Court win for apartment buyers leaves developers reeling

VICTORIANS buying houses and units off the plan have secured new legal rights to demand their money back, under a landmark ruling that has sparked fears of a collapse of projects across Melbourne.

In a setback for an industry already reeling from the credit crunch, the Supreme Court of Victoria has found that off-the-plan buyers can tear up their contracts and get their deposits back when projects are not completed on time.

The ruling came in a case involving two luxury apartment buyers in Geelong who won the right to have their deposits refunded and contracts revoked because the developer took several months longer to finish the project than agreed.

Until this ruling, it had been standard practice for developers to put clauses into off-the-plan contracts allowing for the extension of completion dates.

Reasons for late completion could have included labour strikes, planning approval delays, shortages of materials or labour and weather.

But in a ruling this month, Justice Bernard Bongiorno said such clauses were invalid because they put the risk of delay onto home buyers, leaving them with no way out.

The decision is an unwelcome one for an industry already faltering in the credit crunch, with more than $2 billion worth of Melbourne projects delayed or abandoned since September because of a lack of finance.

A leading property lawyer estimated the decision had put 10 per cent of Melbourne projects at greater risk of collapse.

One of those involved in the case, Jennifer Clifford, said developer Solid Investments had asked for three time extensions to complete her $2 million apartment overlooking Corio Bay. "None of it was the developer's fault," she said. "Things just kept going wrong. I mean there were objections and they struck an underground creek.

"(But) why should we as the prospective purchasers just have to keep hanging on for who knows how long?"

The Edgewater project, in which businessman Frank Costa paid a record Geelong price of more than $3 million for a penthouse, was completed in March.

Edgewater developer Murray Stone, who is appealing against the Supreme Court decision, said the ruling "opened a can of worms" for the industry. "Any contract that now goes over the sunset clause becomes void," Mr Stone said. "Even if buyers want to settle the contract they can't. They have to enter a new contract and not get the stamp duty savings."

He said it was difficult for developers to simply make sunset clauses longer, say five years, because banks would not normally lend beyond a 30-month completion date.

"All projects will now be under an enormous amount of pressure and the banks will probably not loan."

Freehills property partner David Sinn, whose firm was not involved in the case but advises many developers, said it set a precedent that had the industry worried about project collapse.

"Any current development where they have pre-sold apartments and are struggling to get finance is now at risk of buyers terminating their contracts and getting refunds," he said.

The Age Marika Dobbin
June 25, 2009

Clifford & Anor v Solid Investments Australia Pty Ltd

Date: 2 Jun 2009

Citation: [2009] VSC 223

Jurisdiction: Victorian Supreme Court

This case concerns a dispute as to whether the purchasers of two lots on a plan of subdivision have lawfully rescinded the contracts. The contracts were conditional upon registration of the plan of subdivision of the development, and conferred the right on the purchasers to avoid the contract if the plan was not registered by a certain date. The contract also provided for the date for registration to be extended by the vendor under the terms of the contract. The vendor gave notice of the extension of the date. The purchasers gave notice of rescission of the contracts, asserting that the contract term was ineffective to permit the extension under Sale of Land Act 1962 s9AE. The vendor refused to accept the notice of rescission. The Court considered (para 23) Everest Project Developments Pty Ltd v Mendoza and Ors which "held that the purpose and social policy underlying ss 9AA to 9AH of the Act was the protection of that section of the public which comprised purchasers of lots on unregistered plans of subdivision." In this instance, the Court said that the same reasoning applies to s9AE(2), which specifies that if the parties wish to stipulate a period other than the statutory period provided by that section, that other period must be specified in the contract itself. The Court ordered declarations that the contracts were lawfully rescinded by the purchasers. Link to Judgement

Commentary by Herbert Geer on Clifford case