Vendor Disclosure & Warranty

Transcription

1 AUSTRALIAN INSTITUTE OF CONVEYANCERS (NSW DIVISION) 2017 EDUCATION PROGRAM Vendor Disclosure & Warranty PRESENTED BY: TONY CAHILL 10 APRIL, 2017 CROWNE PLAZA NEWCASTLE CNR MEREWETHER STREET & WHARF ROAD, NEWCASTLE

2 Legal Commentator and Author TABLE OF CONTENTS About the author... iii Purpose of investigations 1 The general law duty of disclosure 2 Statutory intervention the anti-gazumping legislation 6 The range of investigations 7 The timing of investigations by the purchaser 7 Some issues regarding section 149 certificates 8 Some issues regarding drainage diagrams 19 Building certificates 20 Swimming pools 23 Home Warranty Insurance and Vendor Disclosure 25 Changed disclosure obligations as from 15 January A summary of the home warranty provisions 37 Mine Subsidence Compensation Act a special warranty 41 i

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4 ABOUT THE AUTHOR started practice in After 13 years with a medium-sized city law firm, Tony commenced practice on his own account at Chatswood until June Tony is currently undertaking a sabbatical from private practice to concentrate on projects in continuing professional education. Tony is a member of the Law Society s Property Law Environmental, Planning and Development Committees. He has been a member of the Re- Draft Committees for the 2000 and 2004 editions of the Contract for the Sale of Business, and the Contract for the Sale of Land since the 1992 edition. Tony was a co-author with Russell Cocks and Paul Gibney of the first New South Wales edition of 1001 Conveyancing Answers, and is currently a coauthor of the Conveyancing Service New South Wales, and Annotated Conveyancing and Real Property Legislation New South Wales, both published by LexisNexis. Tony is also the General Advisor on the recently released online product LexisNexis Practical Guidance Property Law Module. Tony has been a part-time lecturer at the University of Technology, Sydney, in subjects including Construction Law, Legal Studies, and Real Estate Law, and a part-time lecturer at the Sydney and Northern Sydney Institutes of TAFE in various law subjects. He lectures in the Applied Law Program at the College of Law, Sydney. iii

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6 Purpose of investigations When acting for a vendor, investigations can be undertaken for several purposes: to enable the vendor to comply with disclosure obligations imposed under the general law; to enable the vendor to comply with statutory disclosure obligations (principally under the Conveyancing (Sale of Land) Regulation 2010 Schedule 1, but also, for instance, under the Home Building Act 1989); to determine whether there are circumstances which may give rise to a breach of statutory warranty (Conveyancing (Sale of Land) Regulation 2010 Schedule 3); to preclude objection to a breach of an implied term (Conveyancing (Sale of Land) Regulation 2010 Schedule 2); to comply with non-statutory disclosure obligations imposed under the contract (for example, the provision of a section 109 certificate); to check whether it is necessary to preclude objection to a matter affecting the property via an express term of the contract (typically clause , but also note clause 17 dealing with disclosure of tenancies); and to facilitate the transaction even where disclosure is not strictly necessary, it may be helpful in the marketing of the property or in encouraging a cautious purchaser to proceed to exchange. From the purchaser s perspective, investigations may be undertaken: to investigate the quality of the property being sold; to test the validity of statutory warranties; to verify information supplied by third parties (for instance, obtaining certificates of currency to verify information in a section 184 (formerly section 109) strata information certificate); 1

7 to quantify any adjustable rates, levies and charges affecting the property; and to determine whether any amount is owing to an authority which may give rise to a charge on the land. The general law duty of disclosure The general principles regarding the vendor s duty of disclosure are as follows: 1. The vendor will generally have to disclose any latent defects in title. A latent defect is one which is generally not discoverable on an inspection of the property. Some examples include: drainage or sewerage easements not discoverable from a surface inspection (Micos v Diamond (1970) 72 SR (NSW) 392); restrictive covenants (Re Roe and Eddy s Contract [1933] VLR 427); or an undisclosed public or private right of way (Ashburner v Sewell [1891] 3 Ch 405). 2. A purchaser s remedies for failure to disclose a latent defect in title will depend on the gravity of the defect. If the defect is serious or substantial, the purchaser can terminate the contract, or seek specific performance with compensation. In any other case, the purchaser s remedy will be the usual error or misdescription remedy of compensation. 3. Whether or not the vendor knew about the defect at the time of making the contract is irrelevant. The purchaser s state of knowledge is relevant. If the defect in title was irremovable (that is, could not be rectified by a payment of money for example, a mortgage would not be an irremovable defect, and so the fact that the purchaser knew of an existing mortgage would not of itself mean the purchaser was taking title subject to the mortgage) and known to the purchaser (which knowledge includes an awareness that it is intended that the purchaser take subject to the encumbrance), then the purchaser will have to put up with the defect, in the absence of an express contractual obligation to provide an unencumbered title. 4. A vendor does not have to disclose a patent defect in title one which is visible to the eye, or which is discoverable by the exercise of reasonable care when inspecting the property. For such 2

8 defects the principle of caveat emptor let the buyer beware applies. Courts have been reluctant to find that a defect in title is patent in any but the most clear-cut cases. For example, in Yandle & Sons v Sutton [1922] 2 Ch 199, a track was situated on the property. The track ran, irregularly, from one side of the property to the other, and showed signs of periodical use by a number of people. The Court held the matter was latent rather than patent on the basis that even though the track s use was reasonably apparent to the naked eye, this did not necessarily indicate a legal right to use the track (it was, in fact, a public right of way). 5. If the defect is a defect in quality whether latent or patent the principle of caveat emptor again applies. Some common examples of defects in quality include: town planning restrictions (Pottinger v George (1967) 116 CLR 328; Lavery v Nelson (1984) NSW ConvR ; Carpenter v McGrath (1996) 40 NSWLR 39); breach of development consent provisions (Sullivan v Dan (1997) NSW ConvR ); structural danger of a building (Kadissi v Jankovic [1987] VR 225); termite infestation (Eighth SRJ Pty Ltd v Merity (1997) NSW ConvR ); flood-prone land (Maybury v Constantinou (1984) NSW ConvR ); a consolidated coal mining lease (Borda v Burgess [2003] NSWSC 1171: 11 December 2003, per Young CJ in Eq); and the lack of home warranty insurance (or its predecessor) under the Home Building Act 1989 (Festa Holdings Pty Ltd & anor v Adderton & ors [2004] NSWCA 228, 13/7/2004, discussed in more detail below). The caveat emptor rule is subject to a number of important qualifications. 1. Where the vendor has fraudulently concealed a defect in the property (for example, a serious structural fault is concealed by the vendor), the vendor intending that the purchaser acts on the 3

9 concealment and the purchaser does so. Some of the leading cases have involved papered-over settlement cracks (Anderson v Daniels (1983) NSW ConvR ); subsidence (Gronau v Schlamp Investments (1975) 52 DLR (3d) 631); or, in one case, even a cockroach infestation (Rowley v Isley [1951] 3 DLR 766). 2. Where the vendor has made a representation about the property, and that representation is untrue, the fact that the matter is one of quality will not necessarily preclude action. 3. Where the contract involves a house under construction or to be constructed by the vendor, there is an implied term that the house will be constructed in a proper and competent manner, using proper materials, and the end result will be reasonably fit for human habitation (Barber v Keech (1987) 64 LGRA 116). If these matters are expressly dealt with in the contract there will, of course, be no room for the implied term to operate. 4. The failure by a vendor to disclose an important defect in quality may be relevant to the exercise of a court s discretion regarding an action commenced by the vendor for specific performance of the contract or an action by the purchaser seeking a refund of deposit under section 55(2A) of the Conveyancing Act The purchaser may in some situations have a remedy under the Competition and Consumer Act 2010 for misleading or deceptive conduct relating to an otherwise non-actionable defect. For a useful discussion of the principles see Clancy v Prince [2001] NSWSC 85; [2001] ANZ ConvR 354; (2001) NSW ConvR ; [2001] ACL Rep (Issue 5) 355 NSW 24. A recent case of interest raising issues of misleading conduct by silence is Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 257; affirmed on appeal Hinton & Ors v Commissioner for Fair Trading, Office of Fair Trading (GD) [2007] NSWADTAP 17. The agent held the listing for a property which had been the scene of a notorious triple murder. The agent formed the view that this was not a positive marketing feature, and so, to put the matter neutrally, downplayed how the property had come to be for sale. An intending buyer with no knowledge of the property s history exchanged contracts, but discovered prior to settlement the history of the property. The buyer sought rescission and this was ultimately agreed to. The Office of Fair Trading took disciplinary action 4

10 against the corporate licence holder, the licensee-in-charge and the salesperson. Fines of the order of $28,000 were imposed. An appeal to the ADT confirmed the OFT decision. The judgment contained an interesting discussion of the law relating to stigmatized properties, and the duty of an agent to disclose such a matter to prospective buyers. The law regarding properties where a son has murdered his parents and sister is now clear. Issues such as how stigmatized the property has to be, whether there is a statute of stigma limitations, and whether the principles are different if the adjoining property to the one being sold was the scene of the crime await clarification. An important practical issue is how does the vendor (or, for that matter, the purchaser) investigate the possibility of stigma. One point of note for legal practitioners arising from the Hinton case is that the agent did seek legal advice in the circumstances set out at [8] of the decision at first instance: 8 In response to the questions as to whether he had received any legal advice as to how he should comply with his ethical and legal obligations in respect of the sale of the house, Mr Hinton said that he had spoken to the vendor s solicitor who told him there was no obligation to disclose that the house was the scene of the Gonzales murders. He had not sought independent legal advice with respect to his own obligations as agent, rather than the vendor s obligations. He thought marketing the property as a deceased estate was, the way I saw best to market the property in the absence of any other indication. He conceded that the nomination of the property as a deceased estate conveyed an explanation for the state the property was in. It appears that whatever may be the position of a vendor regarding disclosure, the vendor s agent may be subject to different principles, and have different interests. Editions of the standard contract since its inception have contemplated the possibility of contractual disclosure. As long as vendor disclosure was based purely as a matter of contract, there was a risk that the contract would be amended to limit, or, in an extreme case, even remove, the rights of a purchaser as regards defects in the property. This could be achieved either by use of a blanket clause requiring the purchaser to put up with a number of generically described items, or by what was to be dealt with by an attachment to the contract instead being summarised or paraphrased on the face of the contract. Users of earlier editions of the standard contract have long been encouraged to attach a zoning certificate to the contract. Some chose to delete reference to an attached certificate, and instead to 5

11 state the import of such a certificate. The problems which can arise with this practice are evidenced by cases like Sargent v ASL Developments Ltd (1978) 48 ALJR 410 and Champtaloup v Thomas [1975] 2 NSWLR 38. Statutory intervention the anti-gazumping legislation For many years purchasers of real property, and those advising them, operated under certain disadvantages derived from contract law and conveyancing practice. With a buoyant and rising real property market, a practice known as gazumping grew up. Vendors, who had agreed to sell the subject property, later executed contracts with a different purchaser whilst the first purchaser was still securing the certificates of relevant information concerning the property, necessary for completion of the purchase. Different views may be held about this practice. For some, it was simply the market forces at work. For others, it indicated a decline in honourable standards and a retreat from agreements solemnly arrived at but not formalised. Between the two views was an opinion that an attempt should be made to reduce the burden on purchasers of the costs thrown away upon a conveyance which would not proceed and the frustration of dislocated plans, given the frequent interrelationship of one conveyancing transaction with others. It was to attain the objective of reducing the burden on purchasers, diminishing the risks of gazumping and shifting obligations to the vendor that the Conveyancing (Vendor Disclosure and Warranty) Regulation 1986 (the Regulation) was made, pursuant to section 52A(9) of the Conveyancing Act The above (Copmar Holdings Pty Ltd v The Commonwealth (1989) NSW ConvR , per Kirby P), while part of a dissenting judgement, provides perhaps the most succinct summary of the policy issues behind the introduction of what is commonly (although, perhaps, slightly misleadingly) called the anti-gazumping legislation. After a false start with the infamous preliminary agreement era, the legislation has settled down and has produced comparatively little judicial commentary. In the rest of this session, the main features of the group of legislation dealing with formation of the contract and the purchaser s remedies for non-disclosure, will be discussed. The anti-gazumping provisions are contained in a number of different statutes, and have significantly different triggering requirements and consequences which are occasionally confused by practitioners. Time will limit consideration to what might be described as conveyancing statutes (Conveyancing Act 1919, and Property Stock and Business Agents Act 2002) and one other statute (Home Building Act 1989). The important 6

12 subordinate legislation is now Conveyancing (Sale of Land) Regulation 2010 and Property Stock and Business Agents Regulation More general statutes, such as the Australian Consumer Law in the Competition and Consumer Act 2010 (particularly, for instance, sections 18, 29 and 30 of the ACL the former sections 52, 53 and 53A of the 1974 Act), and non-statutory rights, such as contractual warranties, are important enough to merit a separate session. The range of investigations For a vendor, investigations prior to the formation of the contract should, at a minimum, include: those necessary to comply with statutory disclosure obligations; determining whether there has been any residential building work which could be the subject of disclosure under the Home Building Act 1989; ascertaining whether there has been any unauthorised building work; subject to instructions, those necessary to check whether there may be a breach of a statutory warranty the remedy for breach can be precluded; and where documents are attached to a contract for other reasons, checking whether those documents are accurate (not misleading, deceptive or likely to mislead or deceive). For a purchaser, and again subject to instructions, investigations should include at least: relevant quality reports; those investigations necessary to test relevant statutory warranties; for residential properties, whether there has been any work subject to the provisions of the Home Building Act 1989, and whether the vendor has complied with any obligations imposed under that Act (see sections 95, 96, 96A and 96B); and relevant rate and levy inquiries. The timing of investigations by the purchaser When should inquiries be undertaken on behalf of a purchaser? 7

13 Quality reports should be undertaken prior to exchange (or at least prior to the contract becoming unconditional). Matters relating to the Home Building Act 1989 should also be investigated prior to exchange, since lack of home warranty insurance will frequently be a matter going to quality rather than title see the discussion below. Inquiries to test the statutory warranties should be made shortly after exchange of contracts (since the warranty obligations are assessed as at the date of the contract). Rating inquiries and land tax clearances should be obtained shortly prior to settlement (frequently these can be made at the same time as the testing of statutory warranties; where there will be a substantial delay between exchange and settlement, such as in an off-the-plan purchase, the rating inquiries should be postponed until the proposed plan is approaching registration). A search of the Torrens Register can usefully be made shortly after the contract becomes unconditional. Some practitioners would argue that in the age of vendor disclosure a purchaser need only make a final search. My difficulty with that approach is that the title disclosure documents attached to the contract may be out of date by the time of the exchange; and finding out there is a problem only at the time of getting a final search result may not allow sufficient time to address the problem. Some issues regarding section 149 certificates Should the vendor obtain a section 149(2) certificate, or the additional information under section 149(5)? For the purposes of statutory vendor disclosure and warranty, a section 149(2) certificate suffices (see the definition of section 149 certificate in clause 3 of the Conveyancing (Sale of Land) Regulation 2010). Following the introduction of the more limited form of section 149(2) certificate in February 2009 (limited to dealing with complying development), the definition was amended to confirm that the limited section 149(2) certificate will not suffice for disclosure and warranty purposes. 8

14 For the purposes of contractual disclosure, the additional information under section 149(5) may disclose information which can be precluded from objection. For the purpose of facilitating the transaction, the full s 149 certificate will be welcomed by the purchaser. It should be said that the practices of councils relating to s 149(5) vary widely. Some councils include most useful information (such as whether there are outstanding notices affecting the property). On the other hand, I have seen a certificate where the information provided under s 149(5) was to the effect that Council has resolved not to provide any information under section 149(5). When does a section 149 certificate go stale? For the purposes of statutory disclosure, a section 149 certificate has no expiry date. For the purposes of vendor warranty, a section 149 certificate may become problematic the day after its issue, since a change in council policy may mean the certificate no longer shows the true status of the property regarding the matters which must be contained in a section 149(2) certificate. For the purposes of satisfying the requirements of an incoming mortgagee, the policy of the individual mortgagee will be relevant. Local councils frequently take decisions which are of a type which will be recorded on the planning certificate. The Regulation does not prescribe a lifespan for a planning certificate, but some judicial guidance is now available from the Supreme Court decision of Mandalidis v Artline (1999) 47 NSWLR 568; [1999] NSWSC 909; (1999) 9 BPR 16,845 (9 September 1999, Austin J). By contract dated 14 November 1996, the plaintiffs, as vendors, entered into a contract (substantially in the form of the standard 1992 edition of the joint copyright form) with the first defendant, as purchaser, relating to a warehouse and office near Kingsford Smith Airport. The section 149 certificate attached to the contract was dated 18 June 1996, and stated that the land was not affected by any council policy to restrict development by reason of land slip, bushfire, tidal inundation, subsidence, or any other risk. (The certificate also included separately a circular letter, suggesting that if 9

15 information about aircraft noise was required, a written inquiry could be made of the Federal Airports Corporation.) After exchange, the purchaser obtained a section 149 certificate, dated 19 December 1996, which stated that the property was affected by a council policy to restrict development by reason of land slip, bushfire, tidal inundation, subsidence, or any other risk. The policy was adopted on 4 June 1996 and amended on 18 June Details of that affectation were contained in an attachment to the certificate. Stripped of technical detail, the attachment effectively provided that, given the variation from time to time of flight paths, council would assume a worst case scenario in determining whether a property was affected by aircraft noise. If the property was affected, any development consent would be a Deferred Commencement consent to ensure that the development had been certified by the FAC and/or Air Services Australia to a specific Australian Standard. By letter dated 13 January 1997, the solicitors for the purchaser sent a copy of the second certificate to the solicitors for the vendor, and by letter dated 21 January 1997 purported to rescind. The purported rescission was resisted by the vendor, who treated the purported rescission as a repudiation and purported to terminate the contract. The vendor sought declarations as to the validity of the purported termination and the purchaser cross-claimed seeking a declaration of the validity of the rescission, or alternatively an order for recovery of the deposit under section 55 of the Conveyancing Act The Court found for the purchaser, holding that the purchaser was entitled to a refund of deposit for breach of the statutory warranty. The Court also held that, even if the purchaser had not been entitled to rescind for breach of statutory warranty, the purchaser would have been entitled to relief under section 55(2A) of the Conveyancing Act 1919 for a refund of the deposit, because the contract was misleading because of the failure of the certificate to refer to the policy on aircraft noise. It is tempting to suggest that aircraft noise should not be considered as a risk at all, or at least not as a risk of the same type as land slip, bushfire, tidal inundation, and subsidence, and so the council should not have mentioned this particular policy under the heading specified in the certificate. This argument was rejected by His Honour (at paragraphs [53] to [58]; 9 BPR at 16,858 to 16,860). 10

16 The right to rescind for breach of a statutory warranty is not unfettered. Clauses 16(3) and 16(4) of the 2010 Regulation (clauses 19(3) and 19(4) in the predecessor Regulations) must be considered. The purchaser was aware that the property may have been affected by aircraft noise either from extrinsic evidence (properties in Mascot would, by definition, be affected by aircraft noise), or from the reference in the earlier certificate. The matter affecting the land was not the aircraft noise itself (a matter which has long been regarded as a matter of quality rather than going to title), but the policy restricting development because of the noise issue. The defendant also argued that the failure of the purchaser to make the further inquiry suggested in the earlier planning certificate should count against the purchaser. This submission was also rejected by His Honour (at paragraph [63], 9 BPR at 16,861): The fact that prior to the contract, the first defendant made no evaluation of the policies of the Council in regard to development applications and the likely impact of any such policies on the value of the property is not to the point. In light of s52a and the legislative policy underlying it, a purchaser of the Property was entitled to assume, in the absence of anything unusual in the s149 certificate or other parts of the contract, that any necessary development application would not encounter any unusual difficulties, provided that it fitted the requirements of the appropriate zoning category. His Honour also held that, in order to give best effect to the remedial nature of the legislation, the test in what was then clause 19(3)(c) should be construed subjectively (that is, would this purchaser have entered into the contract) rather than objectively (would a reasonable person in the purchaser s shoes have entered into the contract (at paragraph [66], 9 BPR at 16,861-16,862)? Mandalidis v Artline gives guidance to practitioners about the practice of updating section 149 certificates. It is probably impossible to treat planning certificates on the same basis as foodstuffs, with a legislative, regulatory, or judicial use by date on the certificate. Practitioners will need to consider issues such as the land use, the relative activism of the council, the pace of development and redevelopment in the area, and so forth. What is clear is that, whether because of the statutory warranty or the operation of section 55 of the Conveyancing Act 1919, a certificate of the order of six months old imposes significant risks on the vendor. 11

17 One final point the first planning certificate postdated by two weeks the adoption of the council policy on aircraft noise. By coincidence, the date of amendment of the policy was the very day the first certificate issued. To that extent, the certificate did not disclose council s policy as at the date of issue. Will a section 149 certificate need updating when the prescribed content of the certificate changes? The above discussion needs to be read in the light of the changes to the content of section 149 certificates which have taken effect progressively since 27 February From time to time there have been changes to the prescribed content to be set out in a section 149(2) certificate. The key provision listing that content is Schedule 4 of the Environmental Planning and Assessment Regulation What should practitioners acting for vendors do in the light of the content in the Schedule changing from time to time? 1. Applicants for a section 149 certificate should ensure that the application form specifies that the applicant requires the full rather than the limited certificate. The Department of Planning (in Planning Circular PS-005 issued on 20 February 2009) has recommended that Councils modify their application forms to mention the possibility of obtaining a limited certificate, and has advised that by default all other section 149 certificates should set out all of the matters mentioned in Schedule 4. Presumably all Councils have now done this. 2. Recipients of a section 149 certificate should verify that the Council has supplied a full certificate setting out all the matters mentioned in Sch 4 of the EP&A Reg. 3. Where a contract (or option) has not been entered into, practitioners should seek instructions from, and the informed consent of, the vendor as to whether exchange should be delayed until a fresh section 149 certificate is obtained; if not, whether the vendor can make a contractual disclosure by other means. For risk management purposes those instructions should be in writing. Any additional provision in the contract should be so drafted that it 12

18 would not be construed as breaching section 52A (4) Conveyancing Act: (4) Except in so far as the regulations may otherwise provide, a provision, whether in a contract for the sale of land or any other agreement: is void. (a) which purports to exclude, modify or restrict any provision of this section or a regulation made for the purposes of this section, or (b) which would, but for this subsection, have the effect of excluding, modifying or restricting any such provision, 4. Where a proposed contract has been issued to an agent or auctioneer and the instructions are to update the certificate, the holder of that contract should be informed of the vendor s instructions, and warned about the dangers of a premature exchange of contracts. 5. Where a fresh section 149 certificate is obtained after a draft contract has been issued to a prospective purchaser, it may be prudent, notwithstanding provision 20.1 of the standard contract, to seek specific confirmation that the later certificate was annexed to the contract prior to execution by the purchaser (see the discussion of formation of contract in Zhang v VP302 SPV Pty Ltd [2009] NSWSC 73; BC ). 6. Where the contract (or option) was entered into on or after a relevant change date, and the planning certificate does not disclose the true status of the land, instructions and informed consent should be obtained from the vendor as to whether to make a post-exchange disclosure of the status of the land. On the one hand, prompt disclosure may be relevant to any later argument about whether the purchaser has elected to affirm the contract (this aspect is discussed in more detail below). On the other hand, any disclosure may alert the purchaser to an opportunity which might otherwise have escaped the purchaser s notice. It is strongly suggested that any disclosure be limited to answering the question raised by the relevant item in Schedule 4 (and if necessary specifying the reason why the Codes SEPP does not apply). Any mention of failure to comply with the Conv (SoL) Reg, or 13

19 mentioning the remedies available for breach would be, it is suggested, unnecessary and unwise. What are the implications for practitioners acting for purchasers? 1. Purchasers and prospective purchasers of properties which are prima facie within the operation of the Codes SEPP should be advised of the commencement (or extension) of the Codes SEPP. 2. Whether the practitioner is obliged to give more detailed advice about the effect of the Codes SEPP on the property will depend on the scope of the practitioner s retainer (see the observations of Bryson AJ in Luxford v Sidhu (2008) NSW ConvR ; [2007] NSWSC 1356 at [48] to [56]. That case is discussed below). 3. The importance of testing the vendor warranties by obtaining an up-to-date section 149 certificate on behalf of a purchaser (rather than relying on the certificate annexed to the contract) is highlighted by the successive changes to the Regulation. 4. The contents of a section 149 certificate attached to a contract exchanged on or after a relevant date should be considered to determine whether there is a breach of warranty. If so: The purchaser should be informed of the breach. Instructions should be taken to determine whether any of the restrictions mentioned in the Conv (SoL) Reg apply. If the purchaser is inclined to rescind, the purchaser should be warned that any entitlement to rescind may be challenged by the vendor (and that a challenge is even more likely when reliance is being placed on a ground which has only recently been introduced into the vendor disclosure and warranty provisions). It would also be appropriate to advise that a vendor will in general be more likely to resist rescission in a static or falling property market. If the purchaser were found to have wrongfully rescinded, the vendor could elect to treat the purported rescission as a repudiation, terminate the contract, keep or recover the deposit and sue the purchaser under provision 9 of the standard contract. The advice and subsequent informed consent should be readily provable. If the instructions of the purchaser are to rescind care should be taken that a right to rescind is not lost by waiver, election, affirmation 14

20 or estoppel. In particular, the right to rescind should be exercised promptly, and in the manner prescribed by Conv (SoL) Reg clause 17. What restrictions apply to a purchaser s entitlement to rescind for breach of statutory warranty? The right of a purchaser to rescind for breach of a prescribed warranty is limited both by the Conv (SoL) Reg itself, and, it seems, by principles of affirmation, election or waiver. Clause 16 of that Regulation relevantly provides: 16 Circumstances under which purchaser may rescind contract or option (1) The purchaser under a contract for the sale of land may rescind the contract:... (b) for breach of the warranty section 52A (2) (b) of the Act. (2) The purchaser under an option to purchase residential property to which a proposed contract for the sale of the land concerned is attached may rescind the option for breach of the warranty prescribed under section 66ZA (1) of the Act. (3) A purchaser may not rescind a contract or option under subclause (1) (b) or (2) unless: (a) the breach constitutes a failure to disclose to the purchaser the existence of a matter affecting the land, and (b) the purchaser was unaware of the existence of the matter when the contract or option was entered into, and (c) the matter is such that the purchaser would not have entered into the contract or option had he or she been aware of its existence. A specific disclosure in the contract independent of the section 149 certificate (for example, by way of an additional provision in the contract) would preclude rescission by the purchaser because of the effect of clause 16(3)(a) and (b). Clause 19(3)(b) is more likely to be of relevance to an experienced or sophisticated purchaser, or one with a working knowledge of the planning reforms. The predecessor to clause 16(3)(c) has been held to operate subjectively rather than objectively (Mandalidis v Artline, cited above, at [66]). Given the novelty of the expanded complying development regime, it is difficult to predict how a purchaser would subjectively view a parcel being (or not being) excluded from the operation of the Codes SEPP. Proponents of the 15

21 planning reforms may argue that if a purchaser acquired a site which was prima facie amenable to complying development (for example, a parcel on which construction of a single storey or two storey dwelling is not prohibited) and then discovered that the Codes SEPP did not apply the purchaser should have an entitlement to rescind. On the other hand, should a purchaser who buys a parcel which is clearly outside the Codes SEPP (for example, a site on which a multi-storey commercial tower is constructed) be entitled to rescind for a failure to disclose that the land is land on which complying development may not be carried out under the Codes SEPP? The attitude of a purchaser who discovers after exchange and prior to completion that the property is a parcel to which the Codes SEPP does apply may also be difficult to predict. Can a purchaser lose the right to rescind for breach of vendor warranty by affirmation, waiver or election? It is a well known principle of law that a man may by his conduct waive a provision of an Act of Parliament intended for his benefit. (Sandringham C.C. v Rayment (1928) 40 CLR 510 at 527 per Isaacs J). This principle is subject to a number of limitations commonly summarised as there can be no estoppel in the face of a statute. Whether the limitations operate in any given case will depend in part on the wording and purpose of the statute (see for example the analysis in the Court of Appeal of the rights of rescission under Part 6 Division 2 of the Home Building Act 1989 in Tudor Developments Pty Ltd v Makeig [2008] NSWCA 243). There have been cases where a purchaser has been held to have affirmed the contract and elected against the purchaser s right to rescind for breach of a warranty prescribed under section 52A: Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87; NSW ConvR ; Molotu Pty Ltd v Solar Power Ltd (1989) 6 BPR 13,460; NSW ConvR It should be noted that these two cases considered the operation of a differently worded warranty, and that the Regulation as it then stood did not contain a provision limiting the right of rescission as is found in clause 19 in the 2005 Regulation. To what extent does the purchaser s practitioner need to advise on matters mentioned in the s149 certificate which do not presently affect the property being purchased? The standard of care expected of a purchaser s solicitor in explaining to their client the effect of a section 149 certificate was considered in the case of Luxford v Sidhu [2007] NSWSC The purchasers sued their 16

22 solicitor alleging negligence in failing to explain the effect of the section 149(2) certificate annexed to the contract, in particular a notation of the existence of SEPP 53 and its (potential) effect on the property. The purchasers failed against their solicitor. This aspect of the case is considered at [48] [56]: 48 The duties of a solicitor to his client are largely the product of the express and implied terms of his retainer: what the solicitor is asked to do and agrees to do. 49 When narrating what he told Mr McBride he wished Mr McBride to do Dr Sidhu used expressions to the effect that he wished to be told whether the contract was in order or whether everything was in order. That is to say, Mr McBride was not told anything specific which altered his ordinary responsibilities. 50 The form of contract proposed to be exchanged was given to Mr McBride in a context which shows that he was to advise on entering into the contract, but without any instructions that might define his responsibility or extend it beyond what a reasonable solicitor giving such advice with reasonable care would ordinarily do. Annexed to the contract was a Planning Certificate of Ku-Ring-gai Council under s 149(2) of the Local Government Act which stated (accurately) that the zoning of the property was Residential 2(C) under the provisions of the Ku-Ring-Gai Planning Scheme Ordinance. The Planning Certificate also contained much other information including para 7 the heading What other planning instruments affect this property? and a list of the names of 25 State Environmental Planning Policies all of which applied to Ku-Ring-Gai. 51 The respect in which SEPP 53 affects 10B Beechworth Avenue is (and is no more than) that the property is within Ku-ring-gai Local Government Area and it is within power, by some future amendment to Schd 4, to make Part 4 and the planning controls under it apply to the land, and supervene other planning controls including planning powers of Ku-Ring-gai Council, restrictive covenants and other prior instruments; but none of this has happened. 52 Mr McBride had no particular knowledge of how SEPP 53 operated or what it said about parcels of land in Ku-Ring-Gai. If he had investigated the matter further (and he was not given time to do so) the most that it can be supposed he would have told Dr Sidhu is to this effect that under SEPP 53 land in Ku-Ring-Gai can be brought under special powers relating to medium density development, but this land has not been. If he had found that out and told Dr Sidhu, it would have had no relevant effect. 53 The primary responsibility of a solicitor to a client who is purchasing a property relates to the property itself; and at the centre of that responsibility is that it is the solicitor s responsibility to see that the client gets title to the property which the client wishes to acquire. The solicitor s responsibility extends 17

23 beyond title to other matters which closely affect the land being acquired including its zoning under Town Planning law; the availability of the land under Town Planning law for use for the purpose for which the purchaser requires it. I do not accept that in reasonable practice of solicitors in New South Wales dealing with residential property, solicitors do or should investigate the impact of town planning on neighbouring or other nearby property. In doing this I accept and rely on the evidence of Mr Moses, a solicitor who gave expert evidence, and also on the evidence of Mr McBride, whose practice handles a very great number of property sales. I respectfully do not accept views expressed by Mr Bluth; notwithstanding Mr Bluth s very wide experience, it seems to me that his views and evidence were affected by practice in dealing with commercial and development properties, which in turn should be taken to be affected by the purpose, known to the solicitor, for which purchasers wish to acquire property; attaining that purpose would often involve the client having some understanding of a wider town planning context than a person wishing to use the property as his residence would usually need. A solicitor s practice when acting for persons purchasing commercial property and development property is probably also affected by communication by clients of additional requirements, widening the scope of the retainer beyond what should ordinarily be taken to be the terms of a retainer relating to residential property. If a solicitor acting for a purchaser investigated the town planning controls applicable to properties other than the property being purchased, his conduct should be attributed to an indication by the client that a wider investigation was required, or to some general knowledge of the client s purposes and requirements which indicated that that was so. 54 Mr McBride s usual practice, of which he gave evidence, is fairly highly defined in a routine which is followed in the large number of matters which he has handled and continues to handle. In his affidavit evidence about his practice he said that I usually say to my clients words to the effect We do not search with regards to surrounding properties but only the property you are buying. As to what goes on in the neighbourhood, you must make your own enquiries of Council. In two earlier transactions in which he had acted for Dr or Mrs Sidhu, he had given advice to this effect in writing; the probability that he observed his routine and gave advice to that effect while speaking to Dr Sidhu on 2 May 2005 is very high, in my view. In the two letters of advice about two purchases in December 2000 Mr McBride said: We advise that all of the searches and enquiries that we do relate to the property that you are proposing to purchase and none of them relate to adjoining properties or the surrounding area. If you should wish to obtain details as to what is proposed or possible under current Council Zonings, it will be necessary for you to consult the local Council. We will take the opportunity to discuss this aspect with you. 55 In his letter of advice about a purchase in October 2003 Mr McBride said the same things, word for word. 18

24 56 It was Mrs Sidhu s evidence that in the earlier transaction she did not see the letters in which Mr McBride gave this advice. Dr Sidhu said that he had not received one of them. I do not doubt that he received the other and saw what it said: and these letters are part of the proof of Mr McBride s practice of advising in those terms. I do not accept Dr Sidhu s evidence that he was not told to that effect by Mr McBride on 2 May Dr Sidhu denied that Mr McBride said to him to the effect that Dr Sidhu should make sure that finance was right, that the builder s reports and pest reports were organised and that the Sidhus have done their enquiries with regard to the local area; he said (t125/27) A. He said none of those three things. I find it markedly improbable that Mr McBride said none of them. In my finding, Dr Sidhu and Mrs Sidhu were very committed to acquiring the property, and pursued their object of an immediate exchange that day, and Mr McBride s advice had little effect on the course they took. Some issues regarding drainage diagrams Sewerage Service Diagram or Service Location Print (formerly sewer reference sheet)? Two different diagrams are available from Sydney Water one relating to the connections to the relevant property (and frequently including a sketch of improvements on the property), and another which gives a view of adjoining properties and connections. For the purposes of vendor disclosure, it seems either diagram fits the requirement. For the purposes of vendor warranty (and general law disclosure), neither diagram is guaranteed to disclose all sewers which might affect a property. Prudently, a vendor could obtain and attach both diagrams; a purchaser testing the warranty may also be well-advised to obtain both. The availability of two diagrams appears to be an issue unique to Sydney Water; my understanding is that Hunter Water has a single diagram, as do most councils where the council has responsibility for sewerage and drainage matters. What if a diagram is unavailable? The vendor disclosure requirement is limited to where the diagram is available from the authority in the ordinary course of administration. To forestall inquiry from a purchaser about the lack of a certificate, it may be appropriate to include a special condition explaining the absence. 19

25 For the purposes of statutory warranty and general law disclosure, alternative means of disclosure (attaching plans) or a special condition would be appropriate. What if the diagram is known to be inaccurate? For vendor disclosure compliance, the diagram should be attached. The disclosure should be accompanied by a special condition explicitly identifying the inaccuracy, and, to the extent possible, disclosing the true position. Building certificates Until about 1996, it was considered that, where a purchaser found after exchange of contracts that illegal building work had been undertaken on a property, the possibility that the council could order demolition of the offending work may constitute a defect in the vendor s title, and the failure to disclose the illegal work in the contract grounded rights in the purchaser. (See Borthwick v Walsh (1980) 1 BPR 9259; Maxwell v Pinheiro (1979) 1 BPR 9225, and note the discussion in the first edition of Peter Butt s The Standard Contract for Sale of Land in New South Wales at ). On that basis, common practice was for a purchaser to investigate legality of building work after exchange. But that line of authority has been overruled by the Court of Appeal in Carpenter v McGrath (1996) 40 NSWLR 39. That case is authority for the proposition that the risk of the council ordering demolition of a structure passes on exchange the normal equitable principles apply (as reflected in clause 11 of the standard contract). On similar reasoning, the failure of an owner to comply with certain council conditions of consent was held not to be a defect in the vendor s title Sullivan v Dan (1997) NSWConvR The purchaser is protected where an actual order pre-dates the contract, but not against the potential for an order. The Conveyancing (Sale of Land) Regulation 1995, and its predecessor the Conveyancing (Vendor Disclosure and Warranty) Regulation 1986, each gave some measure of protection to purchasers against illegal building work. If the council has issued an order to demolish, repair or make structural alterations to a building, and that order has not been fully complied with as at the date of the contract, that order will constitute an adverse affectation which will ground a breach of vendor warranty. The 20

26 purchaser will then have a statutory right to rescind (although that right has been restricted under the versions of the Regulation since 1995 see clause 16 of the 2010 Regulation). The more problematic area is whether a mere breach of council requirements, without the further step of the issue of an order, gives rights to the purchasers. This issue was addressed in both the 1986 and 1995 Regulations by the incorporation of an implied term in contracts for the sale of land. The implied term attempted to preclude a blanket removal of rights of purchasers by way of a general clause in a contract, requiring rather that any non-compliance be disclosed and clearly described in the contract. This approach has been used, and remains in use, in relation to encroachments. The problem with this approach is that the implied term effectively preserved the common law rights of a purchaser, and, since Carpenter v McGrath, those rights are, in a practical sense, non-existent. The Conveyancing (Sale of Land Amendment (Vendor Warranty) Regulation was gazetted on 18 December 1998, and commenced on 1 January The key effect of the Regulation was to move non-compliance with the Local Government Act 1993 (and now, relevantly, the Environmental Planning and Assessment Act 1979) out of the realm of an implied term and into the realm of a vendor warranty. The regulation expired as part of the subordinate legislation program with the commencement on 1 September 2000 of the Conveyancing (Sale of Land) Regulation The 2000, 2005 and 2010 Regulations continue the regime of the 1995 Regulation as amended. What are the consequences of this move? The matter is not a vendor disclosure requirement. In other words, it is not compulsory for the vendor to obtain and attach a building certificate. Being a vendor warranty matter, the right to rescind for breach of warranty is not unfettered in addition to the matters already dealt with in clause 16 of the Regulation (whether there was a failure to disclose the matter to the purchaser, the purchaser s state of knowledge when the contract was entered into, whether the purchaser would have entered into the contract had the purchaser been aware of the existence of the matter), the issue of a building 21