, the developer was not the registered proprietor of the land (and was not presently entitled to become the registered proprietor of the land). The developer admitted that this constituted a breach of section 13 of the Act. This case concerned the legal consequences of that breach.
The buyers claimed that they had validly terminated their contracts on the basis that the contracts were voidable by the buyers at any time before settlement.
The developer claimed that the contracts were only voidable at the buyers’ election whilst the developer was in breach of section 13 (ie voidable until the developer became “presently entitled” to become the registered proprietor of the land).
In a short judgment, Justice Beech held that a contract entered into in breach of section 13 of the Act is voidable by the buyer but only whilst the seller is not “presently entitled” to become the registered proprietor of the land.
The main reason for Justice Beech’s decision appeared to be that the purpose of section 13 is to protect buyers against the risk that the developer does not become the owner of the development site and so cannot provide title to a subdivided lot. When the developer becomes the registered proprietor of the development site, such consumer protection is no longer required.
Lavan Legal comment
The impact of this decision, from a developer’s perspective, is that there is now no practical impediment to pre-selling lots in breach of section 13. This is because:
the off the plan contract can be conditional upon the developer becoming the registered proprietor of the development site. This protects the developer against the possibility that settlement of the sale of the development site does not occur; and
compliance with section 13 is not policed. Therefore, the potential exposure to a $750 fine in respect of each lot sold is not a practical concern.
Given obtaining sufficient presales is usually the last condition that a developer must satisfy in order to obtain development finance, this decision gives developers scope to commence presales early and thereby reduce holding the costs.
Previously, developers that had entered into contracts to buy a development site often sought for the seller to sign presale contracts on the developer’s behalf on the basis that the presale contracts could then be assigned to the developer at settlement. It appears that these more complex arrangements are now no longer required.
Although the decision currently represents the law on this issue, at this stage it is not known whether the buyers will seek (or have sought) to appeal the decision. As a result, developers should continue to adopt the more prudent approach to preselling in the short term.