Australia: Converting actions for specific performance to damages and new rules for disputed deposits

HG Property Litigation Alert: 3 March 2015

In this Alert, Special Counsel Anthony Pitt and Solicitor Hayley Schindler examine a recent New South Wales decision regarding a vendor's right to sue for specific performance of an uncompleted sales contract and to later decide to instead pursue a claim for damages, as well as the new rules for dealing with disputed deposits under the Agents Financial Administration Act 2014 (Qld) (AFAA).

Galafassi v Kelly [2014] NSWCA 190

In Galafassi, Susan Kelly, the co-founder of Industrie clothing, contracted to sell her residential property in Paddington, Sydney for $6.35 million. The purchasers were Toni Galafassi (formerly Toni Collette, star of Muriel's Wedding and more recently United States of Tara) and her musician husband David Galafassi.

The settlement date was stipulated as 30 December 2011. However, on that day, the purchasers informed the vendor that they were unable to complete the contract due to a lack of funds. The purchasers repeated this message again on 4 January 2012.

On 20 January 2012, the vendor commenced Court proceedings against the purchasers for specific performance of the contract, or alternatively damages. On 24 January and 24 February 2012, the purchasers again stated that they had no funds, and could not complete the contract.

On deciding to abandon the claim for specific performance of the contract and instead pursue a claim for damages, on 24 April 2012, the vendor sent a notice of termination of the contract accepting the purchasers' repudiation, and on the same day resold the property for $5.5 million. The vendor then filed an amended statement of claim seeking damages for breach of contract which included, amongst other things, the resale deficiency, land tax costs and interest stipulated in the contract of 10% on the unpaid purchase price from the completion date to "the actual date for completion".

The purchasers denied that they repudiated the contract and argued that the vendor had elected to affirm the contract and, alternatively, that the vendor had failed to mitigate her loss when selling the property for $5.5 million.

The New South Wales Court of Appeal held that:

  • the purchasers had repudiated the contract by their repeated statements that they were unable to finance the purchase;
  • a vendor who chooses to seek specific performance following repudiation is not precluded from later terminating the contract if the purchaser continues to repudiate and instead seeking damages;
  • there was no need for the vendor to have issued a notice to complete before terminating the contract as the purchasers had already repudiated the contract;
  • the evidence did not establish that the vendor had failed to take reasonable care in selling the property for the price that she did or in making reasonable efforts to minimise her loss;
  • as completion never occurred and the vendor terminated the contract, there was no "actual date for completion" such that the vendor was not entitled to the interest claimed; and
  • the vendor's liability for land tax was a reasonable cost or expense "arising out of the purchaser's non-compliance" with the contract and the vendor was entitled to be reimbursed for that liability.

As a result, the Court of Appeal found that the purchasers were liable to pay $602,500.82 in damages, the vendor was entitled to keep the deposit of $317,500 and the purchasers were to pay the vendor's costs of the proceeding.

Whilst a vendor has the ability to choose between affirming the contract and suing a defaulting purchaser for specific performance, or terminating the contract and suing for damages, the choice of suing for specific performance is not always final. Vendors should also take note of clauses in their contracts regarding when default interest is payable, and whether such clauses encompass all possible situations including where the contract is terminated at a time subsequent to the settlement date.

New rules for disputed deposits

The Property Agents and Motor Dealers Act 2000 (PAMDA) was repealed on 1 December 2014 and replaced by four industry specific Acts, including the AFAA. The AFAA has introduced new rules for dealing with disputed deposits where the parties to a conveyance do not agree as to who is entitled to the deposit.

If a transaction is finalised and a party's entitlement to the deposit is uncontested, Section 22 of the AFAA provides that the deposit holder is required to release the deposit, pursuant to the direction of the person who is entitled to the deposit, within 14 days of receiving the direction to pay the deposit to them.

However, Section 22(4) provides that a transaction is not finalised until any dispute is dealt with by way of the notice procedures in Division 5 (notably Sections 25, 26 and 27).

In this regard, Section 25 of the AFAA provides that if an agent holds a deposit under Section 22 and becomes aware of a dispute, or considers a dispute may arise between the parties to the transaction about the entitlement to the deposit or part of the deposit, then that amount is considered in dispute.

With respect to disputed monies, if the deposit holder considers that a party to the transaction is entitled to the amount in dispute, Section 26(2) of the AFAA provides that the deposit holder must give all parties to the transaction a written notice stating that:

  • they consider that the stated party is entitled to the amount in dispute;
  • they are authorised, under the AFAA, to pay the amount in dispute to the stated party on or after a stated date (that is at least 60 days after the notice is given), unless:
    • a proceeding disputing the stated person's entitlement to the amount in dispute is started and the deposit holder is advised of the start of the proceeding; or
    • all parties to the transaction authorise payment of the amount to the stated party before the stated date.

Section 26(3) of the AFAA consequently provides that a deposit holder may only pay the amount in dispute to the stated party if:

  • after the date stated in the notice, the deposit holder is unaware of the start of a proceeding claiming an entitlement to the amount; or
  • on or before the date stated in the notice, the deposit holder receives written notice that all parties to the transaction authorise payment of the amount to the stated party before the stated date.

Section 26(4) of the AFAA provides that if the deposit holder follows the procedure set out in Section 26, they will not be liable civilly or under an administrative process in relation to the payment of the deposit to the stated party if it is subsequently found that the party was not entitled to the amount.

Section 26(6) of the AFAA also confirms that instead of the above procedure, a deposit holder may decide to continue to hold the deposit until payment is authorised by all parties or the issue is decided by a Court.

Sections 27 and 28 of the AFAA provide that if the amount in dispute is not dealt with under Section 26, then the deposit holder must not pay out the amount in dispute unless they receive written notice:

  • from all parties to the transaction stating the person who is entitled to the amount (in which case it is to be paid to that person); or
  • a proceeding has been started to decide who is entitled to the amount (in which case it is to be paid to the Court in which the proceeding was started).

Maximum penalties of up to $22,770 or 2 years imprisonment apply to contraventions of both Sections 27 and 28 of the AFAA.

Property developers and agents should be aware of the new rules in relation to how disputed deposits are to be dealt with as a contravention of the above provisions can result in significant penalties. Deposit holders should also exercise caution given that the new rules even apply where no actual dispute about the deposit is in existence but where an agent "considers a dispute may arise" about the deposit between the parties to the transaction.

© 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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Hayley Schindler
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