Australia: Where to from here for developers of proposed subdivisions?

HG Litigation and Dispute Resolution Alert: 24 April 2014

A recent decision in the Western Australian Court of Appeal relating to Section 13 of the Sale of Land Act 1970 (WA) (Section 13) has major implications for local property developers, as it is now apparent that contracts that contravene Section 13 cannot be enforced by sellers.

In this Alert, Senior Associate Anthony Pitt and Associate Darren Zusman discuss the Court of Appeal's decision, and outline its consequences for land developers.

Key points

  • A contract that contravenes Section 13 is unenforceable.
  • Developers are now prevented from presenting sales contracts to banks prior to becoming the registered proprietor of the relevant land.
  • Contracts containing provisions which state that the contract is conditional upon the seller becoming the registered proprietor of the land will be rendered ineffective, should Section 13 apply.

The facts

In 2006, Midstyle Nominees Pty Ltd (Midstyle) entered into off-the-plan sales contracts with prospective purchasers for strata-titled lots in an apartment development in Mandurah. The sales contracts were conditional on Midstyle becoming the registered proprietor of the land by 1 June 2007.

At the time of entering into the contracts, Midstyle was not the registered proprietor of the land that was to be subdivided. Section 13 of the Sale of Land Act 1970 (WA) provides that a person is prohibited from selling two or more lots in a proposed subdivision under the Strata Titles Act 1985 (WA) unless they are the proprietor of the land. A contravention of that provision attracts a $750 penalty.

The purchasers, who wished to avoid their contractual obligations, sought to have three questions determined by the Court as preliminary issues, namely:

  1. Was the contract void by reason of Midstyle's breach of Section 13?
  2. If the answer to question one is no, was the contract voidable at the option of the purchaser in those circumstances?
  3. If the answer to question one or two is yes, has the purchaser avoided the contract?

Decision at First Instance

The matter, Midstyle Nominees Pty Ltd v Jordon [2013] WASC 85 (Decision at First Instance), was first heard by Justice Beech (Trial Judge) in the Supreme Court of Western Australia.

In the Decision at First Instance, the Trial Judge held that a contract entered into in contravention of Section 13 was:

  • not void, basing his finding on the fact that the defaulting seller would be able to avoid its contractual obligations if the contract were to be void, which was clearly not the intention of Parliament; and
  • voidable at the option of the purchaser, but only for so long as the seller is not the registered proprietor of the relevant land.

Court of Appeal decision

The purchasers appealed the Decision at First Instance to the Western Australian Court of Appeal in Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75 (Court of Appeal Decision).

The Western Australian Court of Appeal unanimously overturned the Decision at First Instance. Appeal Justice Buss wrote the leading judgment in the Court of Appeal's Decision, and found that:

  • The prohibition in Section 13(1) is concerned with the making of a contract, not with its performance.
  • Section 13 is designed to protect would-be purchasers from a specific risk that arises as a consequence of a seller not being the registered proprietor of the land when the contract is made. The risk was the seller being unable to transfer title to a purchaser on the date for settlement, which may cause the purchaser to suffer loss.
  • Section 13 is designed to constrain the business operations of land developers.
  • The prohibition is not confined to conferring a right to a purchaser or agreeing to sell. It extends to activities preceding the formation of a contract, including advertising by a seller that it is willing to sell.
  • The amount of the penalty is insignificant and would not, of itself, deter a person who may be determined to sell lots in contravention of Section 13. Further, the modest penalty does not indicate that Parliament intended that a contract made in contravention of Section 13 should be unenforceable by the seller only while the seller was not the registered proprietor of the land. The preferable and correct view was that:
    • whilst Parliament made no express provision, Parliament intended that a contract in contravention of Section 13 should be unenforceable by a seller without any limitation or qualification; and
    • in those circumstances, it was unnecessary for Parliament to impose a substantial penalty for the offence.
  • whilst Parliament made no express provision, Parliament intended that a contract in contravention of Section 13 should be unenforceable by a seller without any limitation or qualification; and
  • in those circumstances, it was unnecessary for Parliament to impose a substantial penalty for the offence
  • The purpose of the Act would not be advanced if a land developer could enforce contracts made in contravention of Section 13. Further, if Section 13 was to operate as the Trial Judge envisaged, it might indeed encourage land developers to pursue the very mischief which the Parliament was seeking to prevent.
  • A contract entered into in contravention of Section 13 is enforceable by a purchaser. In that regard, the prohibition in Section 13 is not directed to purchasers (ie Section 13 does not expressly or impliedly prohibit a purchaser from offering or agreeing to purchase any lots in a subdivision or proposed subdivision to which Section 13 applies).
  • Whilst Section 13 does not confer a right for a purchaser to rescind or avoid a contract made in contravention of Section 13, a purchaser is not precluded from relying on common law principles (or other Acts) which may entitle a purchaser to rescind or avoid such a contract.

Consequences of Court of Appeal decision

The Court of Appeal Decision will have a drastic flow on effect for land developers.

It is now clear that contracts entered into in contravention of Section 13 are unenforceable by sellers.

The decision will inevitably have consequences for banks when presented with development proposals. It will no longer be possible for developers to present sales contracts to banks before they are the registered proprietor of the relevant land. Such contracts would provide no comfort to a bank as a result of the Court of Appeal Decision.

It is also clear that provisions in contracts which state that the contract is conditional upon the seller becoming the registered proprietor of the land are ineffective if Section 13 applies.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

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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