In brief - Two recent property contract cases provide valuable lessons for buyers and sellers

It is important to obtain legal advice and undertake due diligence (such as contacting the local council) prior to entering into a contract to buy or sell property. This is demonstrated in two recent cases, one involving an outstanding work order and the other, unapproved building works. 

Outstanding work order case

In Namrood v Ebadeh-Ahvazi [2017] NSWCA 310, the seller performed earthworks to his property prior to entering into a contract to sell the property. The earthworks were declared illegal by the local council and he was issued a work order requiring that he reinstate the property to its previous condition. Once the property went under contract, as per a condition in the contract, he agreed to reinstate the property to comply with the works order prior to completion. 

The contract contained references to both "completion" and the "completion date", and the Court found that these two terms had different meanings. "Completion" is the date on which the title is transferred to the buyer after the parties have performed their respective obligations, whereas the "completion date" is a different date altogether, being a defined term in the contract (in this case, it was defined as "35 days after the date of this contract"). 

When the seller failed to comply with the works order by the completion date, the buyer served a Notice to Complete on the seller and purported to terminate. This was not accepted by the seller who alleged his obligations to do the works only arose prior to "completion" and therefore that the buyer had wrongfully repudiated the contract. 

Some months later, the seller obtained confirmation from the local council of his compliance with the work order, and then served a Notice to Complete on the buyer. The buyer did not comply with this Notice, and as a result, the court ordered that the seller could terminate the contract and keep the $146,000 deposit. 

Had the contract specified that the seller be required to satisfy their obligation to reinstate the property to its previous condition by the "completion date", rather than by "completion", the outcome arguably would have been quite different. It is likely that a buyer would have been entitled to terminate the contract on the seller's failure to comply with the work order, subject to a valid notice to complete being issued, and have the deposit refunded in full.

Unapproved building works case

In Huang & Anor v Ceylan [2018] NSWSC 306, the sellers of a two-bedroom unit had, without the approval of their local council, created a third bedroom by constructing a wall on one of the sides of their media room, thereby enclosing it.

It was found that this was a breach of an implied statutory warranty and, consequently, the buyers were entitled to rescind the contract of sale and have their deposit refunded in full. 

This case serves as a warning to both buyers and sellers about the risks associated with buying and selling land where illegal building works have taken place. It also provides insight into how a court will classify certain building works and the disclosure obligations this creates for vendors. 

The implied warranty in the Conveyancing (Sale of Land) Regulations 2017 provides that:
The vendor warrants that, as at the date of the contract and except as disclosed in the contract that…there is no matter (emphasis added) in relation to any building or structure on the land (being a building or structure that is included in the sale of the land) that would justify the making of any upgrading or demolition order

Whether a "matter" existed was crucial as to whether a breach of this implied warranty occurred, with the Judge in this case stating that this exists "depends upon the state of the building itself".
It was found that the building of the new wall was not compliant with the State Environmental Planning Policy (Exempt and Complying Development Codes) 2008. This was because "it involved the construction of a new wall (containing a doorway), rather than the replacement or alteration of an existing one" and was an "enclosure of an open area". 

Accordingly, the local council was entitled to make an order requiring removal of the wall and the reinstatement of the unit in accordance with the council approved plans and, consequently, a matter "that would justify the making of any upgrading or demolition order" existed. On this basis, the breach of the implied warranty was found to have occurred and the buyers were entitled to rescind.
This case would arguably have had a different outcome if the contract disclosed that the creation of the third bedroom was not approved by the council and that the buyer acknowledged that they were buying the property subject to this non-compliance.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2024.

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