Australia: When Purchasers Default – Assessment Of Vendor’s Damages In Land Contracts

Standard Land Contracts

1. The standard Law Society of South Australia Contract for the Sale and Purchase of Land is representative of those used in most jurisdictions in Australia¹ in that a vendor who terminates due to the purchaser's default either prior to or at settlement may at their option:

2. The former remedy is of course the common law remedy of unliquidated damages, the latter being liquidated damages.

Common Law Unliquidated Damages

3. Common law unliquidated damages compensates the innocent vendor for the loss they may have suffered. It is not restitutionary in nature such as a claim of unjust enrichment. In that event a vendor may be more appropriately advised to rely on the common law remedy of money had and received, or in equity claiming an account of profits.

4. The purpose of an award of damages is to compensate the vendor for the loss which they have suffered as a result of the purchaser's breach. It is intended to restore the vendor to the same position which they would have been if there had not been a breach of the contract, so far as money can do.²

5. However, the principle of compensation is limited by any consideration of causation. The test of whether or not damages are too remote is most famously expressed as the rule in Hadley v Baxendale.³ Subsequently the rule has been widely interpreted to have two limbs, namely that:

Usual Or Natural Measure Of Loss

6. When asked to advise, the lawyers' qualification may be uttered: "it depends on the facts". This will particularly be the case when the usual or natural measure of loss is not dissimilar to the liquidated damages provision in the contract. An election will need to be made. Often this will arise when considering the difference between the date of breach and the contract price on the one hand, and the market value of the property at the intended completion date. To confuse matters (perhaps because of factual differences) the approach to the assessment has been applied inconsistently by the Courts when asked to assess damages between the contract price and the market price.

7. For example, in the Supreme Court of New South Wales,⁴ a vendor reselling after default by the purchaser pursuant to a contract which provided for both unliquidated and liquidated damages, (but on construction of the Statement of Claim had elected unliquidated damages) held that the vendor had a duty to mitigate against loss only. It did not have a fiduciary duty akin to that of a mortgagee.

8. It followed from that assessment that the resale contract price (and damages) would be assessed as the reduction in the resale contract price plus estate agent's commission payable on the original sale, and rates, taxes and interest. Legal costs for addressing the initial breach and negotiations were not allowed.

9. The approach in Jampco would appear to be at odds with the second limb of Hadley v Baxendale; that is, a vendor should be put back in the position they would have been had the contract been performed.

10. It could be argued that if settlement had proceeded, a typical agent's agreement would provide for commission to be payable only in the event of a settlement and not otherwise. However, legal costs could be considered a legitimate expense in pursuing those damages and a vendor would have been unlikely to be able to avoid those costs. Accordingly, on these particular, and not uncommon facts, the full resale contract price, less original sale price, plus legal costs and other legitimate expenses would seem to be the usual or natural measure of loss.

11. Jampco does highlight that quite apart from losses to be assessed between the contract price and any reduction in the resale contract price, an innocent vendor is likely to have incurred other consequential losses as a result of a purchaser's breach.

Agent's Commissions And Conveyancing Costs

12. The second limb of Hadley v Baxendale would suggest that these are not recoverable as the vendor agent's commission and conveyancing costs would have been payable in any event if settlement had proceeded and the contract had not been terminated for the purchaser's breach. Compensation of this type, in addition to damages for differentials in either contract or market price, could be considered a windfall to the vendor. Notwithstanding, expenses of resale and abortive sale was allowed in Jampco.

Legal Costs

13. Costs of this type were disallowed in Jampco, incurred by the vendor in trying to unsuccessfully renegotiate the contract. It seems legal costs would have been allowed in Carpenter v McGrath,⁵ if they and other general damages, had exceeded the amount of the forfeited deposit.

14. However, from time to time, possession is given up to a purchaser prior to settlement through a licence to occupy. Should that licence be given, termination of the contract for the purchaser's breach prior to settlement would require steps to be taken by the vendor to terminate the licence and repossess the property concerned. The conceivable costs of repossession may include legal costs, mercantile agents, changing of locks, repairs and cleaning. In that circumstance, legal costs should be recoverable as damages as they arise naturally and usually from the breach.

Costs Of Resale

15. Relevant to an assessment of damages on the resale of the property, whether at resale market price or contract price, are the actual costs of that resale. Irrespective of whether the resale is successful or not, the costs of that resale, and whether they are a consequential and therefore recoverable loss as part of a common law damages claim, does not appear to be settled.

16. In Jampco it was noted by Justice Young that "the Canadian view... " seems to be that once the vendor retains the land having a particular market value as at the date of breach, and is compensated for the difference between the market value and the net contract price, thereafter the property is something that the vendor can do what he likes with; sell it, or retain it, and lease it, or retain it and live in it, it matters not.". This suggests general damages would not be permitted.

17. On the other hand, the Court in Carpenter v McGrath⁶ cited with approval, McGregor on Damages, and the view that the property will have to be first sold to realise cash, from which must be deducted the reasonable cost of realising the property in order to see its cash value.

18. This is consistent with the view in C Czarnikow Ltd v Koufos.⁷ If both the vendor and purchaser were aware that such loss was likely to result from the breach then the damages will be assessed after that sale and deducting the reasonable costs of sale. The loss should have been within contemplation and flowed naturally from the breach. If on the other hand, the vendor decides to retain the land and then sells it later, then any costs associated with the resale may be irrelevant.

Rates, Taxes And Maintenance

19. Whether or not rates, land taxes and maintenance costs will be assessed as consequential loss and form part of general damages, was considered in Rossco Developments Pty Ltd v O'Halloran.⁸ In that case, the property was a newly developed house, built by the vendor for the sole purpose of sale at a profit. In those circumstances Chief Justice Blackburn held that the maintenance costs of keeping it in first-class condition and attractive to buyers with the intention of selling as soon as a good price was offered, together with additional rates payable, were expenses incidental to the resale. Presumably those expenses must be reasonable and in the usual course

Mortgage Interest Payments

20. Once again, the fact situation of a particular case will be important when considering whether interest on mortgage repayments are a consequential loss forming damages for breach. Courts have consistently held that interest payable on mortgage repayments from the date of completion until the date of resale are not recoverable as damages at common law.⁹ However, where a purchaser is aware that the land is mortgaged, that fact is not enough to remove the general principle that it is not included in damages. If the purchaser was aware of a particular situation in which the vendor were placed so that a breach would be likely to cause special damage, then the general rule may not sufficiently recompense the vendor.

21. For example, this is conceivable where, at the date of entering into the contract, the purchaser knew, or ought reasonably to be aware, that the vendor would require the proceeds of sale to discharge the mortgage so that if the purchaser failed to complete as required by the contract the vendor would be forced to cover the mortgage commitments by borrowing elsewhere or reselling.

Deposit

22. A deposit may be regarded as an initial payment made by the purchaser as a guarantee the contract will be performed.¹⁰ Under all of the standard form Law Society contracts in Australia, if the contract is terminated by reason of the purchaser's default the vendor is entitled to retain that deposit¹¹ (so far as it does not exceed 10 per cent of the purchase price)¹² unless the contract provides otherwise.

23. If the purchaser contracts to pay a deposit, but fails to do so, and repudiates the contract, the vendor is entitled to bring an action to recover the deposit even if it exceeds the actual amount of money suffered by the vendor by reason of the repudiation. Accordingly, common law damages can also consist of a claim for the deposit.¹³

Procedure

24. If a vendor wishes to sue the purchaser for damages they must first rescind the contract or if the purchaser has repudiated the contract, accept such repudiation and then bring an action for damages for breach of contract. Whilst the contract may be thereby extinguished, the contract remains alive for the purposes of allowing the vendor to pursue all rights required under it. The vendor may make their election. While there is no obligation placed upon the vendor to resell the property they must make an assessment of their circumstances, both past and future when doing so. Any rise or fall in the property after the date fixed for the purchaser's performance will be at the vendor's advantage or risk.¹⁴

25. The damages to which a vendor is entitled in such circumstances are calculated by placing the vendor, so far as money can do it, in the same situation as if the contract had been performed.¹⁵

Liquidated Damages

26. The Law Society of South Australia Standard Contract provides that the vendor may resell the land and claim from the purchaser any deficiency in the resale price together with incidental expenses. An innocent vendor will need to assess this against available common law damages. This provision is reflected in the contracts in other jurisdictions and requires an assessment firstly of "any deficiency in the resale price" and then an assessment of "incidental expenses".

Resale Price Deficiency

27. Because common law damages will be assessed at the date of breach or termination, a vendor will need to be cautious in making that election in a falling property market as is being experienced now in many areas of Australia. If the market is falling rapidly, a vendor who elects common law damages may suffer the loss of value from the date of breach or termination.

28. On the other hand if the vendor elects to pursue liquidated damages in that falling market, their damages will be assessed as between the original contract price and the resale contract price, and not from the date of breach or termination. Put another way, liquidated damages would enable the vendor to claim all of the loss between the original price and the subsequent resale price in that falling market.

Incidental Expenses

29. In addition to the loss between the contract price and the resale contract price the vendor is entitled to recover as liquidated damages "incidental expenses".¹⁶

Repossession

30. If a licence had been granted prior to settlement, and the vendor required possession for resale then the reasonable costs of taking possession so will be recoverable as applies for damages at common law.

Expenses Of Resale Or Attempted Resale

31. These expenses are specifically recoverable and would include the usual costs such as agent's commissions, advertising costs, any auction costs, legal and conveyancing costs.

Rates, Taxes And Other Outgoings

32. The provision in the South Australian Law Society Contract is similar to that considered by Blackburn CJ in Rossco Developments. In that case, Blackburn CJ disallowed a claim for rates under that clause. Note however that he distinguished this when assessing unliquidated damages in which case he considered rates to be consequential damages. In Jampco Young J also considered rates to form part of an assessment of common law unliquidated damages because they formed part of the loss flowing from the purchaser's default.

33. Conversely in Bullion Sales International Pty Ltd v Fitzgerald¹⁷ Connolly J allowed outgoings in the nature of rates on the basis that the contract clause provided that expenses of and incidental to the resale included "any outgoings in respect of the said land arising after the date for completion".

34. Notwithstanding what might be "incidental", it is clear that each contract in each jurisdiction will need to be considered for its own terms, particularly terms that specifically allow for any outgoings arising after the date of completion of the original contract and up to the date of resale.

Mortgage Interest

35. Whether mortgage interest is an expense of and incidental to a resale or attempted resale was considered in Jampco where Young J did not consider it would normally come within an assessment of liquidated damages or in fact an assessment of damages at all. He made a distinction between allowing rates on the one hand, while disallowing mortgage interest payments on the other as 'rates inevitably attach to the land, but whether a mortgage is kept on the land or not, depends upon the economic decisions made by the proprietor'.¹⁸

Deposit

36. The Law Society of South Australia Contract provides that upon termination for breach by the purchaser the deposit shall be forfeited to the vendor absolutely. The question then becomes, should the deposit be brought into account if an election is made to pursue liquidated damages.

37. The authorities indicate that the forfeited deposit should be set off against the resale market value of the property and the contract price.¹⁹ Presumably, not to do so would amount to a windfall to the vendor.

38. The High Court has held that GST is payable on forfeited deposits.²⁰ The key issue in this case was whether there was a "taxable supply" to which GST was attributed for the relevant tax period.

39. In a joint judgment, the High Court has held that upon execution of the contract, the vendor made a supply in that it entered into an obligation to do certain things under the contract, including maintaining the property and paying rates, taxes, insurance premiums and other outgoings. The payment of the deposit by the purchaser was "in connection with" a supply by the vendor within the meaning of the definition of "consideration" in Section 9-15(1)(a). Upon forfeiture to the vendor of the deposit, by reason of the failure by the purchaser to complete the contract, the "supply" represented by the making of the contract becomes a "taxable supply".

41. Accordingly, a decision must be made in such sales as to whether the vendor should require the purchaser to pay the agreed deposit plus an amount equal to 10% thereon to cover any GST tax liability arising on a valid termination of the contract by the vendor. The Commissioner of Taxation has issued a Decision Impact Statement dealing with this case on 4 June 2008 which may offer some further guidance.

Footnotes

1. NSW: Law Society of NSW and REI NSW - Contract for the Sale of Land; Vic: Law Institute of Victoria and REI Vic - Contract of Sale of Real Estate; ACT: Law Society of the ACT - Contract for Sale (Crown lease and unit title); Qld: Queensland Law Society and REIQ - Contract for Houses and Residential Land; NT: Law Society of the NT and REI NT - Contract of Sale; Tas: Law Society of Tas, Auctioneers and Real Estate Agents' Council of Tasmania and REI Tas - Contract for Sale of Real Estate; WA: REI WA - Contract for Sale of Land by Offer and Acceptance.

2. Robinson v Harman (1848) 1 Ex 850 at p 855.

3. (1854) 9 Ex 341.

4. Jampco Pty Ltd v Cameron [2] (1985) 3 NSWLR 30.

5. (1996) 40 NSWLR 39.

6. (1996) 40 NSWLR 39 at 59.

7. [1969] 1 AC 350 at 385.

8. (1980) 29 ACTR 1. Rates were also assessable in Jampco Pty Ltd v Cameron (2) (1985) 3 NSWLR 30.

9. Bridges v McPhail (1977) 3 BPR 9317.

10. Brien v Dwyer (1978) 141 CLR 378.

11. Howe v Smith (1884) 27 Ch D 89.

12. NSW Society of NSW and REI NSW – Contract for Sale of Land.

13. Dewar v Mintoft [1912] 2 KB 373; Bot v Ristevski [1981] VR 120.

14. Jamal v Moolla Dawood Sons & Co Ltd [1916] 1 AC 175; Pendergrast v Chapman [1988] 2 NZLR 177.

15. Diamond v Campbell-Jones [1961] Ch 22.

16. See Rossco Developments Pty Ltd v O'Halloran (1980) 29 ACTR 1 at 241-3 for a discussion of 'incidental expenses'.

17. [1983] 1 Qd R 215.

18. Jampco Pty Ltd v Cameron (No 2) (1985) 3 NSWLR 391 at 396.

19. Brien v Dwyer (1978) 141 CLR 378; Carpenter v McGrath (1996) 40 NSWLR 39.

20. Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) ANZ CONVR R 8-033.

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.