Buying off the plan? A lesson in contract specificity

The NSW government introduced new disclosure requirements for developers entering into off-the-plan contracts for residential developments from 1 December 2019. A Disclosure Statement is now required to be attached to a contract for sale that includes information such as sunset dates, whether development approval has been obtained and details of any strata scheme, community precinct or neighbourhood scheme the lot may form part of. The developer is also required to attach a number of prescribed documents, including a draft plan prepared by a registered surveyor, any proposed schedule of finishes and draft strata by-laws. In other states, there are varied requirements for attachments to the contract:

• Victoria: The contract must be accompanied by a conspicuous notice to the purchaser stating that amount of deposit can be negotiated, that a long period of time may pass before they are the owner of the lot and that the value of the lot may change and also details of any works affecting the natural surface level of the lot.
• Queensland: The contract must include a disclosure plan, disclosure statement, plan of survey, proposed community management statement (for proposed lots in a body corporate) and must include a date for settlement.
• Western Australia: The contract must include a condition that the vendor will become the proprietor of the lot within 6 months (or other period) and a warning that the vendor is not the proprietor of the lot.
• ACT: The contract must include default rules, details of the body corporate, rules regarding animals and proposed development stages.
• Northern Territory: The contract must include a disclosure statement including information on the body corporate and the proposed plan.

Over the course of the contractual relationship, vendors must notify purchasers of any changes that are made to “material particulars” that were previously disclosed. This may include changes to the draft plan, the by-laws or easements affecting the lot.

If a purchaser can show that they would not have entered into the contract had they been aware of the change and that they are materially prejudiced by the change, they are entitled to rescind a contract because of a change to a “material particular”. Provision also exists for a purchaser to claim compensation of up to 2% of the purchase price for the change, with arbitration offered as a dispute resolution mechanism.

As part of the new legislative regime, the cooling off period for off-the-plan contracts was extended to 10 business days and a new form has been produced by the Law Society of NSW for this purpose. From 2 June 2020, this new form must be used in all contracts for sale in NSW. This is now a significantly longer period than found in other states – three clear business days in Victoria; five business days in Queensland and two clear business days in South Australia.

The case of Liao v LNG Properties Pty Ltd [2019] NSWSC 1846; BC201912615 demonstrates the importance of specificity in contracts for off-the-plan developments. It also shows the pitfalls of a vendor entering into a new contract for sale with a replacement purchaser. The facts of this case relate to a period before the commencement of the new legislative regime in relation to disclosure of material particulars by developers, but are illustrative of the issues that can arise that the NSW legislature has attempted to address.

In 2016, a purchaser entered into an off-the-plan contract to purchase a residential apartment in Ashfield, NSW from a developer. During negotiations, the purchaser was shown promotional material by the agent showing an internal area of 75 sqm for the apartment. The contract was silent on the internal area of the apartment.

The contract was rescinded in 2018 and a new contract was entered into by the original purchaser’s partner, Ms. Li. The new contract enabled Ms. Li to rescind the contract if the internal area of the lot was reduced by more than 5%. As constructed, the apartment was 70.8 sqm, which was a reduction in area of more than 5% from the represented area of 75 sqm and Ms. Li rescinded the contract.

The court found that Ms. Li was entitled to rescind this contract and also that had the original purchaser’s contract remained afoot, he could have done the same for his contract.

This case is a good example of the way courts are likely to interpret contracts that are ambiguous.  The courts generally will strive to give contracts a sensible and business-like meaning. It remains to be seen whether the new legislative regime will ameliorate these issues, but it would be prudent for practitioners to ensure that off-the-plan contracts are drafted clearly and specifically.

For more information in issues discussed above read, full articles Mandatory disclosure obligations for off-the-plan sales (2020) 35(3) APLB 46 and Off-the-plan contracts and unit size: a lesson on contract specificity (2020) 35(1&2) APLB 2 or subscribe to our Australian Property Law Bulletin.