In Murphy v Mitanovski  SASC 158, the Supreme Court of South Australia considered:
- whether the vendor was able to prove that it had suffered loss in excess of the A$10,000 deposit amount (which was retained by the vendor following termination of a contract for sale of land)
- whether in certain circumstances a vendor under a terminated contract for sale of land has obligations to mitigate its loss (whether or not those obligations are specified in the contract).
In February 2010, the Appellant (Vendor) agreed to sell her Glenelg East home to the Respondent (Purchaser) for A$782,000 under a contract for sale of land (Contract).
When the Purchaser failed to complete the Contract in accordance with its terms, the Vendor served the required notice under the Contract on the Purchaser and the Contract was terminated in July 2010. The Vendor retained the deposit of A$10,000.
In September 2010, the Purchaser offered to purchase the property from the Vendor at a price of A$782,000, but stipulated that the Purchaser's forfeited deposit of A$10,000 was to be credited towards the purchase price (Purchaser's Subsequent Offer). The Vendor did not accept the Purchaser's Subsequent Offer because at that time, the Vendor had decided to retain the property. However, in October 2010, the Vendor again advertised the property for sale and sold it at auction in November 2010 for A$750,000 (to a party that was not the Purchaser).
The Vendor initiated proceedings against the Purchaser in the amount of A$32,000 (being the difference between the initial price under the terminated Contract and the price achieved under the later auction contract), together with other financing costs and agent's fees. In the first instance, the Magistrates Court of South Australia dismissed the Vendor's claim entirely. The Vendor appealed to the Supreme Court of South Australia.
Relevant Contract terms
The Contract provided that if:
- the Contract is terminated by the Vendor, then:
- the Vendor may either retain or sell the property (and in either event, may sue the Purchaser for damages)
- the Vendor may retain the deposit.
- the Vendor resells the property, the Vendor:
- may retain absolutely any surplus arising from the resale in excess of the original purchase price
- will be entitled to any expenses incurred by the Vendor in the resale
- will be entitled to all losses and expenses incurred by the Vendor resulting from the Purchaser's default.
Proof of loss
The Court cited the general principle in Carpenter v McGrath (1996) 40 NSWLR 39 that the measure of loss of a vendor of land who terminates a contract due to the purchaser's breach is the difference between the contract price and the market value of the land at the due date for completion.
One issue in this case was that the price ultimately achieved for the property at the auction was some four months after the due date for completion under the initial Contract. The Purchaser argued that there had been a decline in the value of properties in the market during that period and that therefore, the price achieved at the auction in November 2010 was not evidence of the value of the property at July 2010. The Court ultimately held that the price achieved at the auction in November 2010 was taken to be consistent with the value of the property at the date that the Contract was due to complete in July 2010. Accordingly, the Court found that the Vendor had established a loss of A$32,000.
Obligation to mitigate
The Purchaser argued that by rejecting the Purchaser's Subsequent Offer in September 2010, the Vendor failed to mitigate its loss. If the Vendor had accepted the Purchaser's Subsequent Offer, the Purchaser contended that the Vendor would have obtained the same price for the property and would not have incurred additional costs such as legal costs and finance costs.
The Court held that the question of whether a party has failed to act reasonably so as to mitigate his or her loss is a question of fact to be determined having regard to all of the circumstances in the relevant matter.
The Court found that the terms of the initial Contract entitled the Vendor to either sell or retain the property following termination of the Contract. On that basis, the Court found that the Vendor's refusal of the Purchaser's Subsequent Offer in September 2010 was not unreasonable (as it was open to the Vendor to retain ownership of the property).
However, one month later when the Vendor decided to sell the property, the Court's view was that it would have been reasonable for the Vendor at that time to notify the Purchaser that the property was to be back on the market and to make enquiries with the Purchaser as to whether it wished to renew its offer.
Given that the Vendor failed to make such enquiries with the Purchaser, the Court held that the Vendor had failed to take reasonable steps to mitigate its loss. The Court denied the Vendor's claim for the A$32,000 damages, finding that in light of the Vendor's failure to mitigate, the Vendor was not entitled to any sum greater than the forfeited deposit.
Lessons from this case
This case highlights the need to ensure:
- that vendors are aware that they may need to mitigate any loss that they suffer as a result of a purchaser's default giving rise to the termination of a contract for sale of land
- that contracts for sale of land include provisions which adequately address each party's position in the event of termination
- that vendors and purchasers are aware that their conduct may play an important role in any determinations to be made by a court in matters of this type
- vendors appropriately consider the potential ramifications of accepting a deposit that is less than 10% of the purchase price under the contract.
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.