The NSW Supreme Court made a controversial decision last week in the case of Zhang v VP302 SPV & Others  NSWSC 73 which has important implications for vendors and real estate agents and how they market properties.
The court ruled that two Chinese property speculators were permitted to walk away from a contract to purchase a $1.07 million 'off the plan' terraced building in Sydney because of misleading and deceptive conduct by the real estate agent. Both the vendor and the agent were held liable for the return of the deposit.
In September 2003, contracts were exchanged to purchase a property located in a development in Zetland, Sydney known as Victoria Park. The purchasers were two Chinese immigrants who had negotiated the deal with an employee of the local real estate agent. The property was part of a strata development and completion was to take place once the strata plan was registered (which was expected to take two years). When the strata plan was finally registered in July 2005, the purchasers failed to complete the transaction claiming that they were induced to enter into the contract by misrepresentations made by the agent and were accordingly entitled to avoid the contract.
The vendor then purported to terminate the contract due to the purchaser's failure to complete and the agent released the deposit that it held as stakeholder under the contract to the vendor. The vendor went into voluntary administration shortly before the hearing of the court case and did not take any part in the hearing.
Interestingly, the purchasers knew when executing the contract that they would not have enough funds to complete the purchase. However, they claimed that in May 2003, they read an advertisement about Victoria Park placed by the agent in two newspapers stating that the property was located in an area which was acclaimed by the Sydney Morning Herald to be the number one suburb amongst three suburbs in Sydney which were going to double in value in five years. They also claimed that they met the agent's employee on site on several occasions in September 2003 who assured them that the property would have a higher value by the time settlement was required in two years. This would enable the purchasers to borrow funds to complete the purchase or to re-sell. The agent's employee denied giving such assurances.
Although the court was of the view that neither the agent's employee nor the purchasers were entirely reliable witnesses (given the conflicting nature of their evidence), it was not convinced that the agent's employee expressed the assurances as to the likely increase in value as alleged by the purchasers. However, the court held that the agent did represent (through its advertisements) that Zetland was the leader of three suburbs which would double in value within five years and that it had no reasonable basis for such a prediction, primarily because:
- the article which the agent referred to in the advertisement in September 2003 was in fact published in February 2002 and was well out of date by September 2003 as the property market had shown substantial growth over that period, such that by 2003 the supply of apartments in Zetland was in fact saturated;
- the newspaper article did not actually say that Zetland was the primary suburb where values were expected to double in five years. It claimed that all three suburbs would double in value; and
- the essence of the article was that the higher priced new developments would increase the values for the suburb as a whole and not that the individual units in the highly priced new developments would double in five years.
Accordingly, the court concluded that the agent had engaged in misleading and deceptive conduct contrary to the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW). The court then exercised a power it had under the Trade Practices Act to make an order rescinding the contract (even though the agent who had engaged in the misleading and deceptive conduct was not a party to the contract).
Although there was no evidence to show that the vendor knew of the facts which made the advertisements misleading, the court held that the advertisements were nonetheless published by the agent whilst acting as an 'agent' for the vendor. Accordingly, the vendor (acting through its agent) had engaged in misleading and deceptive conduct. As the court ordered that the contract be rescinded, it followed that the deposit should be refunded to the purchasers. Both the vendor and the agent (as stakeholder) were held liable to the purchasers for the return of the deposit.
Interestingly, the court held that if even if the agent was not liable as stakeholder, the agent would have been liable to pay the purchasers an amount equal to the deposit by way of damages for the loss suffered (for contravening the Trade Practices Act).
The court dismissed the claim that the agent's employee personally engaged in misleading or deceptive conduct by 'harassing' the purchasers into signing the contract. The court felt that the purchasers were instead misled into an over optimistic confidence that property values for Victoria Park would continue to increase.
Finally, the court ruled that if the contract wasn't rescinded under the Trade Practices Act, it would have rescinded it under the Contracts Review Act 1980 (NSW). This was on the basis that it was an 'unjust' contract in the circumstances relating to the time it was made, primarily because the purchasers made it known that they did not have funds to complete the purchase and were reliant on a significant improvement in the value of the property (induced by the misrepresentations contained in the advertisements) to enable them to complete the purchase or to re-sell. It also noted that the agent's employee assured the purchasers that the property market in the area generally had shown substantial capital appreciation and that she did nothing to qualify the representations made in the newspaper advertisements.
This case has quite serious implications for the real estate industry given that the NSW Supreme Court has held that the misrepresentations of a real estate agent can potentially lead to a property contract being rescinded.
Vendors and agents need to be extra vigilant in ensuring the accuracy and reliability of all advertising material used not only in their marketing campaigns but also in the negotiation and marketing techniques adopted by individual agents on the ground. Vendors and agents should only give assurances (whether they relate to property values or otherwise) which are based upon fact so as to avoid purchasers being able to walk away from contracts on the basis that they were in some way misled or deceived by the agents into purchasing a property.
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.