Lack of room allows the purchaser room to leave

On the 1 December 2019, the Conveyancing Act 1919 (NSW) (Act) was amended to give to purchasers a right to rescind a contract for sale or make a claim for compensation if the vendor makes amendments to documents forming part of the Disclosure Statement (being plans, section 88B instruments, bylaws, strata management statements) (Material Change).

In accordance with the Act, if the purchaser determines that as a result of a Material Change, the purchaser:

• would not have entered into the contract for sale had the purchaser been aware of the Material Change, and
• would be materially prejudiced by the Material Change,

the purchaser may rescind the contract for sale or claim compensation.

Whilst during the course of construction, changes are made to a lot and a development site as a result of discontinued fixtures and fittings, legislation changes, Building Code of Australia requirements and changes that occur during construction and generally a large majority of purchasers accept these changes.

However one area that is often raised during negotiations and may result in a dispute between the vendor and purchaser during settlement preparation is a change in the area of a lot.

In a recent decision in the Supreme Court of Victoria, the Court decided in favour of a purchaser to rescind a contract for sale for a variation of less than 5%. Whilst this is not a New South Wales case, it is a cautionary reminder of a vendor’s obligations when entering into an off the plan contract.

The Supreme Court decision of Burger & Ors v Longboat Holdings Group2 Pty Ltd [2021] VSC 469 (Burger v Longboat) has created doubt that despite the terms of the contract for sale to the contrary, a variation of less than 5% in the area of a lot may give rise to a purchaser to rescind the contract or claim compensation.

Background of Burger and Longboat

Burger and Longboat entered into a contract for sale for the sale of an off the plan contract.

The contract for sale incorporated a special condition that the purchaser acknowledges and agrees that an amendment made to the plan of subdivision which altered the area of the lot by 5% or less will not be regarded as an amendment which materially affects the lot. This is not an uncommon provision in off the plan contracts.

On registration of the plan of subdivision, the area of the size of the lot was reduced from 95 square metres (as shown in the draft plan of subdivision attached to the contract for sale) to 91 square metres as shown in the registered plan of subdivision. This was less than a 5% decrease.

However, the reduction in the area of the lot occurred predominately in the main bedroom. The reduction in size of the master bedroom had been reduced by 4 square metres. In addition, an alcove was created which the purchasers stated made the master bedroom unusable as bedroom furniture could not be placed appropriately in the master bedroom.

Further, the purchasers claimed that there was a:

• reduction in the size of the light court, which effected the flow of natural light into the master bedroom;
• change in size and location of one of the car spaces forming part of the lot; and
• decrease in the size of one car space.

The purchasers purported to rescind the contract for sale based on these amendments which was rejected by the vendor. The purchasers commenced proceedings against the vendor in accordance with section 49(1) of the Property Law Act 1958 (Vic) seeking a declaration to rescind the contract for sale.

The Court did not accept the vendor’s arguments that:

• there was only a “modest change” to the size of the master bedroom; and
• the total reduction in the size of the lot of 4.39% which was less than a 5% reduction in size, which was “generally regarded as tolerable” . The vendors relied on the decision in Birch v Robek [2014] VCC 68; which stated “that 5% was a material cut off point for a reduction in the size of the property.

In arriving at its decision, the Court took into account:

1. reduction in the size of the master bedroom together with the negative effects of the useability of the master bedroom and the distribution of natural light; and
2. as a result of the reduction in the light court, this affected the flow of light into the bedroom.

The Court did not consider that the changes to the car parks were material.

The Court ordered the rescission of the contract for sale.

Should we update the off the plan contract to remove the 5% tolerance?

No.

However vendors need to be aware of what may constitute a Material Change. In some instances, a change of less than 5% will not constitute a Material Change but in other cases it may.

Whilst you may not be able to complete eliminate the risk, there are a number of ways you may be able to minimise the risk. By way of example:

1. Prior to the amendment to the Act, off the plan contracts were entered into subject to development consent. If a contract is entered into subject to a development consent, it is likely that plans, 88b instruments, management statements are not in final form as the vendor does not know if changes will be made by Council. In this instance, we would recommend going to market once you have a development consent and if dealing with a modification, then the details of the modifications are set out clearly as a vendor disclosure.
2. Section 88B instruments, management statements, bylaws are all legal documents. Each document must be prepared to incorporate appropriate terms and conditions having regard to the development being constructed. These documents form part of the Disclosure Statement and if they are required to be updated closer to registration, then the changes may entitle the purchaser to rescind the contract for sale or claim for compensation.
3. Plans of subdivisions as well as the documents listed in Item 2 above should be in final form when the vendor is going to market.
4. When negotiating your building contract, ensure that the variations permitted by the builder are clear. Whilst this may not be achievable If you can negotiate zero tolerances or a tolerance much less than 5%, do so.
5. In the event that changes need to be made to the Disclosure Statement, then a careful analysis must be made to consider the ramifications of such changes and the purchasers rights.

If you have any questions as a result of the impact of this case or any other matters relating to title structuring, off the plan sales and contracts or property development, please do not hesitate to contact Kathy Gray.

This article was written by Kathy Gray, Partner.