Earlier this year, the District Court of South Australia
delivered a decision that now means any debenture, fixed and
floating charge or security interest over land must be disclosed in
a vendor's statement (commonly known as a 'Form 1.')
Failing to disclose the interest will result in the Form 1 being
defective. Accordingly, a purchaser will retain their statutory
'cooling off' rights, at least until they become aware of
the non-disclosure of the security interest.
This means that cooling off periods could last for months or
even years depending upon when completion is to occur.
Background facts of the decision
Adelaide Hotel International Pty Ltd ("AHI") was the
owner of land in North Adelaide where it operated a hotel. The land
and hotel were subject to a mortgage with National Australia Bank
(NAB) which also had a fixed and floating charge ("the
charge") over all the assets of AHI. Place on Brougham Pty Ltd
("the developer") entered into an option to purchase the
land from AHI to develop the land into a community strata apartment
On 23 May 2005, Le Cornu and Kurda ("the purchasers")
entered into a contract with the developer to purchase one
apartment 'off the plan' for $2,999,000 with a deposit of
$299,990. At that time, the developer did not own the land.
Accordingly, the Form 1 related to a community lot that did not yet
exist. Further, the Form 1 made reference to the NAB mortgage but
made no mention of the charge.
The purchasers intended to on-sell the apartment for a profit
before completion by assigning their interest in the apartment to a
third party. They began marketing the apartment almost immediately
but were unable to find a buyer.
The purchasers became aware that the Form 1 was defective in
July 2007 and their solicitors advised them to stop marketing the
property and to rescind the sale contract by exercising their
'cooling off' rights. However, the purchasers continued to
market the property. Three months later the purchasers served a
'Cooling Off Notice' on the developer.
The developer disputed the validity of the Notice and responded
with a Notice to Complete under the sale contract. The purchasers
did not comply with the Notice to Complete and continued to market
the property. Subsequently, the developer terminated the sale
contract and retained the deposit. The developer eventually resold
the apartment after some time for $1,500,000.00.
In the litigation that followed the purchasers claimed they had
a right to 'cool off' and for the return of their deposit.
The developer disputed the claim and counterclaimed for the
difference between the sale contract price and the amount the
apartment sold for less the deposit forfeited.
Key findings of the Court
Non-existence of the community lot at the time the
Form 1 was produced
The Court found this did not render the Form 1 defective as it
only has to be correct at the time of service.
The charge secured "all moneys, costs, charges and
expenses" in connection with "the preparation,
stamping, registration, enforcement or release" of the
charge in addition to what was secured by the mortgage. In the
Court's view the charge should have been disclosed in the Form
1 as it impacted the land given it was a potential liability on the
land over and above the liability in the mortgage. The failure to
set out the prescribed particulars of the charge meant the Form 1
Affirmation of the sale contract
The purchasers failed to exercise their right to "cool
off" for three months after they received legal advice of
their right to rescind the contract. Further, they continued to
attempt to on-sell the apartment and by not rescinding the contract
they prevented the developer from being able to sell the apartment
at an earlier time in a declining market. The failure by the
purchasers to exercise their cooling off rights and their marketing
of the apartment after receiving legal advice meant the purchasers
elected to affirm the contract.
The purchasers' conduct was unconscionable in that they
induced an assumption in the developer that they were intending to
complete and they knew or expected the developer to rely on his
assumption. Accordingly, the purchasers were estopped from denying
the validity of the contract.
The Court dismissed the purchasers' claim for return of the
deposit; and found in favour of the developer for the forfeiture of
the deposit and payment of the vendor's loss on the resale,
What does this mean for the future?
Before preparing a Form 1 for land in South Australia, the
vendor's conveyancer or agent must now ensure that every charge
the vendor has is reviewed to ascertain whether it impacts the sale
property and should therefore be included in the Form 1
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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