Australia: Pre sales contracts - building the defences

Market conditions have created a difficult environment for developers (particularly of residential product) and emphasised the importance of the enforceability of pre-sales contracts against a background of shifting market conditions and values.

Background

Litigious activity focused on pre-sales in projects completing during and after the GFC shows that buyers will seek whatever mechanisms are available to them to avoid a accepting an asset with diminished market value and to mitigate their changed financial circumstances. Large projects that may run for an entire property cycle have been particularly exposed to this attitude.

New projects face considerable implementation thresholds (well in excess of pre-GFC requirements) in limited or patchy markets, uncertainty about future values on completion and high pre-sales and debt cover ratios. Pre-sales remain a keystone for project underwriting but recent experience has raised scepticism about their value if litigation is the only option for enforcement.

Attacks on pre-sales contracts have traditionally focused on technical non compliances with consumer legislation, especially in Queensland where the legislative framework has over time provided a buffet of termination arguments for buyers to choose from. Recent steps to reduce complexity and remove technical grounds for overturning contracts in Queensland are accordingly welcomed (and commented on further below) as is the new Queensland State Government's pledge to reduce red tape and untangle development from it.

However, compliance with consumer protection requirements is and will remain a core issue for pre-sales in all jurisdictions and the introduction of the ACL unfair contracts regime is a new player in this field. Moreover, alleged misrepresentations are an almost mandatory basis for buyers to seek to circumvent contractual obligations. The lessons for developers from recent experience and judicial determinations are several.

Recent case law

Recent decisions in Queensland perhaps indicate that obsessive emphasis on the "consumer protection" element of legislative policy won't always be a barrier to enforcement of contract commitments.

The decisions of Mirvac Queensland P/L v Horne & Ors1 and Mirvac Queensland Pty Ltd v Beioley & Anor2 concerned contracts in the same development. The Queensland Supreme Court was asked to consider whether a change in the configuration of a lot (in one case, a change to the floor area of the lot and in the other, a change to the lot balconies) triggered the rectification statement obligations under Queensland's Land Sales Act 1984 and in turn termination rights. The Court, in both cases, qualified the legislative trigger to give further disclosure by reference to contractual provisions that allowed the developer to vary the area and configuration of the lots within certain parameters. This was notwithstanding a prohibition on contracting out of the statutory disclosure obligations. The concept of what was sold was related to the right of the seller to change the area of the lot within a 5 per cent tolerance and any change within that range did not result in the statutory triggers for further disclosure applying.

The Court arguably went further in Beioley where despite the area of the balcony changing by more than five per cent, there was no inaccuracy in the originally disclosed material if the lot remained as substantially shown in the disclosure statement, including in respect of function and amenity – the changes to the balcony area alone were not considered to change the nature of what was sold in material way.

These cases emphasise the need to consider how disclosure material will be reviewed by buyers and may change over the course of a project between point of sale and settlement. It is not enough to satisfy the obligation as to what is to be disclosed initially. Developers' contracts must recognise the interpretations that may be applied to legislative requirements for further disclosure and use (to the extent permitted) contractual provisions to limit the triggers for further disclosure.

Buyers have also sought to use statutory disclosure regimes as alternatives to pleading misrepresentation claims (which may have a different evidentiary basis). Termination rights for material prejudice created by a change to disclosed information are given under legislation in Queensland (and in other jurisdictions). Buyers may seek to use an "inaccuracy" in disclosed information as a "foot in the door" to argue that they will be prejudiced by what might be seen as, objectively, remote risks.

For example, in the Oracle decision – Gough & Anor v South Sky Investments Pty Ltd3 (and related cases involving other buyers in the development) - the Court was asked to accept that the on-site management operation as implemented changed the nature of the development from a residential tower to a hotel operation, in turn making disclosure inaccurate. The Buyers argued that they were materially prejudiced by that inaccuracy (for a range of reasons). The Buyers also argued that the branding of the building had changed making initial disclosure inaccurate and the change in branding was also prejudicial to them. They also sought to link increased use of facilities by short term visitors and a deprivation of a sector of the rental market (i.e. long term rentals) by virtue of the on-site operation being focused on short term stays as grounds for material prejudice.

The Court rejected that view that any contractual commitment had been made as to what type of residential tower would be developed or that the nature of the on-site operation was confined to long term tenancies by virtue of the disclosed management rights agreements. The fact that hotel style services were available did not mean that the tower ceased to be a residential tower and in substance the developer had delivered what the contract required – a lot in a residential tower. Moreover the disclosure made was accurate because it referred to a residential tower and that had not changed.

In considering the statutory provisions governing further disclosure and termination rights, the Court noted that the fact that some people might label the building a hotel did not make the disclosure statements as issued inaccurate – the Court had found that the building was still a "residential" tower despite the nature of services offered and which had been identified in the disclosed material from the outset. While the name of the building had changed and this was an inaccuracy there was no material prejudice found to have been caused by that inaccuracy. Nor did the Court accept that the buyers suffered prejudice because the building may or may not be attractive to a class of potential occupiers – short term or long term occupiers and it rejected the idea that the disclosure statement had made any particular statement as to the mix of occupants that could be the basis for an inaccuracy.

The forensic examination in the Oracle decisions of the substance of the contract (that is, what was offered – a lot in a residential tower), the incorporation of disclosed material as terms of the contract and the impact of the tower not being branded as originally forecast confirms the importance of ensuring that contractual terms are consistent with disclosed material and point of sale representations. Any discrepancy will be a potential ground for termination utilising statutory disclosure rights if the buyer can prove the developer has failed to deliver what it contractually provided for or changes mean that the buyer is disadvantaged substantially or to an important extent.

The Court in Oracle noted that matters extraneous to the disclosure statements, such as brochures and representations by sales staff may have created expectations in the minds of buyers but the disclosure statement did not make representations of that nature. It might be thought that the buyers could have run misrepresentation cases based on "extraneous matters" but that was not how these actions were pleaded. It may have been perhaps too hard for buyers to establish that representations were in fact made, that they were relied on, formed a significant part of the buyer's decision to contract and loss is attributable to the buyer acting on the representation. Those elements are not part of the consideration of the termination rights arising from statutory disclosure – the test of material prejudice in Queensland is one that focuses on the materials disclosed not extraneous materials.

Misrepresentation claims and disclaimers

While Buyers have sought to maximise use of statutory rights, they have not abandoned claims of misrepresentation and misleading and deceptive conduct, centred on point of sale disclosure and representations made by selling agents and/or developers. Many of these claims include alleged representations about value and returns, the lawfulness of uses and occupation as at the settlement date, the nature and basis of on-site management operations (similar to claims in the Oracle decision discussed above), views (a favourite in seaside projects) and other amenities as delivered.

Proposals in relation to a project that don't create inaccuracies in disclosed materials (and invoke statutory rights) may have an altogether different consequence from the perspective of buyers and reliance by them on conduct or statements made in the sales process.

The developer's defence to such attacks has traditionally been to rely on disclaimers and exclusionary language in advertising and promotional material and exclusionary provisions in contracts. However, these mechanisms suffer from a number of limitations, most relevantly that the exclusionary provisions are generally read narrowly and against those seeking to rely upon them. The Courts have generally said that for "No reliance" or similar exclusionary provisions contained in contracts to be effective, they must rectify the inaccuracy or misrepresentations complained of – which is difficult to do after the event and through generally worded clauses.

Rather than rely upon broad disclaimers, developers should establish an evidentiary protection against future claims. Appropriate instructions to sale teams and sales agents as to the parameters for the making of statements about a development is an integral part of any selling process. The decisions of Courts in Mirvac Queensland Pty Ltd v Tyan Pty Ltd ATF Tavakol Investment Trust4 (where the sales manual process was accepted as counting against the claimed representation) Nifsan Developments Pty Ltd v Buskley & Anor5 (where the buyer's evidence based on a course of dealings with the selling agent concerning views was preferred), and Avis & Anor v Mark Bain Constructions Pty Ltd6 (where the buyers specific statements pre contract as to the significance of views gave it a termination right) demonstrate this.

In the off-the-plan context, representations are usually those in respect of future matters and allegations will often be tested some years after the alleged time at which the allegations were claimed to have been made. A contemporaneous record of statements made and any particular matters of concern to the buyer should assist in removing the scope for different views about what was said and by whom. Developers would do well to include specific acknowledgments in their contract packages that are given by buyers prior to the buyer signing the contract and acknowledged as such. Such an acknowledgment would provide the opportunity for the buyer to state what representations it was relying on (if any) and for the seller to consider then what risk there is of accepting an offer on that basis.

Conclusion

In a shifting market buyers are refusing to complete contracts until forced to by Court order or relying on litigation as an escape route. Statutory sunset dates can run where contracts are not terminated but kept on foot pending litigation outcomes resulting in the developer being divested of all of its enforcement rights - Norton Rose Australia and its client Juniper Development Group achieved amendment to the Land Sales Act in Queensland in March this year to prevent that outcome for off the plan sales in Queensland.

Buyers' tactics affect the integrity of compliant pre-sales contracts from an underwriting perspective and make financiers nervous.

To counter this, developers must heed the lessons from the cases and look ahead when drafting contracts and disclosure. The sales process should involve embedded acknowledgments from buyers about critical matters. Claimed representations need to be identified at point of sale and not left to emerge several years later. In summary, protection for pre–sale contracts can be constructed if claims are properly anticipated in the first place.

Footnotes

1[2009] QSC 269
2[2010] QSC 113
3[2011] QSC 361
4[2010] QSC 333
5[2011[ QSC 314
6[2011] QSC 80

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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