Introduction
The Western Australian Court of Appeal was recently required to consider, at length, the definition of a ‘terms contract’ under the Sale of Land Act 1970 (WA) (Act). The disparity amongst the judges’ reasons for decision creates some confusion around the Court’s interpretation of the definition of ‘terms contract’ under the Act.
However, the decision highlights the importance of taking care when dealing with a contract that includes terms whereby the purchase price is paid in instalments or the deposit is to be paid in instalments made 28 days after the date of the contract.
Facts
On 3 September 2012, the buyer and the seller entered into a standard form offer and acceptance sale contract (incorporating the 2011 Joint Form of General Conditions (General Conditions)) for the sale of a property in East Perth for the sum of $2,090,000 (Contract).
The Contract was subject to a number of variations over the following months and the final iteration provided for a settlement date of 7 March 2013 and a deposit of $105,000 to be paid as follows:
Settlement did not occur as scheduled on 7 March 2013 and the seller served a default notice on the buyer on 21 March 2013 (14 days later) claiming the buyer was in breach of their obligations under clause 3.5 of the General Conditions and requiring them to complete settlement within 11 business days.
The buyer did not settle and the seller terminated the sale contract by written notice on 16 April 2013 for failure to remedy the breach.
The seller commenced proceedings by originating summons seeking declarations in effect that the contract had been validly terminated and the seller was entitled to the deposit of $105,000.
Relevant Law
Under s 5 of the Act, a ‘terms contract’ is defined as an executory contract for the sale and purchase of land under which the buyer is:
For the purpose of the definition in s 5, the word ‘deposit’ includes any part of the purchase price which the contract specifies as being a deposit and provides is to be paid, whether by one or more payments, within 28 days of the execution of the contract.
Under s 6(2) of the Act, a default notice for a terms contract must:
Reasons of the primary judge
The primary judge, Jenkins J1, was required to consider whether the contract was a terms contract, as defined in s 5 of the Act, and if it was, whether the contract had been validly terminated in accordance with s 6 of the Act.
Jenkins J found that the contract was a 'terms contract' within the meaning of s 5 of the Act by applying an exhaustive interpretation of the term 'deposit'. As a result Jenkins J formed the view that the payments made by the buyer 28 days after the execution of the contract, although labelled as a deposit, did not fall within the internal definition of ‘deposit’ under the Act and were ‘over and above’ the deposit.
Notwithstanding Jenkins J’s finding that the contract was a ‘terms contract’, her Honour concluded that the breach was not a failure to pay a sum of money and therefore was not a breach to which s 6(2)(a) applied. As such the buyer had been afforded a ‘reasonable time’ to remedy the default and her Honour made the declarations sought by the seller.
The issues on the appeal
The buyer appealed on the grounds that the primary judge erred in finding that the breach upon which the seller relied to terminate the contract was not 'a failure to pay a sum of money' and the seller filed a notice of contention by which they challenged the correctness of the primary judge’s finding that the contract was a 'terms contract'.
Appeal Court Findings
The appeal was upheld by a 2:1 decision with Justice McLure and Justice Newnes ruling in favour and Justice Murphy ruling to dismiss the appeal.
The appeal turned on whether s 6(2)(a) of the Act applied to the termination of the Contract.
All three judges respectfully disagreed with the view of the primary judge that the default relied upon to terminate the contract was not 'a failure to pay a sum of money' under s 6(2)(a) of the Act.
The judges were unanimous in their view that in ‘failing to complete Settlement’ the buyer’s breach was, and was no more than, a failure to pay a sum of money.
Therefore the only issue in contest and the matter upon which the judges’ opinions greatly differed was whether the contract was a ‘terms contract’ under the Act and whether the internal definition of ‘deposit’ in the definition of ‘terms contract’ is an exhaustive or inclusive definition.
While Justice McLure and Justice Murphy upheld the appeal they applied conflicting interpretations of the internal definition of ‘deposit’ under the Act.
In contrast to both McLure J and Murphy J, Justice Newnes agreed with the primary judge and found that the internal definition of ‘deposit’ within the definition of ‘terms contract’ was intended to be exhaustive as the evident intention of the legislature was to confine the term ‘deposit’ to an amount that is so designated in the contract and is payable (whether by one or more payments) within 28 days of execution of the contract, notwithstanding the use of the word ‘includes’2.
Justice McLure applied an inclusive definition to conclude that the internal definition of ‘deposit’ served to extend the common law meaning to include all payments labelled as a deposit in the contract if paid within the nominated period and narrow the common law meaning to exclude payments that are in substance deposits if they are not labelled as such in the contract.
Similarly to McLure J, Murphy J found that the definition of terms contract was not an exhaustive definition but extended the general law meaning of ‘deposit’3. However, Murphy J concluded that the appeal should nevertheless be dismissed as the primary judge erred in her construction of the definition of ‘terms contract’ in s 5 of the Act4 and therefore the notice of contention should be upheld5.
Where McLure J and Murphy J differed was whether one or more of the 19 October 2012, 12 December 2012 and 1 March 2013 payments were part of the deposit at common law.
Justice McLure found that the payments were not a deposit at common law as the payments were so remote in time from the date of entry into the Contract and when it became unconditional as to be inconsistent with an inference that the primary purpose of the payments was to bind the bargain and provide security for its performance.
In contrast to McLure J, Murphy J formed the view that each of the payments of 19 October 2012 and 12 December 2012 operated as part payments to seal the bargain and should properly be regarded as a deposit at common.
Implications of the decision
Whilst this decision does little to settle the Court’s position on the interpretation of the definition of a ‘terms contract’ under the Act, our view is that the inclusive interpretation of the internal definition of ‘deposit’ within the definition of ‘terms contract’ by McLure J and Murphy J is to be preferred.
However, care must be taken when drafting a contract that includes, or varying a contract to provide for, the payment of the deposit in instalments to ensure that the deposit is not merely labelled a deposit under the contract but satisfies the requirements of a deposit at common law.
Practitioners should also exercise caution when issuing a default notice or terminating a contract that includes terms whereby any payment towards the purchase price is to be paid 28 days after the contract date even if it is labelled as part of the deposit.
If a contract is a ‘terms contract’ under the Act this can have substantial ramifications far beyond the restrictions placed on a seller endeavouring to terminate when the buyer is in breach.
Sale of land under a ‘terms contract’ is governed by and subject to the restrictions in Part II of the Act which include:
If the requirements of s 7 and 8 of the Act are contravened by the seller, a buyer may, at any time prior to the registration of the transfer of the land to the buyer, but within one year of the buyer becoming aware of the contravention, commence proceedings for the cancellation of the contract.
In practice this can cause difficulties for developers, particularly if pro-forma ‘off the plan’ sale contracts are deemed to be ‘terms contracts’ under the Act by virtue of the deposit payment provisions or special conditions inserted by a selling agent at the time of negotiating the sale.
In light of this decision, off the plan sale contracts should, as standard, include a provision notifying the buyer of any mortgage, encumbrance, lien, or charge on the land or other registered encumbrance and an express acknowledgement by the buyer that this information has been provided prior to entering into the contract.
Developers should also review any existing contracts to determine whether deposits, if paid in instalments in excess of 28 days from the date of the contract, satisfy the requirements of a deposit at common law to see if the provisions of the Act are invoked. If the Act applies, consent from the buyer will likely be required before any encumbrances can be registered in the course of the development (such as mortgages) to secure debt funding or easements, restrictive covenants, or notifications that may be required as a condition of subdivision or development approval. This can cause obvious difficulties to developers.
Finally developers should ensure that their selling agents exercise caution if a buyer wishes to include terms which allow for a deposit to be paid in instalments in excess of 28 days from the date of the contract which may include seeking legal advice to confirm that the deposit complies with the requirements of a deposit at common law.
1 Chan v Du Buisson Perrine [2014] WASC 219; BC201405029
2 Du Buisson Perrine v Chan [2016] WASCA 18 at [58]
3 Ibid at [127] – [134]
4 Ibid at [157]
5 Ibid at [182]
