Claim free conveyancing

25 September, 2017
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Introduction

Claim free conveyancing has been produced to help practitioners avoid the most common mistakes which have resulted in a claim in conveyancing transactions. By being aware of how and why mistakes occur, you will be in a better position to protect against claims.

Claims against practitioners arising from conveyancing transactions are regular and consistent. Time and cost pressures, in what is a very technical area of the law, can result in simple errors.

For 2016/17 there have been 127 conveyancing claims notified being approximately 30 per cent of all claims. The cost for 2016/17 is estimated to be approximately $15 million.

To discuss any concerns you have when acting on conveyancing transactions, contact LPLC on (03) 9672 3800. While we are unable to provide legal advice, we can discuss danger areas, how claims may arise and direct you to relevant resources.


The causes

The three major underlying causes of claims in order of highest to lowest are listed below.

  • Failure to manage the legal issues
  • Claims continue to arise where the practitioner does not know the law, overlooked an issue or more common, did not collect enough facts to apply the right law. Owner builder requirements are a good example where not enough information is obtained and advice on the legal issue is not given.
  • Poor communication
  • These claims often involve the failure to give the client enough information to make an informed decision.
  • In addition, many clients have never retained a lawyer before and do not know how to work effectively with them. This lack of understanding also contributes to claims that could have been avoided or minimised if there had been better communication between the firm and the client about working together.
  • To help practitioners manage their clients’ expectations as well as explain both the client’s and lawyer’s roles and obligations in the relationship LPLC has developed a sample information brochure Working together – roles and obligations to illustrate what could be done.
  • Poor engagement management
  • This is about how firms set out the scope of the retainer at the beginning and manage any variations that occur during the retainer so both the client and the firm know what is being done and by whom.
  • Being vigilant about client management and properly scoping the retainer as well as using checklists can go a long way to minimising exposure to conveyancing claims.

Administrative matter

In this guide:

  • SLA refers to the Sale of Land Act 1962 (Vic)
  • section 32 statement refers to the statement required pursuant to section 32 of the SLA.

The most common mistakes

1. Duty, CGT, land tax and GST

2016/17 saw a substantial number of conveyancing claims in relation to all taxes including duty, CGT, land tax and GST. This is one of the reasons LPLC has produced two new checklists. One checklist is about raising tax issues with clients and the other targets GST issues.

Refer to the Checklists in the back of this booklet. All our checklists are available for downloading at: https://lplc.com.au/category/checklists/

Duty

Claims have also arisen where practitioners acting in the transfer of family farms to trustees do not appreciate that the transactions does not qualify for an exemption from duty.

When acting on the transfer of a family farm, practitioners need to explain the duty consequences and structuring options to the client, and document that advice. If the practitioner does not intend to give that advice, they should inform the client of the risk and the need for advice from another expert as well as document the limited retainer.

See our blog Trusts and family farm transfers posted 16 December 2016 for more information about this sort of claim and s.56 of the Duties Act 2000 (Vic).

Duty claims also arise where a practitioner provides advice without first checking whether the relevant legislation has been amended.

Example:

Transfer not exempt

The trustee of a family trust instructed the practitioner to transfer a property to a specified beneficiary.

The usual information about the transfer was obtained from the client including details of loan accounts and provided to the State Revenue Office (SRO). The consideration for the transfer was the forgiveness of a loan to the trust by the beneficiary.

The SRO determined that the transfer was not exempt pursuant to section 36A of the Duties Act 2000 (Vic). Duty was assessed and paid on the transfer.

The client subsequently complained to the practitioner that they would not have proceeded with the transfer had they been told duty would be payable before an assessment has issued. While there were arguments to say that the long-term benefits of transferring the asset to the beneficiary outweighed the duty payable, the client should have been given an opportunity to make an informed choice.

CGT

CGT claims have arisen where there is a related party transfer such as a transfer of land from a trustee to a beneficiary, between spouses and/or between related corporate entities.

Some clients may think such transfers are simply. Experienced practitioners know these sorts of transfers are anything but simple and should be treated no differently to an arm’s length conveyance.

One way to deal with clients who believe related party transfers are simple is to give them a list of issues which need to be addressed. The list would include items such as duty payable, CGT, notification to various authorities and dealing with any mortgagee on title.

Example:

No advice about CGT

In the decision of Snopkowski v Jones (Legal Practice) [2008] VCAT 1943, the tribunal found the practitioner had been asked by the client in general terms if any liability would flow from him transferring his property to his wife’s name. The practitioner advised the couple that the procedure to transfer the property would be relatively simple and the only cost would be the practitioner’s fees and a Titles Office fee. The practitioner said the issue of CGT did not even occur to her.

The tribunal held that when a practitioner is asked whether there would be any financial implications upon transfer of the property, it is reasonable to expect the practitioner would at least advise the clients to seek advice from their accountant or a tax lawyer relating to the issue of CGT. By failing to alert the clients to the possibility of CGT liability, the practitioner had breached the standard of care required of a practitioner in such a situation.

Land tax

There are numerous sections of the Land Tax Act 2005 (Vic) dealing with trusts and land tax.

Most land tax claims arise where the SRO form 8 notice of acquisition by a trust was not given to the SRO.

The key to avoiding these claims is to inform the client of the need to give notice and allocate who is responsible for giving notice − the client or the practitioner.

In addition, ask the client whether they are purchasing in a trustee capacity and check all conveyancing documents for any reference to a ‘trust’, especially the contract of sale and any nomination form.

When acting for a purchaser, you should always obtain a land tax certificate so the purchaser is protected pursuant to s96(4) of the Land Tax Act 2005 (Vic) in the event the land tax is altered later. That is, only the amount in the certificate can constitute a charge on the land.

For more information refer to the SRO website and search land tax and trusts as well as following the LPLC publications:

Example:

Was the purchaser a trustee?

A practitioner acted for a purchaser of a house. The property was marketed as a development site with the potential for a ‘number of premium townhouses STCA’.

The individual purchaser nominated a company as substitute purchaser. The matter settled in September 2011.

In early 2016 the SRO determined that the property was subject to the land tax surcharge for trusts and sought additional land tax of approximately $20,000.

The client contacted the practitioner and sought an explanation as to why notice was not given to the SRO of the acquisition by a trust.

In this claim the practitioner did not ask whether the purchaser was a trustee and the client did not volunteer the information. In recognition that both the client and practitioner were to blame for failing to give notice, the claim settled with a small payment to the client.

In a similar claim which resulted in a bigger payment to the client, the practitioner prepared the nomination form which referred to the nominee company in its capacity as trustee of a trust. The practitioner failed to either give notice to the SRO about the trust acquisition or tell the client to do this.

GST

The introduction of GST on 1 July 2000 imposed a layer of complexity for practitioners acting for vendors and purchasers in conveyancing transactions. Practitioners need to consider whether:

  • a vendor client is registered or required to be registered for GST
  • the sale is in the course or furtherance of an enterprise
  • the nature of the property being sold attracts GST
  • the supply falls within one of the exemptions.

The supply of habitable residential premises does not attract GST unless the sale is the first since the residence was constructed or undergone substantial renovation.

Where a supply may qualify as GST-free, the elements of the exemptions need to be considered. In the case of the farming exemption, has the property been farmed for five years immediately preceding settlement? In the case of the going concern exemption in the context of sales of tenanted non-residential premises, will the property be tenanted at the date of supply?

There are also questions of whether the contract should be GST-exclusive or inclusive and whether the margin scheme should be applied. Close attention needs to be paid to the proper completion of the GST provisions in the particulars of sale.

Claims continue to arise in this area and the number and cost of claims have not varied significantly over the last three years. The average has been eight claims a year costing approximately $600,000 per annum. The mistakes made have also not varied greatly from year to year.

Vendors’ practitioners are sued for:

  • failing to include a GST clause in the contract
  • including the wrong GST clause in the contract (a GST-inclusive clause instead of a GST-exclusive clause) or contradictory clauses in different parts of the contract
  • purporting to apply the margin scheme in circumstances where it is not available (usually because full GST was paid on the acquisition of the property) or no agreement was reached to apply the margin scheme
  • failing to obtain the professional valuation for margin scheme purposes (when required) by the end of the tax period in which settlement falls
  • using the supply of a going concern exemption in circumstances where the strict requirements of section 38-325 of A New Tax System (Goods and Services Tax) Act 1999 are not met or
  • failing to collect GST at settlement, often because it was wrongly assumed it is not payable such as where the property sold is vacant residential land. Vacant land will not be considered to be residential premises and will attract GST.

Purchasers’ practitioners are sued for failing to:

  • provide pre-contractual advice on the existence and consequences of a GST-exclusive clause in the contract
  • protect a commercial purchaser’s entitlement to an input tax credit when purchasing on a GST-inclusive basis by failing to exclude the application of the margin scheme
  • advise the purchaser of the effect of a margin scheme provision or a mixed supply on the availability of an input tax credit or
  • ensure the tax invoice provided at settlement was correct.

Examples:

No pre-contract advice on GST

The practitioner acted for the purchaser of commercial offices. The purchaser informed the practitioner that they wished to purchase the property inclusive of GST and subject to obtaining a change of permitted use to residential as he intended to live there and the office building had originally been a dwelling. The practitioner drafted a special condition dealing with this issue. The parties ultimately agreed that the purchase price be exclusive of GST and the sale be a going concern because it was currently leased. The client intended to terminate the commercial lease several months after settlement and use it as a residence.

The problem with this structure was pointed out to the client by his accountant after the contract was signed. By changing the creditable purpose uses from going concern to private use within two and half years after the purchase, GST would become payable.

The client claimed that the practitioner should have provided GST advice prior to the exchange of contracts as to the different GST consequences of treating the property as a dwelling and input taxed compared to an office and sold as a going concern.

The purchaser’s practitioner failed to appreciate the GST consequences where a change of creditable use occurred so soon after the sale.

Margin scheme not available

The practitioner acted for a developer client selling an expensive parcel of land. The contract was prepared on a GST-exclusive basis with the ‘option’ of the purchaser one month before settlement requesting application of the margin scheme. The contract was entered into before the amendments to section 75 of A New Tax System (Goods and Services Tax) Act 1999 (Cwlth) which require the vendor and the purchaser to agree in writing that the margin scheme is to apply.

The day before settlement the purchaser asked for the margin scheme to be applied and provided a valuation equalling the purchase price resulting in no margin so no GST payable. The transaction settled on that basis.

After settlement, the vendor’s accountant advised that the margin scheme was not available because full GST had been paid and claimed on the acquisition. The vendor then looked to the purchaser to recover the GST. The purchaser refused and had to be persuaded by expensive litigation to change its position. The vendor’s practitioner was exposed for not having checked the availability of the margin scheme with the client or the accountant when preparing the contract or considering the out of time request for application of the margin scheme by the purchaser.

No pre-contract advice on GST-exclusive clause

The practitioner provided pre-contract advice regarding the client’s proposed purchase of a property on the city fringe which the client wanted to develop into residential apartments. The practitioner provided a comprehensive letter of advice concerning issues with the existing planning permit, contamination, the location of an easement, the timing of proposed demolition works and stamp duty. He otherwise described the contract as ‘standard’. No reference was made to the GST clause which provided the price was GST-exclusive and allowed for the application of the margin scheme. The matter proceeded to settlement without any reference to GST.

Shortly after settlement the vendor’s practitioners discovered the oversight and demanded immediate payment. The matter was resolved by payment of margin scheme GST. However, the client maintained he believed the price was GST-inclusive and all calculations on the project had been done on this assumption. He sued his practitioner for failing to advise on this aspect of the contract. The practitioner had capably advised on the unusual issues in the contract but had overlooked an obvious one.

Our recommendations

When acting for the vendor

  • Consider whether the GST threshold criteria are present.
    • Is the vendor registered or required to be registered for GST?
    • Is the sale in the course or furtherance of an enterprise?
  • If yes to both questions, consider whether the property being sold will attract GST.
    • Is it vacant land including residential vacant land?
    • Is it new residential premises including substantially renovated premises?
    • Is it commercial residential premises?
    • Is it non-residential premises?
  • If the property being sold will attract GST, ensure there is a clear GST treatment in the contract. Consult your client about whether the GST clause should be inclusive or exclusive and whether the margin scheme is available and should apply.
  • If the margin scheme should apply, ensure there is agreement in writing between the parties to this effect. If a professional valuation is required, advise your client in writing of the time frame in which the valuation must be obtained such as by the end of the tax period in which settlement falls.
  • If the property is farmland, consider whether:
    • the farmland exemption (section 38-480) will apply and no GST will be payable on the sale of the freehold, although GST will be payable on livestock, plant and equipment
    • the supply of a going concern exemption (section 38-325) will apply and no GST will be payable on the sale of the freehold, livestock, plant and equipment.
  • If the property is tenanted commercial premises, consider whether the technical requirements of section 38-325 and the ATO ruling GSTR 2002/5 are met with no GST being payable on the sale. In particular:
    • the vendor and the purchaser must agree in writing that the supply is of a going concern
    • the purchaser is registered or required to be registered for GST
    • the sale is not to the tenant
    • there is a tenant at the date of supply (usually settlement) and the contract provides for receipt of rents and profits, not vacant possession
    • the tenant is in occupation pursuant to a lease or periodic tenancy, not just a tenancy at will
    • if there is a temporary vacancy, it will be necessary to show a new tenant is being actively sought or the property is undergoing necessary refurbishment. However, this will not be sufficient if the premises have never been let
    • the purchaser does not intend to change the creditable use of the property in the near future.
  • Even if you consider the sale will be GST-free under the farmland exemption or as the supply of a going concern, include in the contract a GST-exclusive ‘claw back’ clause (with an expanded definition of GST to include penalties and interest) and a non-merger clause to protect your client. GC13 of the standard LIV land contract adequately deals with ‘claw-back’.
  • If a tax invoice is required, ask your client to provide it. Alternatively, check if your client is GST registered (not just ABN registered) before purporting to prepare a tax invoice on your client’s behalf.
  • If GST is payable in addition to the purchase price, ensure it is collected at settlement.

When acting for the purchaser pre-contract

  • Advise on the existence and consequences of any GST-exclusive clause.
  • If the price is GST-inclusive and your GST registered commercial purchaser is expecting to claim 1/11th of the price as an input tax credit:
    • recommend your client seek advice from their accountant about whether the proposed purchase is a ‘creditable acquisition’ for which an input tax credit can be claimed
    • if there are any maintenance, supply or other agreements in place for the benefit of the tenanted premises, that they are transferred to or novated in favour of, the purchaser.
  • Check whether the vendor is GST registered (not just ABN registered) and consider negotiating a special condition that the vendor shall remain GST registered up to and including the date of supply. Your client will not be entitled to an input tax credit if the vendor is not GST registered at the date of supply.
  • Check whether the margin scheme is to be applied. Application of the margin scheme will deprive your client of an input tax credit but would normally be regarded as important if the property is to be redeveloped and sold for residential purposes and has stamp duty implications.
  • Check the validity of any tax invoice provided at settlement.

When acting for the purchaser post-contract

  • Advise on the existence and consequences of any GST exclusive clause.
  • If the price is GST-inclusive and your GST registered commercial purchaser is expecting to claim 1/11th of the price as an input tax credit:
    • recommend your client seek advice from their accountant about whether the proposed purchase is a ‘creditable acquisition’ for which an input tax credit can be claimed.
  • Check whether the vendor is GST registered (not just ABN registered) and consider negotiating a special condition that the vendor shall remain GST registered up to and including the date of supply. Your client will not be entitled to an input tax credit if the vendor is not GST registered.
  • Check whether the margin scheme is to be applied. Application of the margin scheme will deprive your client of an input tax credit.
  • Check the validity of any tax invoice provided at settlement.

2. No advice about matters relating to the land

This category of claims relates to mistakes in advice given by practitioners acting for purchasers.

There are three common scenarios.

  • The practitioner gives no or inadequate pre-contractual advice on a pertinent issue. The client later alleges that had proper advice been given, they would not have signed the contract.
  • The practitioner fails to make post-contract enquiries and searches. The client later alleges that had the enquiries been made, information would have been disclosed giving the client the right to rescind.
  • The practitioner’s post-contract searches and enquiries reveal some critical information the vendor had not provided in the section 32 statement, which is not passed on to the client. The client later says they would have attempted to avoid the contract had they known of the information.

Specific errors made by practitioners include failing to:

  • advise on zoning or planning scheme matters or the existence of a restrictive covenant resulting in the client being unable to use the property as intended
  • detect the existence of drainage/sewerage easements resulting in the purchaser client being unable to build or extend where intended on the property
  • detect discrepancies in the section 32 statement, particularly as to whether services are connected to the property
  • advise on unusual lease provisions involving tenanted commercial premises, such as:
    • worthless rental guarantees
    • the existence or non-existence of options to renew
    • whether a five-year term has been created by virtue of section 21 of the Retail Leases Act 2003 (Vic) or
    • the early termination rights of the tenant
  • advise the client to check and/or measure the boundaries of the property
  • adequately handle all issues relating to water allocation and shares
  • obtain a VicRoads certificate which disclosed the land was subject to a proposal to acquire the land
  • advise on building notices
  • advise on the conditions in any crown grant.

Examples:

No advice on building approvals

The client entered into a contract to purchase the land and a B & B business. The section 32 statement showed there were no building approvals in the last seven years. The client’s practitioner did not apply for a building approval certificate, warn the client of the risks of not doing so or to make enquiries with council. When the client went to sell the land several years later it was discovered a building permit had been issued to the original vendor but no final inspection had ever been undertaken and the council had required works to be done to rectify the illegal structures. A claim was made against the practitioner for the cost of rectification works and the difference in the sale price once the new purchasers discovered the problem.

Easement revealed in search and client not informed

The practitioner acted for the purchaser and was provided with the contract of sale and the section 32 statement. However, the section 32 statement was 18 months old and since it had been prepared, a plan of subdivision had been approved with a three-meter sewerage easement at the rear of the property. The practitioner did the necessary searches but failed to draw the client’s attention to the easement prior to settlement. As a result, the client lost the chance to either rescind the contract or perhaps negotiate a lesser price and had to relocate the sewerage line.

‘Available’ not connected

A section 32 statement indicated sewerage was ‘available’ and the purchaser client assumed ‘available’ meant connected. The client’s practitioner applied for an information statement from the local water authority. On the back page of the statement it was noted the property was likely to be part of a sewerage development in the future and the landowner would be required to contribute to the cost. This was not detected by the practitioner who only read the front page. After settlement, the client discovered the sewerage was not connected, blamed the practitioner and sought to claim the difference in value between the sewered and unsewered land.

Our recommendations

When providing pre-contractual advice

  • Carefully check the contract, section 32 statement and associated certificates. If anything unusual is detected, warn the purchaser client and confirm your advice in writing.
  • Be on the look-out for zoning issues, planning overlays, restrictive covenants and unusual lease provisions where tenanted commercial premises are involved.
  • Ask the client what their intended use is and warn them to check with the local council about any use requirements. It may be that the intended use is prohibited and/or the current use is in breach of the planning scheme.
  • Obtain instructions to make further investigations if necessary or if instructed not to do so, confirm this in writing with the client.
  • Consider the need to obtain details of any lease(s) affecting the land.

When instructed to act post-contract

  • Apply for a full set of certificates, particularly where the section 32 statement contains certificates that are outdated (three months old as a ‘rule of thumb’) or incomplete, for example where it does not include a water information statement disclosing any unregistered easements. Some property reports are freely available at http://services.land.vic.gov.au/landchannel/jsp/reports/ReportsIntro.jsp
  • Make sure you carefully compare the results of your searches with the information in the section 32 Advise your client of any discrepancies or differences and the client’s rights to avoid the contract, if any.
  • Always advise your client to check and/or measure the property and point out to them the shape of the property on the title. Where the client is buying an apartment, it may assist the client if you highlight the relevant lot(s) on a copy of the plan of subdivision.
  • In the event that a section 32 statement indicates services are ‘available’, advise your client that ‘available’ may not mean connected and further enquiries should be made to determine which services are connected.
  • Always review any related documents contained in the section 32 statement such as a covenant and provide advice regarding all relevant terms.

3. Defective section 32 statements

Claims usually arise from the practitioner failing to:

  • ensure current and accurate information is used when preparing the section 32 This often occurs when the vendor is in a hurry or there are unreasonable time frames. The practitioner may take shortcuts such as recycling old certificates or using an old copy of the certificate of title resulting in serious consequences for the vendor client
  • include a description of any easement, covenant or other similar restriction, for example a 173 agreement registered on title
  • include required current certificates like owners corporation certificates, water authority information certificate, building approval certificates, Heritage Victoria certificates and current plans of subdivision
  • accurately identify and indicate in the section 32 statement whether services are ‘connected’. Too often, the misleading description ‘available’ is used resulting in claims
  • seek instructions to obtain information statements from the relevant water authority to provide current information about any unregistered easements affecting the land
  • check real estate agents have complied with requests made by the practitioner to amend, update or attach relevant certificates to the section 32 statement
  • check the location of property to see whether any potential growth area infrastructure contribution is payable for any growth area land brought into the Urban Growth Boundary 2005/06 or 2010 which is zoned for urban development.

Examples:

Recycled certificates

The practitioner was instructed to prepare a section 32 statement on the same day and did so using information from the file created several years earlier when acting for the client in the original purchase of the property. The section 32 statement stated the property was zoned Residential C but failed to indicate there had been changes in the meantime resulting in the property being subject to a significant landscape overlay. The purchaser’s practitioner did further searches and found this out. The purchaser rescinded the contract.

‘Short form’ section 32 statement

The vendor’s practitioner prepared the section 32 statement but a water information statement was not attached. After the contract was signed, the purchaser’s practitioner obtained a statement from the relevant water authority with an attached plan showing the course of a declared main drain running underneath the kitchen of the house. The purchaser’s bank refused to advance the finance to complete the purchase after being informed of the easement. The purchaser rescinded and demanded return of the deposit. The vendor resisted, but after costly court action the purchaser was successful.

Real estate agent held to account

On the instructions of the vendor who thought ‘connected’ sewerage included connection to a septic tank, the practitioner prepared the section 32 statement. Luckily, before the parties signed the contract, the practitioner picked up the error and instructed the estate agent to amend the statement to indicate the sewerage was ‘not connected’. Correctly, he kept a file note of these instructions. The section 32 statement was signed but the agent had not amended all copies of the statement; the vendor’s copy had been changed while the purchaser’s had not. The purchaser discovered the lack of sewerage and rescinded the contract.

The vendor took action against the real estate agent and the practitioner. The practitioner had protected his position by keeping good file notes. Without these, the practitioner would have shared the liability with the agent.

Our recommendations

When asked to prepare a section 32 statement on short notice:

  • make it clear to your client and the selling agent that it takes at least a week to obtain all necessary certificates required to prepare a section 32 statement and a statement prepared in a hurry may be invalid
  • point out to your client an invalid section 32 statement risks avoidance of the contract by the purchaser which may then involve double agent’s fees, delay and possibly a lower sale price
  • let your client know an invalid section 32 statement also carries the risk of an action for damages for misrepresentation
  • if despite this advice, your client insists the statement be prepared in a hurry, confirm the advice in writing to both your client and the selling agent.[A pro forma letter can be found at Appendix One.]
  • confirm whether an owners corporation exists and if so advise your client about the need for an owners corporation information (even if the owners corporation is said to be ‘inactive’) [See Appendix Four for more details on this issue.]
  • attach a copy of the Register Search Statement and the document showing the location of the plan such as the plan of subdivision to the section 32 See section 32I.
  • Do not rely on the duplicate certificate of title. Always conduct an up to date title search as it is preferable to obtain an historical title search.
  • Consider having your vendor client complete the LPLC sale of land questions for vendor checklist available for downloading from the LPLC website at lplc.com.au/checklist-sale-land-questions-vendor/
  • Apply for a fresh set of certificates. Make it your practice to obtain an information statement from the relevant water authority, which is necessary to establish whether there are any unregistered easements such as water, sewerage or drainage affecting the property or notices issued affecting the property. Read each certificate carefully.
  • Make proper enquiries to ensure the section 32 statement accurately states which services are not connected. See section 32H. Avoid using the term ‘available’. Further details are available at lplc.com.au/category/in-check/in-check-issue-60/
  • When instructing estate agents to amend, update or attach relevant certificates to the section 32 statement, keep a file note of any verbal instructions and confirm those instructions in writing.

4. Subdivisions

Many of these claims relate to ‘off-the-plan’ sales, although claims still arise where there are existing subdivisions particularly relating to identifying the right title and accessory units.

Practitioners acting for vendors get sued for:

  • transferring the wrong lot on a plan of subdivision, often because the lot number and street unit number are mixed up
  • the contract for the sale of a lot on an unregistered plan of subdivision not complying with section 9AA of the SLA by not providing that deposit monies are to be held in accordance with that section, giving the purchaser the right to rescind pursuant to section 9AE(1) of the SLA
  • not promptly attending to registration of the plan of subdivision, giving the purchaser the right to rescind pursuant to section 9AE(2) of the SLA
  • failing to advise on or obtain owners corporation insurance as required by section 11 of the SLA failing to draw clearly worded special conditions setting out the responsibility of the vendor and purchaser for certain works, usually in a subdivision development. For example, where both the vendor and purchaser have agreed to do certain building works, failing to specify which party is responsible for which works.

Practitioners acting for purchasers get sued for:

  • failing to spot a section 9AA or 9AE(2) breach, thereby depriving the purchaser client of the opportunity to rescind
  • failing to ensure car parks or accessory units are transferred
  • failing to detect a material difference between the proposed plan of subdivision in the contract of sale and the plan finally registered, usually with the lot size having been reduced, or a change in the boundary or an easement being added.

Examples:

Basement car park disappeared

The purchaser client bought an apartment off-the-plan expecting a basement car park to be included as part of the purchase. The registered plan did not provide for the basement car park. Despite having correctly obtained a copy of the final plan prior to settlement, the practitioner failed to notice this. Settlement occurred and the client did not get what they had anticipated.

While the vendor had failed to comply with its obligation under section 9AC(1) of the SLA to notify the purchaser of a change to the plan prior to registration, thereby depriving the purchaser of the statutory right to rescind under section 9AC(2), the practitioner should have picked up the change prior to settlement. If the practitioner had done so, the client could have taken action to rescind on the basis the change represented a breach of a fundamental term of the contract.

Deposit monies not correctly held

The practitioner acted for the purchaser in an off-the-plan contract. A non-standard contract was used and breached section 9AA of the SLA by not providing for payment of deposit monies into trust. This failure provided the purchaser with grounds to rescind the contract at any time up to the date of registration. When the purchaser encountered problems with the vendor developer, the practitioner did not pick up this failure and advise the client of this way out of the contract. Instead, lengthy disputation occurred which continued after settlement relating to significant building defects. The purchaser turned on the practitioner for failing to advise that they could have rescinded and avoided all the extra costs and inconvenience.

Cases to note

Practitioners drawing off-the-plan sales contracts should be aware of a number of cases that directly affect ‘off-the-plan’ sales. In Clifford & Anor v Solid Investments Australia Pty Ltd [2009] VSC 223 it was said that contract ‘sunset’ clauses must specify a time for registration of the plan of subdivision in explicit terms and cannot be subsequently extended by the vendor. In Everest Project Development Pty Ltd v Mendoza & Ors [2008] VSC 366 it was found the wording of the contract of sale did not comply with sections 9AA to 9AH relating to how the deposit bond could be called on.1

The fixing of the registration date was considered in Harofam Pty Ltd v Allen & Ors [2013] VSCA 105 and Harofam Pty Ltd v Scherman [2013] VSCA 104. A special condition in the contracts of sale provided for a 24-month period for registration of the plan of subdivision and this date could be extended once by six months. In reliance on the reasoning in Clifford, it was determined that this sort of clause breached section 9AE and the purchasers were entitled to rescind.

Our recommendations

  • Carefully check plans of subdivision and contracts of sale to ensure the plan is current and the contract accurately describes what is being bought or sold.
  • Check the registered plan of subdivision carefully. Do not assume that because the subdivision plan number is the same as the plan attached to the contract (or that the vendor has not notified the purchaser of any amendments) that no amendments have been made to the plan.
  • When acting for a vendor of a lot on an unregistered plan, ensure your precedent contract complies with the obligations imposed by the SLA and warn the vendor of the consequences of any breach including that the purchaser may rescind. Specifically:
  • Section 9AA: the contract must provide that deposit monies be paid into the trust account of a legal practitioner, conveyancer or licensed estate agent for the purchaser until the registration of the plan of subdivision.
  • Section 9AB: details of any works affecting the natural surface level of the land must be disclosed in the contract or, if carried out after the date of contract but before registration of the plan, must be disclosed as soon as practicable after details become known to the vendor.
  • Section 9AC: the vendor must notify the purchaser of any proposed amendments to the plan of subdivision prior to registration and, if the changes materially affect the lot, the purchaser may rescind within 14 days of being so notified.
  • Section 9AE(1): any breaches of sections 9AA and 9AB may result in the purchaser rescinding before the plan is registered.
  • Section 9AE(2): the purchaser may rescind if the plan is not registered within 18 months (or such other period specified in the contract) of the contract date.
  • Be aware of the insurance requirement imposed by section 11 of the SLA if the lot is affected by an owners corporation. Unless the owners corporation has the required insurance, the purchaser may avoid the sale at any time before settlement.
  • When acting for a purchaser, check compliance by the vendor with the SLA’s obligations and, if there is non-compliance, advise your purchaser client of the right to rescind.
  • Practitioners need to ensure their clients are aware of the expiry date for any planning permit including for the subdivision of land and the consequences for failing to meet the deadline. Unless there is a contrary provision, a planning permit for the subdivision of land expires five years after certification of the plan of subdivision. See section 68(1)(b) of the Planning and Environment Act 1987. Once the period has expired, the plan of subdivision will need to be recertified by the council and that can be costly. In some instances it may also be necessary to apply for a new planning permit to subdivide the land.

5. Building Act 1993 (Vic)

The complex provisions of the ‘owner builder’ sections of the Building Act 1993 (Vic), particularly as they relate to domestic owner builders, continue to catch practitioners out. Failure to ensure compliance with sections 137B and 137C result in the contract being voidable at the option of the purchaser at any time before settlement. The domestic owner builder requirements are summarised in Appendix Two.

When acting for a vendor, there are several common scenarios.

  • The practitioner focuses on the pre-contract disclosure obligations such as building approvals within seven years, certificate of insurance and condition report, completely overlooking the need for the section 137C warranties in the contract.
  • The practitioner assumes that because the domestic owner builder work is less than $16,000 in value, the requirements do not apply. The insurance requirements do not apply in these circumstances but the condition report and warranties are still necessary.
  • When preparing a section 32 statement the practitioner forgets to check that the condition report is less than six months old or fails to warn the vendor or agent that the section 32 statement should not be used once the condition report is more than six months old.
  • There has been a failure to assemble sufficient information for the practitioner to make an assessment of whether the vendor is an owner builder. This is often coupled with a failure to warn the client of the consequences of non-compliance including the purchaser being able to avoid the contract and the critical timing issues including that the requirements must be met pre-contract.

We have also seen claims against purchasers’ practitioners for failing to advise that the purchaser could avoid the contract because the vendor had not complied with the owner builder requirements. This often occurs because appropriate enquiries were not made to determine whether the vendor was an owner builder.

Example:

Domestic owner builder works overlooked

The practitioner received instructions to prepare auction contracts and a section 32 statement for the sale of a residence. The practitioner knew a garage had been constructed by a registered builder but did not consider the status of a further addition of an extra room carried out by the vendor as domestic owner builder for $45,000. The section 32 statement prepared by the practitioner included a property information certificate from the local council listing both building permits. However, the section 32 statement did not include a condition report or a certificate of insurance in respect of the further addition and the contract did not include the warranties. The purchaser avoided the contract and the vendor incurred significant losses as soon after there was a significant drop in the market and a much lower price was obtained.

Comments on the claim

A condition report which is no more than six months old at the time of contract prepared by a prescribed building practitioner such as an architect, building surveyor or building inspector must be given to the buyer pre-contract. Although it is common practice to attach an owner builder inspection report to a section 32 statement there is no legal requirement to do so.

Our recommendations

  • Take detailed instructions from a client intending to sell domestic property including answers to the following questions.
    • Have any building permits been issued in the last seven years or has there been any other building work in that time?
    • Who did the building work? Unless a registered builder’s name is on the building permit, sections 137B and 137C will apply.
    • What was the value of the building work? Was it more than $16,000?
    • When did the building work commence?
    • Was any occupancy permit or certificate of final inspection issued?
  • Warn your client in writing of the timing issues and the consequences of non-compliance.
  • If the requirements apply, ensure the condition report and certificate of insurance are provided with the section 32 statement and the section 137C warranties are set out in the contract. Insurance is only required where the value of the building work is more than $16,000.
  • When acting for a purchaser, check in whose name any building permits were issued.

The domestic owner builder requirements are summarised in Appendix Two.

6. Allowing a conditional contract to become unconditional

‘Subject to finance’ clauses continue to catch purchasers and their practitioners out and there are some common errors.

  • The practitioner and/or the client fail to realise the pre-approval letter from the financial institution is not a final approval and is conditional on a valuation. When the valuation is obtained it is too low for the purchaser’s needs but by then the contract has become unconditional.
  • The practitioner and/or the client do not realise the amount approved for finance is less than required.
  • The client is not given sufficient warning by their practitioner of the requirement to notify the vendor in writing by a specified time if finance cannot be obtained and the consequences of not doing so.
  • Delays occur in seeking an extension of time for finance approval or notifying that no finance was obtained, usually caused by oversight or administrative errors.

Examples:

Client not warned

The purchaser’s practitioner wrote to the client soon after receiving instructions relating to the purchase and informed him of the date by which finance needed to be approved. The practitioner also asked the client to notify the practitioner if finance had been approved by the required date. He did not warn the client of the consequences of not providing the information in time. The client appeared to be relatively sophisticated and the practitioner assumed the client knew the consequences.

When the approval letter was received, it was for less than the client required and subject to valuation. The client did not tell the practitioner until sometime after the approval date. The client alleged he thought if he could not get finance, the contract was automatically avoided. He says he did not realise the vendor had to be notified by a certain date in order to avoid the contract.

Client doing some of the negotiating

The purchaser’s bank was not prepared to lend the purchaser the amount he needed because the valuation was less than the purchaser had agreed to pay. While the purchaser’s practitioner was negotiating with the vendor’s practitioner about when the ‘subject to finance’ clause expired and an extension, the purchaser spoke directly with the vendor and arranged an extension of time to obtain another valuation. The purchaser’s practitioner was told of the oral extension by his client but did not confirm it in writing.

When the purchaser received the second valuation he decided to avoid the contract but the vendor said the extension was only to allow the purchaser to make an application for finance from a specific bank and the contract had now become unconditional.

The purchaser’s practitioner was blamed for not having told the client to avoid the contract when the first approval date was looming and for not confirming the extension date in writing. It could be said the client was very bossy, wanting to do his own negotiations and the practitioner let himself be pushed around.

Our recommendations

When a contract has a ‘subject to finance’ clause a number of things need to occur.

  • Write to your purchaser client immediately on receipt of the contract setting out clearly the date by which finance must be obtained. Spell out the consequences if the vendor is not notified in time that finance has not been obtained.
  • Confirm with the client any approval they receive is in writing, is final and not conditional, and is for an amount sufficient for their needs. Where time permits, ask the client to give you a copy of the letter of approval for finance and ensure you check these points.
  • If the approval is conditional, seek instructions to request an extension of time until the conditions have been met.
  • Do not leave requests for extensions of time for finance approval unanswered. Chase up the answer before the time expires.
  • Confirm any oral agreement to extend time in writing.
  • When time is about to expire, pay careful attention to requests for extensions or notification that the contract is at an end. Take steps to ensure letters dictated are actually typed and sent or faxes or emails are sent to the correct person/places.

For more information see the LPLC blogs:

7. Disbursement of settlement money without authority

It should go without saying that settlement funds should not be disbursed without first obtaining instructions, preferably in writing, but we continue to see mistakes in this area.

These claims arise in a variety of ways including the following scenarios.

Examples:

The silent vendor

The law firm acts for several parties who own property either as joint proprietors or as tenants in common. Instructions are given by just one of the vendor clients as to how the proceeds of sale are to be disbursed at settlement. When that client absconds with the money the other, ‘silent’ vendor client argues that the law firm had no authority to disburse the money as they did.

Owners in dispute

The law firm acts for one of several owners of property who are in dispute. Often a matrimonial or de facto separation is involved. The parties agree the property will be sold and the proceeds of sale are to be held by the law firm pending resolution of the dispute. At some point the client gives instructions for the proceeds to be paid in a certain way and the operator at the law firm either does not know or does not remember and takes no steps to check the basis on which the money was being held. They therefore pay the money out as directed and in breach of the trust on which the money was being held. While the law firm does not act for the other disputing vendor, it nevertheless owes them a duty to act in accordance with the agreed trust and cannot just act on its own client’s instructions if this involves a breach of trust.

Our recommendations

  • While it may seem obvious, practitioners are reminded that money held on trust must be dealt with in accordance with the terms on which it was accepted. If it was agreed that the money would be placed in a joint interest-bearing account in the names of both parties or paid out to discharge a particular debt, then that is what must happen. The law firm that holds the money on trust is responsible for seeing it happens.
  • The terms of the trust should always be revisited before any money is paid out.
  • Keep a file note of the instructions to disburse money and when given verbally, confirm the instructions in writing.
  • Where the parties cannot agree on how the money is to be paid out and the terms of the trust do not squarely deal with the situation, the practitioners should not pay it to their client or the party who shouts the loudest. Rule 12 of the Supreme Court (General Civil Procedure) Rules 20015 (Vic) sets out a procedure for a stakeholder’s interpleader. Practitioners are urged to pursue this procedure where it is available.
  • Proactive supervision of employed practitioners and clerks, and properly training them so that they understand why it is important to obtain instructions relating to the disbursement of settlement funds.

8. Intra-family transfers

These claims continue to arise mainly where the practitioner acts for an existing client who wishes to transfer property or gift the proceedings of the sale of a property to a family member, usually a child. The practitioner then also acts for the child.

The arrangement is usually done on the basis that the former owner client is entitled to live in the property for the rest of their lives. Subsequently the parties either have a falling out and the former owner leaves or the new owner mortgages the property and goes into default. In either case the former owner wants to undo the arrangement.

Allegations are made later that the practitioner preferred the interests of the transferee and failed to advise the transferor of all the risks.

The failure to advise that CGT may be payable on the transfer of the property can also be an issue.

Always consider CGT, stamp duty, land tax, GST, GAIC, FHOG and any affect to pension entitlements that may apply to any transfer between family members or related entities. If any of these are applicable, recommend to the client they consult with their taxation/accounting advisers before any transfer proceeds.

Examples:

Lack of ‘useable trail’

An elderly client came with her granddaughter to see the practitioner and instructed that she wished to have the property transferred to the granddaughter so the granddaughter could obtain a loan for extensions to the home. In return, the client could continue to live there.

The practitioner advised against the arrangement but failed to advise that an alternative would be for the client to retain the property and obtain a loan with the granddaughter acting as guarantor. The transfer proceeded and there was the inevitable falling out several years later.

The client alleged the practitioner did not protect her interests and failed to give her any warnings. The practitioner maintained he did warn against the arrangement but could not prove it as he had not kept any file notes or sent the advice in writing.

Our recommendations

  • Never act for both parties. Remember a deterrent excess applies where a practitioner acts for more than one party in a matter. See clause 5 of the LPLC insurance policy.
  • When the other party is unrepresented, tell them you are not acting for them and recommend the party obtains separate representation and advice. Confirm this in writing.
  • Warn the transferor client in writing of the dangers in these types of arrangements, in particular that the transferee will have the right to encumber the property.
  • Find out what the transferor client is trying to achieve by the transaction and consider if there are other ways of achieving the desired result. Advise your client of those options. For example, a transfer and mortgage back to the transferor may be appropriate in some circumstances.
  • Warn the transferor to seek advice from an accountant about possible CGT liability if the property is not the longstanding residence of the transferor.
  • Also see further information on Senior Rights Victoria’s website and in particular their booklet ‘Care for your Assets: Money, Aging and Family’ at seniorsrights.org.au.

For more information see:

9. Lost title or delayed settlement

One emerging issue to be aware of in relation to titles is the need to destroy or make a title invalid in certain circumstances in accordance with clause 6 of schedule 3 to the ARNECC Model Participation Rules. For more information about this issue see the LPLC blog Destroy titles or make them invalid?

From a claims perspective, this category usually involves a problem with a lost or unstamped and unregistered transfer of land which was either not picked up by the practitioner or actually caused by the practitioner.

The consequences of failing to stamp and register a transfer of land can be disastrous for a purchaser and may result in a penalty being imposed by the SRO.

These claims arise in the following types of scenarios.

  • Administration errors where documents (often transfers with title deeds) were sent back to the practitioner’s office for amendments and mistakenly put on the file. The file is then closed without anyone checking what is sitting on the file.
  • The documents were lost or delayed in transit or at a third party’s office such as the local council, bank or surveyor and the practitioner did not do enough to chase up the matter.
  • Titles were discovered missing at the time the client attempts to sell or mortgage the property because they were never transferred when the client bought the property, sometimes because no one realised there were multiple titles for the property.
  • There were special conditions on the contract which required other things to be done before settlement could occur such as the obtaining of an easement over adjoining property or the purchase of other property. The practitioner lost sight of those conditions and did not pursue them, resulting in delay.
  • At settlement the practitioner received a number of titles on behalf of a client in addition to the one required for settlement of the sale of the client’s property. The additional titles were handed over by the discharging mortgagee. The titles were placed on the file and no instructions were sought from the client as to what to do with the titles.

Examples:

Missing titles

The sale contract indicated the property consisted of five titles but prior to settlement the purchaser’s practitioners discovered that two titles were missing. Two of the existing titles were only ‘one equal undivided half part or share of the land’ and so the other ‘half part of share’ titles needed to be found. The previous vendor had failed to convey those titles and refused to do so when the current vendor requested them.

Three months after the problem was discovered, proceedings were issued to compel the previous vendor to transfer the titles. Those proceedings took 12 months. Just as they were resolved in the current vendor’s favour, his practitioner discovered a third title was missing. This time it was the title to a narrow strip of land that had been previously conveyed by the council to the previous vendor. Again the previous vendor would not hand over the title and further proceedings had to be issued. The total delay as a result of the missing titles was three years and eight months. The delay was argued to have cost both the vendor and purchaser significant damages.

Title left on file and destroyed

In one claim the practitioner acted for a client who was selling their house and also buying another property. Cheques for payment of the stamp duty and lodging fees for the new property were provided at settlement of the property being sold by the client in preparation for the forthcoming purchase. The transfer for the property being purchased, the title and goods declaration were all collected at the subsequent settlement and placed on the practitioner’s file together with the cheques instead of being registered. Approximately 10 years after settlement, the client sought to use the property as security for a loan. At this point, the client discovered that they were not registered as the owner of the property. On making enquiries with the practitioner, it was discovered the purchase file which contained the cheques for payment of the stamp duty and lodging fees, transfer of land, title and goods declaration had all been destroyed.

Transfer misfiled

In 2004, a practitioner acted for a company selling property to one of the directors of the company. The practitioner had a number of files for the vendor company. Following settlement, documents were lodged for assessment with the SRO but were rejected. On receiving the documents back from the SRO, they were placed on another file for the same client and this ‘other’ file was archived. The client discovered the error in 2011 with the missing documents eventually being found and re-lodged with the SRO. The practitioner ended up paying the interest due to the SRO and the client paid the stamp duty which would have been paid at the time of settlement.

Our recommendations

  • Always check files before closing to ensure there are no original documents left on the file.
  • Keep track of the date by which a document must be stamped, especially a transfer of land must be stamped no later than 30 days after settlement. Diarise for follow-up action regularly, such as weekly.
  • Inform the client at the first opportunity of your estimate of the amount of stamp duty and lodging fees payable. You may need to consider any stamp duty concessions, exemptions and/or the right to apply for the first home owner’s grant.
  • Advise the client of the date by which any funds must be provided to enable the practitioner to stamp and register documents as necessary and the consequences of failing to stamp and register in time. It is safest to seek the funds well before settlement.
  • Notify the client in writing that you accept no responsibility for reminding the client of the due date to provide funds to your office for stamping and registration.
  • Check the requirements of the purchaser’s financier for the stamping of the transfer. Most banks specify that a stamped transfer must be handed over at settlement.

10. Drafting errors

Many drafting errors occur in the contracts of sale, rescission notices, transfers of land for subdivisions or where a contract has been renegotiated and subsequently changed.

Typographical errors in the transfer of land are by far the most prevalent mistakes. Very often an earlier draft of a restrictive covenant is transcribed on to the transfer and while they may look very similar, they specify different lots for different restrictions or miss an important accepted use. Other mistakes have included omitting one of the titles to be transferred or referring to a dimension in a covenant as ‘meters’ instead of ‘square meters’. While it may seem like a formality, transfers of land need to be very carefully proofread to ensure they are accurate and the correct covenants have been used.

Mistakes frequently occur when precedents are used. Common errors include failing to take out irrelevant clauses, for instance an abatement of rent clause in a licence when that had not been agreed.

Particular clauses practitioners should check carefully are those dealing with remuneration for the vendor by way of rights to purchase or receive in lieu of payment, a unit in the proposed development. These types of clauses have either been inexplicably deleted from subsequent drafts of contracts or not drafted well enough to protect the vendor in the event the development does not go to plan.

Refer to part 11 of this booklet and the attached LPLC Vendor’s Practitioner Checklist for further details about rescission notices.

Examples:

Error in contract of sale

The practitioner acted for a vendor who was selling part of his land. The vendor owned multiple adjoining lots in the same subdivision. All of the lots were recorded on one certificate of title. The practitioner was instructed to sell only one of the lots in the certificate of title. The practitioner incorrectly described the land being sold as ‘all of the land in the certificate of title’. The error was only discovered after the purchaser became registered as the owner of all of the lots. To remedy the error, it was necessary for the purchaser to transfer land back to the vendor and this was done at the cost of the vendor’s practitioner.

Wrong precedent used

A practitioner was instructed to prepare an off-the-plan contract. The practitioner mistakenly included the wrong sunset date in an off-the-plan contract of sale. The practitioner was instructed that a period of 36 months was required to register the plan of subdivision but a 12-month sunset date was inserted in the contract. The practitioner had used a precedent contract which had a 12-month sunset date. One purchaser rescinded based on the 12-month sunset date as the vendor was unable to register the plan of subdivision within the 12-month period.

One crown allotment not included in the transfer of land

The practitioner acted for a purchaser of farm land. Seven crown allotments were included in the sale. When the transfer of land was prepared one of the crown allotments was missed.

The vendor and purchaser were notified of the error by the Land Registry a number of years after settlement. The purchaser’s practitioner spent a considerable amount of time resolving the matter and also paid compensation to the vendor for the time spent to rectify the error.

Our recommendations

  • Always proofread documents like contracts, rescission notices, transfers of land and double check the wording of any restrictive covenant.
  • When contracts are renegotiated, amended or reproduced always proofread them to ensure no clause has ‘dropped out’.
  • When using precedents, carefully check only relevant clauses have been left in.
  • Where the vendor is to receive other benefits under the contract besides payment at settlement, consider whether the relevant clauses adequately cover all contingencies.
  • When acting for multiple purchasers, specific instructions should be obtained relating to the manner of holding. Practitioners should not assume spouses and/or domestic partners wish to be recorded as joint proprietors.
  • Send the draft documents to the client for approval with explanatory notes of their purpose and meaning.

11. Rescission notices

Issuing a default and/or rescission notice requires accuracy and attention to detail. Many practitioners get caught out by failing to strictly comply with the notice requirements in the relevant contract of sale.

A regular enquiry LPLC receives is whether a vendor can rely on a rescission notice where the vendor is not ready to settle. This issue was considered in Barrak Corporation Pty Ltd v Jaswil Properties Pty Ltd [2016] NSWCA 32.

In this case the vendor issued a rescission notice. The matter proceeded to settlement before expiry of the notice but it was discovered at settlement that the vendor was not ready to settle as the transfer of land had been incorrectly executed by the vendor. The execution clause was mistakenly prepared by the purchaser’s representative for an individual person to sign rather than the corporate vendor execution. Settlement did not proceed.

The vendor sought to rely on the original rescission notice when the date to comply expired.

The court stated that the vendor could not exercise its rights to rescind as the vendor was not ready, willing and able to complete.

Claims relating to rescission of a contract of sale usually arise because a rescission notice is defective as it:

  • does not accurately specify default
  • does not accurately specify when the default must be remedied or required in the contract
  • is not served or required in the contract.

Claims have also arisen where a practitioner has failed to advise their client on all their options relating to a default.

Examples:

Rescission notice did not specify amount payable to remedy default

The purchaser failed to pay the balance of the deposit by the due date specified in the contract of sale.

The vendor’s practitioner issued a rescission notice which did not specify the actual amount of the deposit due but stated the particulars of default were ‘…failure to pay deposit by the date specified…’.

Proceedings were issued by the purchaser seeking specific performance and alleging the rescission notice was defective because no dollar amount was specified.

Serving a second rescission notice without instructions

In another example a vendor’s practitioner also served a rescission notice when the purchaser failed to pay the balance of the deposit by the due date.

After the rescission notice expired the purchaser’s practitioner pointed out the rescission notice was defective because it referred to the incorrect amount of the outstanding deposit. The vendor’s practitioner failed to take into account a part payment of the deposit of $500, which was paid to the selling agent on signing of the contract of sale.

The practitioner sought advice from counsel who believed it was arguable as to whether the notice was defective.

To protect the vendor’s position, the practitioner issued a second notice of rescission. This notice was issued without seeking instructions from the vendor client. The purchaser was able to settle within the 14 days of service of the second rescission notice.

The vendor brought a claim against the practitioner on the basis the second notice should not have been served without first seeking instructions from the vendor. Had those instructions been sought the vendor would have instructed the practitioner to rely on the first rescission notice. The vendor believed the property could have been resold for an amount greater than the original contract.

Failure to advise purchaser of consequences of rescission

A practitioner acted for a purchaser of a rural property who failed to pay the balance of deposit by the due date and as a consequence the vendor issued a rescission notice.

After the notice expired, the purchaser unsuccessfully attempted to negotiate an extension with the vendor for payment of the deposit on the basis that an additional amount would immediately be paid in reduction of the balance due at settlement.

The property was eventually sold to another buyer and the vendor sued the purchaser for the balance of deposit plus interest and legal costs.

The purchaser alleged the practitioner was negligent for not explaining to the purchaser the consequences of failing to comply with the rescission notice. Eventually the practitioner was joined as a party to the proceedings. The matter settled with payment to the purchaser on behalf of the practitioner.

Our recommendations

  • Before drawing a default and/or rescission notice always read the contract of sale carefully and be certain the client has the right to issue the notice. Consider whether this is the best option to achieve the client’s objectives.
  • Check the contract of sale to determine the requirements for a default or rescission notice and the form of service. Refer to Appendix Three for a form of default notice, combined default and rescission notice. Also refer to the LPLC blog What’s the difference between a default notice and a rescission notice?
  • Obtain instructions before issuing a default and/or rescission notice on behalf of a vendor.
  • Proof read the default and/or rescission notice and respect the necessity for a high level of technical compliance.
  • Send the draft default and/or rescission notice to the client for approval.
  • Specific advice should be given to a purchaser relating to a breach of the contract of sale, the effect of a default and/or rescission notice instructions and the consequences of failing to comply.

Refer to the attached LPLC Vendor’s Practitioner Checklist for further details about rescission notices.

12. Terms contracts

Both vendors’ and purchasers’ practitioners get caught out with terms contracts, usually because the practitioners fail to recognise the contract is a terms contract. As a consequence, vendors’ practitioners don’t advise their clients of what needs to be done to comply with the requirements in the SLA and the consequences of not complying. Purchasers’ practitioners fail to advise their clients they could get out of the contract.

Claims usually arise in relation to terms contracts where the practitioner is unaware of the relevant law.

Changes to the law

Terms contract amendments commenced on 22 April 2015 following Royal Assent on 21 April 2015 of the Veterans and Other Acts Amendment Act 2015 (Vic). See section 29A of the SLA.

Pursuant to the amendments, a terms contract will be constituted by sales where more than two payments are made other than the deposit and final payment or possession is given or to the receipt of rents and profits before the purchaser becomes entitled to a conveyance or transfer of the land.

The definition of deposit has been amended to make it clear that a deposit is a part of the purchase price specified in the contract as a deposit and required to be paid within 60 days of the execution of the contract. It can be paid in more than one amount provided it is paid within the 60 days.

The amendments also make it clear that any amount paid by a purchaser as a result of a default by them does not make the contact a terms contract.

Consumer credit code

LPLC has received calls about whether a terms contract is caught by the Consumer Credit Code. Whether the code applied to a contract which provided for vendor finance was considered in Gray v Latter [2014] NSWSC 122.

Vendor finance was agreed on terms that the purchaser would make repayments of $300 per week but they would have to repay the balance of the purchase price of about $240,000 after two years.

The purchaser was unable to refinance the loan before the two years expired so the vendor sought possession of the land and judgment in the amount of the purchase price.

The court rejected the purchaser’s argument that the vendor had breached the code which would result in the loan being invalid. The court’s view was that the vendor was not engaged in a business so the code did not apply.

Examples:

Failure to consider whether the contract was a terms contract

A land owner was approached by a developer wanting to buy their land. The parties negotiated the essential terms to be included in the contract of sale. The developer’s practitioner prepared the contract of sale and submitted it to the land owner’s practitioner.

The contract provided for four instalments payable over three years. The contract was entered into prior to the 2008 amendments to the SLA.

Unfortunately, the practitioner acting for the land owner failed to consider whether the contract was a terms contract. Two years after entering into the contract, the purchaser issued a rescission notice citing a breach of section 6(4) of the SLA.

Possession allowed before payment of residue

A practitioner was approached by a client who proposed to buy a large farming property for future development. The client intended to borrow and mortgage the property to fund the purchase and subdivision of the land.

He was going to then sell the lots off-the-plan and give the purchasers possession prior to payment of the residue but after registration of the plan of subdivision thereby creating a terms contract within the definition of section 29A of the SLA.

The practitioner failed to recognise that by selling on terms, the client would not be permitted to mortgage the land. The purchaser was forced to fund the acquisition without mortgaging the land and brought a claim against the practitioner for failing to properly advise him of the impact of creating a terms contract.

Our recommendations

  • Consider whether a terms contract will be created where there are multiple payments and/or where possession is given and obtain instructions as to whether this is what the client intends.
  • Always check the SLA to determine the current requirements relating to terms contracts.
  • Advise the client in writing of their options and the consequences of entering into a terms contract.
  • As entering into a terms contract may involve a client making financial decisions, consider the need to refer the client to their accountant and/or financial advisor.
  • Advise your vendor client of the risks of entering into a terms contract, especially where payments are made over a number of years.

LPLC Vendor’s Practitioner Checklist

This is not a comprehensive checklist but it will help you to avoid many mistakes made by vendor’s practitioners in conveyancing transactions. The checklist can be photocopied for ongoing use.

Section 32 statements

  • Check the following when preparing a section 32
    • Do not rely on duplicate certificates of title. Always conduct an up to date title search as it is preferable to obtain an historical title search. Read the titles to ensure they are not a ‘half part or share’ of land. Assess whether the titles you have cover all of the land being sold.
    • When asked to prepare a section 32 statement in a hurry, advise your client of the risks and confirm the advice in writing. See Appendix One for a pro forma letter.
      • Make it clear to your client and the selling agent that it takes at least a week to obtain all necessary certificates required to prepare a section 32 statement and a statement prepared in a hurry may be invalid.
      • Point out to your client an invalid section 32 statement risks avoidance of the contract by the purchaser which may then involve double agent’s fees, delay and possibly a lower sale price.
      • Let your client know an invalid section 32 statement also carries the risk of an action for damages for misrepresentation.
      • If despite this advice, your client insists the section 32 statement be prepared in a hurry, confirm the advice in writing to both your client and the selling agent.
    • Consider having your vendor client complete the LPLC sale of land questions for vendor checklist available for downloading from the LPLC website at lplc.com.au/checklist-sale-land-questions-vendor/
    • Do not rely on certificates more than three months old. Apply for a fresh set of certificates.
    • Read all certificates as soon as they are received.
    • Consider the possibility of unregistered easements. Question your client about the existence of agreements with neighbours or a neighbour’s use of an access track or water pipes across your client’s land.
    • Apply to relevant water authorities for information statements and ensure these are attached to the section 32 statement.
    • Include a plan of subdivision if appropriate.
    • Attach a planning certificate from the responsible authority.
    • Obtain a statement from the relevant municipality relating to building approvals.
    • Provide a condition report and certificate of insurance if the client is an owner builder (warranties go in the contract). See Appendix Two.
    • Indicate whether services are connected or not connected. Do not use the term ‘available’.
    • Carefully check a revised section 32 statement to ensure no documents have been left out.
    • Where a property is part of a subdivision involving an owners corporation include a current owners corporation certificate and the required statutory documents. Note section 32F of the SLA also gives the vendor the option of providing the required information in substitution to giving the certificate.
  • Confirm in writing any request to a real estate agent to amend, update or attach certificates to the section 32 statement.
  • Obtain instructions to make further investigations if necessary or if instructed not to do so confirm this in writing.

Subdivisions

  • If the contract is for a lot on a plan of subdivision:
    • check the plan of subdivision is current
    • check the contract accurately describes what is being sold
    • if the lot is affected by an owners corporation, check whether there is insurance as required by section 11 of the Sale of Land Act 1962 (Vic) (SLA) and Part 3, Division 6 of the Owners Corporations Act 2006 (Vic).
  • If the contract is for a lot on an unregistered plan of subdivision:
    • ensure compliance with the relevant sections of the SLA, warning your client of the dangers of non-compliance such as rescission by the purchaser and specifically check the following.
    • Section 9AA: does the contract provide for the deposit monies to be paid into the trust account of a legal practitioner or licensed estate agent, or into a special purpose account with an authorised deposit-taking institution?
    • Section 9AB: have details of any works affecting the natural surface level of the land been disclosed in the contract or, if carried out after the date of contract but before registration of the plan, been disclosed to the purchaser?
    • Section 9AC: have any proposed amendments to the plan of subdivision prior to registration been notified to the purchaser?
    • Section 9AE (2): has the plan been registered within 18 months (or the period specified in the contract) of the contract date?

Domestic owner builders

  • Take detailed instructions from a client intending to sell domestic property including answers to the following questions.
    • Have any building permits been issued in the last seven years or has there been any other building work in that time?
    • Who did the building work? Unless a registered builder has taken responsibility for the work, sections 137B and 137C may apply.
    • What was the value of the building work?
    • When did the building work commence?
    • Was any occupancy permit or certificate of final inspection issued?
  • Warn your client in writing of the need to provide insurance, condition report and warranties, and the consequences of non-compliance.
  • If the requirements apply, ensure the condition report and certificate of insurance are provided with the section 32 statement and the section 137C* warranties are set out in the contract. Insurance is only required where the value of the building work is more than $16,000. See Appendix Two.
  • When the section 32 statement contains an owner builder condition report, confirm in writing when sending the statement to the client or the real estate agent that the section 32 statement should not be used if the condition report is more than six months old and the consequences if it is used.

GST

  • Consider whether the GST ‘threshold criteria’ are present.
    • Is the vendor registered or required to be registered for GST?
    • Is the sale in the course or furtherance of an enterprise?
  • If ‘yes’ to both questions, consider whether the real property being sold will attract GST.
    • Is it vacant land including residential vacant land?
    • Is it new residential premises including substantially renovated premises?
    • Is it commercial residential premises?
    • Is it non-residential premises?
  • If the property being sold will attract GST, ensure there is a clear GST treatment in the contract. Consult your client about whether the GST clause should be inclusive or exclusive and whether the margin scheme is available and should apply.
  • If the margin scheme should apply, ensure there is agreement in writing between the parties to this effect. If a professional valuation is required, advise your client in writing of the time frame in which the valuation must be obtained such as by the end of the tax period in which settlement falls.
  • If the real property is farmland, consider whether:
    • the farmland exemption (section 38-480) will apply resulting in no GST being payable on the sale of the freehold
    • the supply of a going concern exemption (section 38-325) will apply resulting in no GST being payable on the sale of the freehold, livestock, plant and equipment.
  • If the real property is tenanted commercial premises, consider whether the technical requirements of section 38-325 and the ATO ruling GSTR 2002/5 are met, with the result that no GST will be payable on the sale. In particular:
    • the vendor and the purchaser must agree in writing that the supply is of a going concern
    • the purchaser is registered or required to be registered for GST
    • the sale is not to the tenant
    • there is a tenant at the date of supply (usually settlement) and the contract provides for receipt of rents and profits, not vacant possession
    • the tenant is in occupation pursuant to a lease or periodic tenancy, not just a tenancy at will
    • if there is a temporary vacancy, it can be shown that a new tenant is being actively sought or the property is undergoing necessary refurbishment. However, this will not be sufficient if the premises have never been let.
  • Even if you consider the sale will be GST-free under the farmland exemption or as the supply of a going concern, include in the contract a GST-exclusive ‘claw back’ clause with an expanded definition of GST to include penalties and interest and a non-merger clause to protect your client.
  • Have your client prepare the tax invoice.
    • Alternatively, check your client is GST registered and not just ABN registered before purporting to prepare a tax invoice on your client’s behalf.
  • If GST is payable in addition to the purchase price, ensure it is collected at settlement.
  • For additional information refer to the LPLC Key Risk Checklist: GST.

Disbursements

  • Obtain written authority from all vendors before disbursing the balance of settlement monies to one of several vendors.

Intra-family transfers

  • Clarify in writing who you are acting for in family transactions. Only act for one party. When acting for the transferor:
    • always explore why your client wishes to transfer the property and what other options are available to meet your client’s needs
    • advise of the risks of the transaction
    • confirm all advice in writing.

Rescission

  • To rescind a contract:
    • read the contract carefully to determine if your client is entitled to rescind the contract and the grounds on which it may be done
    • use the precedent rescission notice making sure that you particularise the default and state the condition in the contract that you are relying on to rescind the contract. See Appendix Three
    • do not pre-empt the other party and issue a rescission notice too early
    • if issuing a rescission notice for failure to pay the balance of purchase monies by the due date, wait until the day after the settlement is due
    • allow sufficient time in the notice for the defects to be remedied with the time running from the date of service not the date of the notice and check what specific requirements have been provided for in the contract
    • record details of service in case proof is later needed
    • proof read the default and/or rescission notice and respect the necessity for a high level of technical compliance
    • send the draft default and/or rescission notice to the client for approval.

Terms contracts

  • Consider whether the contract is a terms contract:
    • if so and the property is subject to a mortgage, ensure compliance with Division 4, section 29M of the SLA by giving particulars of mortgage (schedule 1) or discharging the mortgage within 90 days
    • if the terms contract requires multiple payments, ensure compliance with subsection 32(2)(f) by giving details of the cost of vendor finance (schedule 2) in the section 32 statement.
  • Always check the SLA to determine the current requirements relating to terms contracts.
  • As entering into a terms contract may involve a client making financial decisions, consider the need to refer the client to their accountant and/or financial advisor.

Other

  • Check your file for original documents before closing.

LPLC Purchaser’s Practitioner Checklist

This is not a comprehensive checklist but it will help you to avoid many mistakes made by purchaser’s practitioners in conveyancing transactions. The checklist can be photocopied for ongoing use.

Review of contracts and section 32 statements

  • When you receive a contract, immediately check it for any conditional clauses. Diarise the dates and advise your client clearly about the conditions, what the client must do to comply with them and the consequences if they are not met.
  • Consider whether the contract is a terms contract. If so and the property is subject to a mortgage, check whether particulars of the mortgage have been provided or whether the mortgage will be discharged within 90 days. If multiple payments are required, check whether details of the cost of vendor finance have been provided.
  • Read all certificates when they come in and carefully compare them with the information in the section 32 statement. Advise your client if the section 32 statement is defective and if there is a possibility the contract might be avoided.
  • If the vendor is a domestic owner builder, consider whether there are any grounds to avoid the contract for non-compliance with the insurance, condition report and warranty requirements under the Building Act. See Appendix Two.
  • Advise your client about any easements or restrictive covenants on the property. Apply to the relevant water authority for information statements and check these for any unregistered easements such as water, sewerage or drainage.
  • Obtain instructions to make further investigations if necessary or if instructed not to do so, confirm this in writing.
  • Identify any zoning restrictions or overlays and recommend your client check whether the proposed use of the land will be adversely affected by them.
  • If the section 32 statement indicates services are ‘available’, advise your client to check if they are in fact connected.
  • Advise the client to measure the land to ensure it corresponds with the measurements on title,if circumstances warrant it.
  • Consider the need to obtain details of any lease(s) affecting the land.
  • Also refer to the LPLC checklist Purchase of land – questions for the purchaser

Subdivisions

  • If the contract is for a lot on a plan of subdivision:
    • check the plan of subdivision is current
    • check the contract accurately describes what is being sold and whether there are accessory units included
    • if the lot is affected by an owners corporation, check whether there is insurance in place as required by section 11 of the Sale of Land Act 1962 (Vic) (SLA) and Part 3, Division 6 of the Owners Corporations Act 2006 (Vic)
    • if the lot is affected by an owners corporation, check whether an owners corporation certificate and attachments have been provided (See Appendix Four).
  • If the contract is for a lot on an unregistered plan of subdivision:
    • ensure the vendor has complied with the relevant sections of the SLA and if any breaches are detected that allow your client to rescind the contract, advise your client accordingly, specifically, check the following.
      • Section 9AA: does the contract provide for the deposit monies to be paid into the trust account of a legal practitioner or licensed estate agent or into a special purpose account with an authorised deposit-taking institution?
      • Section 9AB: have details of any works affecting the natural surface level of the land been disclosed in the contract or, if carried out after the date of contract but before registration of the plan, been disclosed to the purchaser?
      • Section 9AC: have any proposed amendments to the plan of subdivision prior to registration been notified to the purchaser?
      • Section 9AE (2): has the plan been registered within 18 months (or such other period specified in the contract) of the contract date?

Contracts

  • When a contract has a ‘subject to finance’ clause a number of things need to occur.
    • Write to your purchaser client immediately on receipt of the contract setting out clearly the date by which finance must be obtained. Spell out the consequences if the vendor is not notified in time that finance has not been obtained.
    • Confirm with the client any approval they receive is in writing is final and not conditional, and is for an amount sufficient for their needs. Where time permits, ask the client to give you a copy of the letter of approval for finance and ensure you check these points.
    • If the approval is conditional, seek instructions to request an extension of time until the conditions have been met.
    • Do not leave requests for extensions of time for finance approval unanswered. Chase up the answer before the time expires.
    • Confirm any oral agreement to extend time in writing.
    • When time is about to expire, pay careful attention to requests for extensions or notification that the contract is at an end. Take steps to ensure letters dictated are actually typed and sent or faxes or emails are sent to the correct person/places.

GST

  • Advise on the existence and consequences of any GST exclusive clause.
  • If the price is GST-inclusive and your GST registered commercial purchaser is expecting to claim 1/11th of the price as an input tax credit:
    • recommend your client seek advice from their accountant about whether the proposed purchase is a ‘creditable acquisition’ for which an input tax credit can be claimed
    • check whether the vendor is GST registered (not just ABN registered) and consider negotiating a special condition that the vendor shall remain GST registered up to and including the date of supply. Your client will not be entitled to an input tax credit if the vendor is not GST registered
    • check whether the margin scheme is to be applied. Application of the margin scheme will deprive your client of an input tax credit.
  • Check the validity of any tax invoice provided at settlement.

Lost title or delayed settlement

  • Keep track of the date by which a document must be stamped, especially a transfer of land must be stamped no later than 30 days after settlement. Diarise for follow-up action regularly such as weekly.
  • Inform the client at the first opportunity of your estimate of the amount of stamp duty and lodging fees payable. You may need to consider any stamp duty concessions, exemptions and/or the right to apply for the first home owner’s grant.
  • Advise the client of the date by which any funds must be provided to enable the practitioner to stamp and register documents as necessary and the consequences of failing to stamp and register in time. It is safest to seek the funds well before settlement.
  • Notify the client in writing that you accept no responsibility for reminding the client of the due date to provide funds to your office for stamping and registration.

Rescission

  • To rescind a contract:
    • read the contract carefully to determine if your client is entitled to rescind the contract and the grounds on which it may be done
    • use the precedent rescission notice making sure you particularise the default and state the condition in the contract you are relying on to rescind the contract. (See Appendix Three)
    • do not issue a rescission notice too early
    • allow sufficient time in the notice for the defects to be remedied with the time running from the date of service, not the date of the notice
    • record details of service in case proof is later needed
    • proof read the default and/or rescission notice and respect the necessity for a high level of technical compliance
    • send the draft default and/or rescission notice to the client for approval
    • specific advice should be given to a purchaser relating to a breach of the contract of sale, the effect of a default and/or rescission notice instructions and the consequences of failing to comply.

Terms contracts

  • Always check the SLA to determine the current requirements relating to terms contracts.
  • Advise the client in writing of their options and the consequences of entering into a terms contract.
  • As entering into a terms contract may involve a client making financial decisions, consider the need to refer the client to their accountant and/or financial advisor.

Nominations

  • Where there is a nomination, check and advise your client if the provisions of Chapter 2, Part 4A of the Duties Act 2000 (Vic) apply. When dealing with property outside Victoria, seek expert advice on the duty requirements.

Other

  • Clarify in writing who you are acting for, especially in family transactions. When the transferor is unrepresented, recommend in writing that the transferor obtain independent legal advice.
  • In relation to domestic owner builders, check in whose name any building permits were issued.
  • Check your file for original documents before closing it.

Appendix One: Suggested form of letter to client if requested to prepare a section 32 statement in a hurry

You have requested me to provide, at very short notice, the statement required by section 32 of the SLA for the sale of your property.

I confirm my advice that a period of at least a week and sometimes more is required to make all the enquiries and obtain all the certificates that are necessary to ensure the statement is correct and valid.

In the present case, I have done the best I can in the limited time available. However, in the circumstances I cannot guarantee the validity of the statement.

If the statement is not valid, the purchaser may withdraw at any time up to final settlement. If that happens, the purchaser will recover the deposit and you will probably be liable for agent’s commission on the first sale as well as on any resale. You may also be faced with additional legal costs.

It is appreciated that by delaying the sale until all the information is available you may lose a prospective purchaser, but I do want you to understand the risk involved in proceeding on the basis of the statement as now prepared.’


Appendix Two: Owner builder obligations

The owner builder provisions of the Building Act are complex. The following is provided as a summary of those provisions. Practitioners should familiarise themselves with sections 137B, C and D of the SLA as well as the current ministerial order (at the time of publication: ministerial order published in the Government Gazette No. S98 dated 23 May 2003).

Who is a domestic owner builder?

The Act does not define in any detail what constitutes an ‘owner builder’. However, it does provide that the provisions apply to ‘a person who constructs a building’. A domestic owner builder is therefore someone who ‘constructs’ domestic building work on their own property but it does not include a subsequent owner of the property. These provisions also apply to registered building practitioners who own the property on which they have ‘constructed a building’ where that building is a home i.e. domestic property only, not commercial property. Registered building practitioners in this instance are often referred to as ‘builder owners’.

What does ‘construct’ mean?

‘Construct’ includes not only the domestic owner builder personally building, altering or extending a building, but also the domestic owner builder causing, managing or arranging for another person (other than a registered builder who accepts responsibility for the work by being nominated on the building permit as the builder) to do so. It includes new houses and alterations and additions to existing buildings or structures. Adding a veranda, pergola, deck or garage, enclosing a veranda or renovating a bathroom or kitchen may all be considered an ‘alteration to the building’.

The key to determining who is an owner builder is the building permit.

If the owner is listed on the building permit as both the ‘owner’ and the ‘builder’ then they are an owner builder and the provisions of section 137B apply. If no building permit was issued (whether it was required to be or not) then the owner will automatically be considered an owner builder.

When do domestic owner builder obligations arise?

Subsection 137B(2) provides that domestic owner builder obligations arise if a contract to sell is entered into within the prescribed period, which is defined in subsection 137B(7) as being:

  • six years and six months after the date of completion of the work. Completion means an occupancy permit has been issued (new houses) or a certificate of final inspection has been issued (alterations and additions)
  • OR
  • seven years after the date of commencement of the work, which is the date of the issue of the building permit, if neither an occupancy permit nor a certificate of final inspection has been issued
  • OR
  • six years and six months after the certified date of commencement which is the date the client declares in a statutory declaration to be when the works commenced.

What are the obligations if a domestic owner builder is selling within the prescribed period?

  • In all cases, the following statutory warranties by the vendor must be set out in the contract of sale:
    • all domestic building work carried out relating to the construction by or on behalf of the vendor of the home was carried out in a proper and workmanlike manner
    • all materials used in the domestic building work were good and suitable for the purpose and, unless stated otherwise, new
    • the domestic building work was carried out in accordance with all laws and legal requirements including the Building Act 1993 (Vic) and its regulations.
  • A condition report which is no more than six months old at the time of contract prepared by a prescribed building practitioner such as an architect, building surveyor or building inspector must be given to the buyer pre-contract. Although it is common practice to attach an owner builder inspection report to a section 32 statement there is no legal requirement to do so.
  • If the value of the work is more than $16,000 and the owner is not a registered building practitioner, building insurance must be obtained and a certificate of currency given to the buyer pre-contract. The insurance must cover structural defects for six years and non-structural defects for two years. However, the insurance can only be invoked on the death, insolvency or disappearance of the domestic owner builder.

The Building Act 1993 (Vic) requires that both the condition report and the insurance obligations apply if selling within the prescribed period of six years and six months or seven years. However, the Ministerial Order provides that insurance is required to cover only the period of six years from practical completion. Therefore, if selling after six years but within six years and six months of the date of issue of the occupancy permit or certificate of final inspection, it appears only the condition report must be given to the buyer pre-contract as the insurance is not required (or available) for the remainder of the period.

While the seven-year prescribed period in the Building Act 1993 (Vic) runs from the commencement of the work, the relevant six-year insurance requirement in the Ministerial Order runs from the date of practical completion of the work, ignoring the commencement date altogether. Practical completion, for the purposes of the Ministerial Order, means the date when the domestic building work is completed save for minor omissions or defects.

Accordingly, practitioners will have to determine when practical completion occurred because if selling six years after the date of practical completion of the work, only the condition report must be given to the buyer pre-contract as insurance is not required or available for any greater period.

What happens if the domestic owner builder obligations are not complied with?

The buyer can choose to avoid the contract at any time prior to settlement. Also, the client may be prosecuted with a maximum penalty of 100 penalty units ($11,682). If any of the warranties are breached, the purchaser and any subsequent purchaser can take proceedings against the vendor.

What if my client cannot obtain insurance for the owner builder works?

Section 68 of the Domestic Building Contracts Act provides that application can be made to VCAT to have a building exempted from the operation of section 137B.

An exemption was granted in Turriff (Domestic Building Exemption) (Building and Property) [2015] VCAT 2043. See also St George Bank v Lehmann [2003] VCAT 1040 where an application for exemption was rejected.

Who is a commercial owner builder?

Section 137B also applies to non-registered-building-practitioner owners (lay owners) who construct commercial buildings but it does not apply to registered building practitioners who own commercial land and build or make alterations to commercial buildings.

The requirements for commercial owner builders are different to domestic owner builders. The prescribed period is 10 years and only the condition report needs to be supplied.

Owner builder domestic Builder owner domestic
$16,000 or lesss More than $16,000 $16,000 or less More than $16,000
Condition report Condition report No condition report No condition report
No insurance Insurance No insurance Insurance
Warranties Warranties Warranties Warranties

Mortgagees in possession and executors or administrators of the estate of the person who constructed the building – will now be considered owner builders (See 136(5AA)).

Prescribed period

Domestic buildings

Contract Date

  • Completion of construction (6 years and 6 months)
    • Certificate of occupancy
    • Certificate of final inspection
  • Date of commencement (7 years)
    • Date of issue of building permit
  • Certified date of commencement 137B(7)(a)(ii)(B) (6 years and 6 months)
    • No building permit issued
    • Owner’s statutory declaration of commencement of works

Appendix Three: Rescission Notice

To: The Purchaser/Vendor and To: The Practitioner for the Purchaser/Vendor

SCHEDULE

  1. Vendor:
  2. Purchaser:
  3. Date of contract:
  4. Land description:
  5. Property address:
  6. Due date:
  7. Particulars of default (*):
  8. Interest rate:
  9. Legal costs (**):

TAKE NOTE that you are in default under the contract referred to in the Schedule and that the particulars of default are specified in Item 7 of the Schedule.

TAKE FURTHER NOTICE that the vendor/purchaser intends to exercise his/her/its rights unless:

  • the default is remedied within 14 days of the service of this notice upon you; and
  • the proper legal costs specified in Item 9 and interest on the amount due under the contract at the rate specified in Item 8 are all paid within 14 days of service of this notice upon you.

AND TAKE FURTHER NOTICE that unless the default is remedied and the legal costs and interest paid in accordance with this Notice the contract will be rescinded pursuant to [general condition 28 of the contract] use this phrase if the contract is the standard form of contract prescribed by the Estate Agents (Contracts) Regulations 2008 (Vic) otherwise insert the relevant clause.

Dated the ___ day of 20 ___

Practitioner for the Vendor/Purchaser

(*) Suggested wording where purchaser fails to pay residue:

‘The Purchaser/s has/have defaulted in the performance of the Purchaser’s/s’ obligations under the contract by failing to pay to the Vendor the residue of purchase money and adjusted apportionable outgoings on the due date or at all.’

(**) A specific amount must be included here so the defaulting party knows exactly what has to be paid to rectify the default.

Default notice

To: The Purchaser/Vendor___and___To: The Practitioner for the Purchaser/Vendor

Schedule

  • Vendor:
  • Purchaser:
  • Date of contract:
  • Land description:
  • Property address:
  • Due date:
  • Particulars of default (*):
  • Interest rate:
  • Legal costs (**):

Take note that you are in default under the contract referred to in the Schedule and that the particulars of default are specified in Item 7 of the Schedule.

Take further notice that the vendor/purchaser intends to exercise his/her/its rights unless:

  • the default is remedied within 14 days of the service of this notice upon you; and
  • the proper legal costs specified in Item 9 and interest on the amount due under the contract at the interest rate specified in Item 8 are all paid within 14 days of service of this notice upon you.

Dated the ___ day of 20___

 


Practitioner for the Vendor/Purchaser

(*) Suggested wording where purchaser fails to pay residue:

‘The Purchaser/s has/have defaulted in the performance of the Purchaser’s/s’ obligations under the contract by failing to pay to the Vendor the residue of purchase money and adjusted apportionable outgoings on the due date or at all.’

(**) a specific amount must be included here so the defaulting party knows exactly what has to be paid to rectify the default.


Appendix Four: Owners corporation certificate issues

Subsection 32F of the SLA sets out the requirements to provide current owners corporation information and the attachments referred to in subsection 151(4)(b) of the Owners Corporations Act 2006 (Vic) (the Act) be included in any section 32 statement where the property is affected by an owners corporation.

Subsection 151(4)(a) of the Act sets out that the owners corporation certificate must include prescribed information in relation to the matters listed in (i) to (xiii) of that subsection.

Subsection 151(4)(b) of the Act requires that the certificate be accompanied by:

  • a copy of the owners corporation rules – model rules where no specific rules have been made by the owners corporation as set out in Schedule 2 of the Owners Corporation Regulations 2007
  • an information statement (Schedule 3 of the Owners Corporation Regulations 2007)
  • a copy of all resolutions made at the last AGM
  • a statement advising that further information can be obtained by an inspection of the owners corporation register.

A prescribed fee is payable for the certificate.

Failing to include an owners corporation information in the section 32 statement, or providing false information, will give the purchaser a right to rescind the contract at any time before settlement. This is subject to any right that may exist under subsection 32(7) of the SLA to excuse the vendor’s non-compliance.

For further information on who must issue owners corporation certificates and what procedures are required see our bulletin Amended section 32 statement.