The recent case of Zhang v VP302 SPV & Ors  NSWSC 73 demonstrates that agents and vendors may risk having a contract for sale rescinded if false or misleading statements are used to promote the property.
The New South Wales Supreme Court held the agent in breach of the Trade Practices Act 1974 (Cth) (TPA) for its actions leading up to the sale of an off-the-plan strata terrace. The inexperienced buyers alleged they had been enticed by the agent's exaggerated estimates on the property's future value. The Court ruled the agent's actions enabled the contract to be rescinded. It also held both the agent and vendor liable for the return of the deposit.
The case involved an off-the-plan terrace in a strata development in Victoria Park, Zetland, New South Wales. The first defendant was the developer (vendor). The second defendant was the real estate agency, Sydney Advance Reality (agent). An employee of the agent who marketed the property was named as the third defendant in the proceedings.
In 2003, Mr Zhang (an immigrant cook who spoke little English) and Ms Liu (an immigrant waitress who spoke basic English) (purchasers) saw an advertisement in a Chinese newspaper stating that Victoria Park, Zetland was an area 'acclaimed by the Sydney Morning Herald to be the number one district amongst three areas which is going to double in value in five years'. Not long after, the purchasers, having little experience in real estate in Australia, exchanged contracts for a four-story terrace comprising part of 'The Form' development in Victoria Park.
At the time of the exchange, a total deposit of $107,000 was paid by the purchasers in several instalments. The deposit money was received by the agent as the stakeholder and placed in an interest bearing account.
The vendor set the date of settlement in July 2005, following registration of the strata plan. The purchasers refused to settle on that date and failed to complete the transaction. The vendor's solicitors served a notice requiring completion on 10 August 2005. The purchasers again failed to complete and the vendor terminated the contract. The deposit was then released by the agent to the vendor.
The purchasers initiated legal proceedings seeking the return of the deposit claiming, among other things, that they were induced into the contract by various misrepresentations made by the defendants (including the advertisement).
Justice White of the Supreme Court held that the purchasers were entitled to rescind the contract and receive the deposit back from the vendor and the agent.
This was on the basis that the agent had provided misrepresentations in the advertisement, which contravened section 52 of the TPA.
Justice White's reasoning in this case implies that the plaintiff does not need to show 'absolute' reliance on a representation (which is not negated by any other factors such as awareness of a risk), to satisfy the requirements of section 52 of the TPA. Here the Court found that the purchasers' expectation that the property would increase in value caused by the advertisement was sufficient to establish reliance under section 52. This was despite the fact that the purchasers understood that instead of doubling in five years the value of the purchased property might fall.
In this case, Justice White found that the representations made by the agent were misleading and deceptive, because there was no reasonable basis for a prediction that the value of the property in Victoria Park would double in value in five years. This was primarily because:
- The Sydney Morning Herald article referred to in the agent's advertisement was over a year old when it was used, and as the market and the supply of developments in the area had since changed, the information was out of date.
- The advertisement also misstated what was said in the original article – that is, the article had referred to the doubling in value of three suburbs in the area, not just Zetland and not specifically of individual units in new developments.
The Court ordered that the contract be rescinded in light of the agent's misrepresentations (even though the agent was not a party to the contract, but was acting as 'agent' for the vendor).
Accordingly, agents (and vendors) should be careful of any representations made to the public, ensuring that they have reasonable grounds to make the representations.
Release Of Deposit
As set out above, the Supreme Court found the agent misrepresented future value of the property (double in five years as advertised), which amounted to a breach of section 52 of the TPA. This misrepresentation entitled the purchasers to rescind the contract and claim back the deposit paid. Justice White held that both the vendor and the agent were liable for the purchasers' deposit and the interest accrued.
The vendor was held liable to pay the purchasers' the deposit because of the rescission of the contract (albeit due to the agent's misrepresentations). The Court ruled the agent was liable (as stakeholder) and while being aware of a dispute between the vendor and the purchasers, it received the deposit and released it to the vendor instead of paying the deposit into Court. However, even if the agent was not liable as stakeholder, the Court held the agent would have been liable to the purchasers for an amount equal to the deposit by way of damages for the losses suffered by the purchasers.
This suggests that in the future, agents should be particularly careful in releasing deposit money to vendors where the vendor is alleging termination of the contract due to a breach by the purchaser. This will assist the agent in avoiding future liability for deposit money where the dispute between the parties is later resolved in favour of the purchaser.
Rescission For Unfairness
Although not considered by the Court in this case, Justice White stated that the contract was unfair because the purchasers' entry into it was by the misrepresentations in the advertisement. This unfairness would entitle the purchasers to rescind the contract under the Contracts Review Act 1980 (NSW) (CRA).
The primary reason for this was because the purchasers' entry into the contract was induced by the misrepresentations made in the advertisement. Justice White also considered the purchasers' inability to effectively communicate in English, lack of experience in the property market in Australia and absence of independent financial advice offered as factors supporting the finding of unfairness under the CRA.
This suggests that vendors should be mindful of the way a sale is conducted (with respect to, for example, legal and financial advice and agents' conduct) if it involves inexperienced 'mum and dad' purchasers.
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