The Facts

Contract for sale of land contains mental illness clause

A seller and a buyer entered into a contract for the sale of land near Grafton in NSW in November 2007, intending to settle 13 calendar months later.

In the contract was a special condition, clause 33, which referred to the ability of the contract to be rescinded (i.e. cancelled without any consequence or penalty) by either party, prior to completion, if either party died or became mentally ill.

Seller allows buyer to occupy land subject to occupation fee

Prior to settlement of the contract, the seller agreed for the buyer to occupy the land, subject to the contract, with an occupation fee of $13,000 plus GST per quarter, paid in advance.

During the time the buyer occupied the land, he had two problems. The first was that he was having trouble with one of his neighbours. The second was that his finance approval fell through, due to the global financial crisis.

The buyer was forced into the position of attempting to sell eight other properties which he owned, in order to raise the funds required to pay the seller for the Grafton property.

Seller offers buyer extension of time to settle

In early December 2008, the seller offered to give the buyer an extension of time to settle the contract, due to the financial difficulty the buyer was facing.

However, the real estate agent responded to the offer, suggesting that the buyer was unable to settle or continue paying the occupation fee at the agreed rate. The seller then made another offer to the buyer, but that offer was not accepted.

Seller issues Notice to Complete, buyer serves Notice of Rescission

The contract did not settle, so the seller issued a Notice to Complete to the buyer, requiring settlement on or before 3pm on 30 January 2009.

On that day, the buyer served a Notice of Rescission, stating that he terminated the contract in accordance with clause 33(a) of the contract, because he was suffering from a number of mental illnesses. These included panic attacks, anxiety, possibly depression and possibly bipolar disorder.

Seller serves Notice of Termination when contract is not completed

The seller then served a Notice of Termination on the buyer, on the basis that the buyer had not settled the contract in accordance with the Notice to Complete.

The seller then commenced proceedings in the Supreme Court, seeking a declaration that the Notice of Termination was effective, and a declaration that the Notice of Rescission issued by the buyer was invalid.

The buyer made a cross-claim that his Notice of Rescission was effective and the seller's Notice of Termination was invalid.

case a - The case for the seller

case b - The case for the buyer

  • To the extent the buyer was suffering from a mental illness, this condition existed well before entering into the contract, as confirmed by the psychiatrist's report.
  • The buyer did not disclose any longstanding mental illness to me when we entered into the contract and I dealt with him in good faith.
  • Clause 33 of the contract refers to becoming mentally ill, not being mentally ill. There is no medical evidence whatsoever to back up the buyer's claim that he became mentally ill around November/December 2008.
  • Rather, the medical evidence showed that the buyer continued to successfully manage his mental illness at all material times.
  • His illness did not prevent him from managing his affairs or providing for himself and his family. Further, contemporaneous notes taken by the real estate agent and the mortgage broker also make clear that the buyer continued to have the mental and emotional capacity to engage in business transactions.
  • I issued a valid Notice to Complete and the buyer has failed to settle the purchase. The court should find that my Notice of Termination is effective and that the Notice of Rescission issued by the buyer is invalid.
  • I have a history of anxiety symptoms and have previously taken the sedatives Valium and diazepam when necessary. As the report from the psychiatrist confirms, I have an anxiety disorder and a personality disorder.
  • I did not disclose my condition to the seller or even to my own solicitors due to acute embarrassment.
  • Before entering into the contract, I had been able to manage my mental illness. However, my symptoms worsened considerably after I entered into the contract.
  • After moving into the Grafton property, my neighbours there regularly harassed me by saying things such as: "we are going to run you off the island or drive you to hang yourself". This situation greatly exacerbated my symptoms.
  • Due to the global financial crisis, the loan I obtained in March 2007 fell through, which also caused my symptoms to become more acute.
  • My inability to work due to my worsening conditions led to my inability to earn money to meet my obligations under the loan, or even pay the occupation fee. This further exacerbated my illness.
  • The court should find that I validly terminated the contract under the mental illness clause and that as a result, I should not suffer any penalty.

So, which case won?

Cast your judgment below to find out

Anneka Frayne

Disputes and litigation

Stacks Law Firm