Off the plan sales (Victoria) rescission risk - What changes to subdivision plans will "materially affect" lots? - Real Estate

SUPREME COURT UPHOLDS PURCHASER RESCINDING CONTRACTS OF SALE OF REAL ESTATE

In Lockwood v PSP Investments Pty Ltd [2013] VSC 10, the Victorian Supreme Court held that the purchaser had validly rescinded off-the-plan contracts of sale on the basis that the vendor's amendments to the plan of subdivision materially affected the lots the subject of the contracts.

THE FACTS

On 24 January 2010 Lockwood, the purchaser, entered into eight off-the-plan contracts of sale of real estate with PSP Investments Pty Ltd, the vendor, in respect of a proposed development in Windsor called Ecosquare. Four contracts related to apartment lots and four contracts related to car park lots to be developed at Ecosquare. None of the contracts were explicitly interdependent, i.e. there was no provision making completion of each contract conditional on the Vendor being able to complete the other contracts. The purchaser paid a deposit of $21,500 on each apartment and a deposit of $4,500 on each car park. Ecosquare was to comprise seven levels of 86 apartments and 10 car parks on the ground floor, as shown by the plan of subdivision attached to each contract.

In early 2012 the City of Port Phillip required the deletion of the car park lots from the plan of subdivision. Consequently, they would merge into common property. 'Lot 800', which was an area on the rooftop planned for a penthouse, was also deleted from the plan of subdivision and would merge into common property.

The vendor notified the purchaser of these changes to the plan of subdivision after it was registered. The purchaser then gave notice to the vendor that, pursuant to section 9AC(2) of the Sale of Land Act 1962 (Act), it rescinded each contract of sale of the apartment lots. The car parks no longer existed and were no longer available for sale. Accordingly, the purchaser demanded a refund of the deposits that it had paid in respect of all eight contracts. When the vendor refused to refund the deposits paid in respect of the apartment lots, the purchaser brought an application to establish that the contracts were validly rescinded pursuant to section 9AC(2) of the Act and for the return of the deposits under section 9AF of the Act.

THE ISSUE

The key issue before the Supreme Court was whether the amendments to the plan of subdivision materially affected the lots to which the contracts related, such that the purchaser had a right to rescind the contracts under section 9AC(2) of the Act.

Section 9AC of the Act provides:

If after a prescribed contract has been entered into and before the registration of the relevant plan of subdivision an amendment to the plan is required by the Registrar or requested by the vendor, the vendor shall within 14 days after the receipt of the requirement of the Registrar or the making of the request by the vendor (as the case requires) advise the purchaser in writing of the proposed amendment.
The purchaser may rescind a prescribed contract of sale within 14 days after being advised by the vendor under subsection (1) of an amendment to the plan of subdivision which will materially affect the lot to which the contract relates.

THE DECISION

The defendant contended that the deletion of the car parks did not materially affect the apartment lots as those lots remained largely unchanged. Even if the apartment lots were affected by the increase in common property and changes to lot entitlements, this did not deleteriously or adversely affect the apartment lots and therefore, the purchaser did not have a right to rescind.

The plaintiff contended that regardless of whether the amendment had the effect of improving rights, it would nonetheless materially affect the lot to which the contract related. In addition, the essential elements of the scheme as a whole had changed materially due to the deletion of the car parks. It was coincidental that the purchaser had entered into eight contracts and not four contracts for an apartment and a car park and therefore, the contracts for the apartments should be considered connected to the contracts for the car parks.

The Supreme Court decided the following:

For an amendment to a plan of subdivision to materially affect a lot, the amendment does not necessarily need to be deleterious, adversely affect the size or configuration of the particular lot or detrimental to the purchaser in order to give the purchaser a right to rescind;
It is entirely artificial to look only at each individual contract when common experience gave the mutual understanding that the acquisition of the car park, in short supply, would enhance the value to the plaintiff of each apartment;
In substance, the transaction as a whole was for four packages of an apartment and a car park; and
Even if the contracts were to be considered in isolation, the amendment materially affected the apartment lots both by removing the car park lots and by increasing the common property. The operation of section 30(1) of the Owners Corporation Act 2006 vested in the apartment owners a substantially greater proportion of common property and consequently there was a substantial change to the bundle of rights and lot entitlements/liabilities of each apartment lot owner.

The Supreme Court concluded that the deletion of the car park lots and the inability of the defendant to complete those contracts materially affected the apartment lots. Accordingly, the Supreme Court declared that the plaintiff had validly rescinded each apartment lot contract pursuant to section 9AC(2) of the Act and ordered that the deposit moneys be returned to the plaintiff pursuant to section 9AF of the Act.

THE IMPLICATIONS

This case highlights the importance of timing for developers. There was no concession for the fact that the deletion of the car parks was required by the local Council and that the development could not have gone ahead without the amendment. Accordingly, early in the process, developers should assess the likelihood that changes will be required to a plan of subdivision that will change lot entitlements and common property, and if so, the plan of subdivision should be approved before contracts of sale are entered into.

The decision highlights the need for plans of subdivision to be finalised as much as possible prior to entering into contracts of sale. Any subsequent changes should be kept to a minimum wherever possible.

Developers should take care to comply with the statutory requirements where section 9AC of the Act is triggered by any proposed amendments to the plan of subdivision.

When determining whether a proposed amendment materially affects a lot, developers should:

consider the affect of the amendment on the project as a whole – not just the physical impact on particular lots - and whether it changes the context in which the purchaser entered into the contract(s);
note that changes to common property and lot entitlement/liability can be treated as materially affecting lots; and
remember that even changes which are arguably beneficial to purchasers can be found to materially affect lots and create rescission risk.

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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