Developers Beware – Court of Appeal Clarifies the Effect of a Breach of the Sale of Land Act

more+
less-

Summary

In Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75, the West Australian Court of Appeal has considered the legal consequences of a developer entering into off the plan contracts in breach of Section 13 of the Sale of Land Act 1970 (WA) (Act). The Court unanimously held that contracts for the sale of lots in a subdivision, or proposed subdivision, which are entered into when the seller is not, or is not presently entitled to become, the registered proprietor of the land, are illegal and are unenforceable by the seller.

This decision has significant consequences for both sellers and purchasers. In particular, it is now clear that a developer cannot pre-sell lots in a proposed subdivision without first becoming the registered proprietor of the relevant land.

Background

Section 13(1) of the Act relevantly provides that a person who would, but for the Act, have the right to sell five or more lots in a subdivision, or proposed subdivision, must not sell any lots unless the person is, or presently entitled to become, the proprietor of such lots.

The term 'sell' is broadly defined in Section 11 and includes offering, advertising or holding oneself out as being willing to enter into a contract for the sale of a lot.

In June 2006, the purchasers entered into contracts with the seller for the purchase of a strata lot in an apartment development. At the time the contracts were entered into, the seller was not the registered proprietor of the land. The seller subsequently became the registered proprietor in August 2006. The seller admitted that, by entering into the contracts when it did not own the land, it was in breach of Section 13.

The penalty for breaching Section 13(1) is AUD750. However, the Act does not expressly state the legal consequences, with respect to the enforceability of the contract, where a contract is entered into in breach of Section 13(1).

The question before the Court of Appeal concerned the contractual consequences of a breach of Section 13, in particular whether a contract entered into in breach of Section 13 can be enforced by the seller against the purchaser.

The Decision at First Instance

The primary judge held that a contract entered into in breach of Section 13 was voidable at the discretion of the purchaser, for so long as, and only for so long as, the seller was not the registered proprietor of the relevant land.

In reaching this conclusion, the judge stated that the purpose of the Act was to protect purchasers from the risk that the purchaser would be left with only a personal claim for damages against a seller who has no title to the land. The judge held that, once the seller has title, the risk to the purchaser is eliminated and the mischief to which Section 13 is directed is eliminated.

The purchasers appealed.

The Court of Appeal

In allowing the appeal, the Court held that, when a seller enters into a contract with a purchaser for the sale and purchase of a lot, and is not, or is not presently entitled to become, the registered proprietor of the land, the contract is illegal and unenforceable by the seller. In reaching this conclusion, the Court made the following observations in relation to the purpose of the Act:

  • the prohibition in Section 13(1) is directed to a would-be seller and expressly prohibits the making of a contract or acts that are essential to its formation. If a seller enters into a contract in contravention of Section 13(1), the contract is illegal as formed. That express prohibition cannot be transformed, by construction, into a prohibition against the seller enforcing the contract, once it becomes the registered proprietor
  • the prohibition in Section 13(1) operates to protect a would-be purchaser from the risk that the seller may be unable to transfer title to the purchaser, in accordance with the contract, on the settlement date – a purchaser may be unaware of such a risk when he or she enters into the contract
  • in enacting Section 13(1), Parliament intended to forbid a would-be seller, who is engaged in a relatively large subdivision project, from conferring a right to purchase or agreeing to sell in circumstances where it was not the proprietor of the land. In this regard, the extent of Parliament's concern to forbid such conduct is apparent from the broad definition of 'sell' in Section 11
  • a would-be seller who contravenes Section 13(1) commits an offence, the penalty for which is a AUD750 fine. This modest penalty, which has not been altered since 1970, did not indicate that Parliament intended a contract entered into in breach of Section 13(1) should be unenforceable by a seller only while the seller was not the registered proprietor of the land. The preferable and correct view was that Parliament intended that a contract in breach of Section 13(1) should be unenforceable by the seller without any limitation or qualification.

Having considered the purpose of the Act, the Court found that the purpose would not be advanced if a seller could enforce contracts made in breach of Section 13(1) if the seller subsequently became the proprietor of the land. The Court also observed that, if Section 13 operated in the manner set out by the primary judge, a developer, who was speculating in a proposed subdivision, may be encouraged to pursue the mischief which Parliament was seeking to prevent.

The Court also held that the Act does not confer on a purchaser a right to rescind or avoid a contract on the ground that the seller entered into the contract in breach of Section 13(1).

The Court concluded that the contracts:

  • were enforceable by the purchasers, but were unenforceable by the seller
  • remained unenforceable by the seller upon it becoming, and after it became, the registered proprietor of the land.

Observation

This decision has significant consequences for both sellers and purchasers. In particular, it is now clear that a developer cannot pre-sell lots in a proposed subdivision without first becoming the registered proprietor of the relevant land.

It was previously the practice for developers to obtain sufficient pre-sales in order to obtain finance for the development. It appears from the Court of Appeal's decision that developers will no longer be able to engage in such conduct.

In circumstances where a contract for the purchase of a lot in a subdivision, or proposed subdivision, is entered into in breach of Section 13, a purchaser may elect to enforce the contract. However, the contract cannot be enforced by the seller.

 

Topics:  Australia, Breach of Contract, Land Sale Contract

Published In: General Business Updates, Construction Updates, Commercial Real Estate Updates, Residential Real Estate Updates, Zoning, Planning & Land Use Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »