Australia: Caution Required When Drafting Off The Plan Contracts Of Sale

Last Updated: 19 March 2009
Article by Justin Lethlean and Steven Mackay

Under Section 9AA of the Sale of Land Act (Vic) 1962 (Act), an 'off the plan' contract of sale will be unenforceable where it provides that a vendor can retain the deposit prior to registration of the plan of subdivision.

The recent decision in Everest Project Developments Pty Ltd v Mendoza [2008] VSC 366 (Everest Case) considered the application of Section 9AA.

In the Everest Case, the purchasers were able to rescind the contract because:

  • the vendor was entitled to make a claim on the deposit bond prior to registration of the plan of subdivision, notwithstanding that no deposit bond was actually paid
  • the vendor directly received an initial holding deposit that was to later form a part payment of the purchase price.

The facts

The plaintiff, Everest, was a property developer that sold 33 lots off an unregistered plan of subdivision to the defendant purchasers, Mr and Mrs Mendoza. The Mendozas paid a 'preliminary deposit' between $500 - $1000 for each lot and then subsequently provided Everest with a deposit bond for the 10% deposit. The 'preliminary deposit' was then refunded by Everest to the Mendozas.

Before the development was completed and the plan of subdivision registered, Everest was placed into external administration. Mendoza purported to rescind the contracts on the basis that, among other things, the deposit bond special condition in the contracts breached section 9AA of the Act. Everest sought a declaration that the purchasers were not entitled to rescind the contracts.

Section 9AA prescribes how deposit moneys are to be paid by a purchaser for a lot, off an unregistered plan of subdivision.

Section 9AA(1) provides that:

  • deposit moneys payable by the purchaser are to be paid:
    • to a legal practitioner, conveyancer or licensed estate agent acting for the vendor to be held by the legal practitioner, conveyancer or licensed estate agent on trust for the purchaser until the registration of the plan of subdivision
    • into a special purpose account in an authorised deposit-taking institution in Victoria specified by the vendor in the contract in the joint names of the purchaser and the vendor until the registration of the plan of subdivision
  • the deposit moneys payable under an off the plan contract must not exceed 10%of the purchase price of the lot.

Pursuant to the terms of the contract of sale a deposit bond was defined as follows:

"Deposit Bond means an unconditional undertaking by an Insurer, in a form acceptable to the vendor, to pay money to the vendor..."

In addition, special condition 15.5 of the contracts permitted Everest to claim on the deposit bond if certain events occurred. Some of these events could occur prior to registration of the plan of subdivision.

The decision

The Court held that when the definition of a deposit bond was read together with special condition 15.5, it permitted Everest to make a claim on the deposit bond in contravention of section 9AA and the purchasers were entitled to rescind under section 9AE of the Act. In reaching its decision, the Court determined that:

  • the meaning of 'deposit bond' under the contract left open the possibility of Everest receiving a deposit amount directly which breached section 9AA(1)(a)
  • the payment of a 'holding deposit' was a part payment of the 10% deposit on the purchase price and contravened section 9AA(2)
  • the purchasers had an unqualified right to rescind under the Act.

Despite the fact that the 'preliminary deposits' were repaid by Everest and that moneys received under the deposit bonds by its solicitor were to be held on trust, Everest was under an obligation to ensure that the form of the deposit bond complied strictly with the Act.

Practical considerations

The Everest Case confirms the statutory right of a purchaser to rescind a contract of sale under section 9AE(1) where the vendor fails to comply with section 9AA of the Act.

Special conditions in an off the plan contract of sale that provide for methods of payment and retention of deposits need to be carefully drafted and reviewed to ensure compliance with section 9AA(1) of the Act.

In particular, the terms and conditions must provide for deposit moneys to be paid to either:

  • a legal practitioner
  • a conveyancer
  • a licensed estate agent; or
  • into a special purpose account as opposed to the vendor

and the deposit must be held on trust for the purchaser until the plan is registered. In addition, a vendor should never request or accept any monies directly from the purchaser prior to registration of the plan of subdivision.

Issues may arise where special conditions in the contract of sale allow the vendor to deal with the deposit bond prior to registration of the plan of subdivision. For example, conditions that allow the vendor to:

  • deal with deposit bond moneys 'as it sees fit'
  • make a claim on the deposit bond on the occurrence of certain events prior to registration of the plan of subdivision

are likely to be treated as a contravention of section 9AA and could entitle the purchaser to rescind the contract under section 9AE(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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