Lessons when terminating for major building defects

In the case, the purchaser relied on a ‘subject to building approval’ clause to terminate the contract on the day the balance of the deposit was due to be paid. The termination was challenged by the vendor and the purchaser then sued to recover the deposit paid. While the purchaser had not paid the balance they were not yet in default of the contract and were therefore entitled to terminate it. The requirement to be ‘ready, willing and able’ to comply with the contract was not necessary.

An LIV/REIV standard form contract had been signed for the sale of a property in country Victoria for $1,875,000. Under the terms of the contract a 10 percent deposit was payable with $1,000 due on signing and the balance of $186,500 payable by 13 December 2019, but subsequently extended by 5 days to midnight on 18 December. The sum of $184,000 was paid to the agent’s trust account on the afternoon of 18 December, leaving a balance due of $2,500. The purchaser claimed this was an inadvertent error.

General Condition 21 (GC 21) in the contract gave the purchaser the right to terminate the contract if the purchaser obtained a written report from a registered building practitioner or architect disclosing a major building defect, provided the report was served on the vendor and the purchaser was ‘not then in default’.

The purchaser obtained two building reports. The first one identified “major defects” but the second report did not. In reliance on the first report and in accordance with GC 21, a notice of termination was given to the vendor by the purchaser at 7:51 pm on 18 December.

The vendor denied the purchaser was entitled to rescind the contract and the purchaser sued to recover the deposit paid. The trial judge found in favour of the vendor on the basis that:

1. The purchaser was not ready, willing and able to settle at the time they served the notice to terminate as the purchaser provided no proof that it was possible for her to have paid the outstanding amount of the deposit between 7:51 pm, 18 December, and midnight on that night.
2. The purchaser was not entitled to terminate pursuant to GC 21 as the second report did not identify any major defects and the purchaser was taken to have elected to rely on the second report.

On appeal to the Full Court of the Supreme Court the purchaser successfully argued that they had validly terminated the contract pursuant to GC 21. In a joint judgment, the Court found that the ‘…enquiry as to whether the purchaser was ‘ready, willing and able’ to pay the balance of the deposit was not a relevant enquiry….’ because the purchaser was relying on an express contractual provision entitling them to terminate the contract. [58]

The requirement that the purchaser be ‘not then in default’ at the time they served the notice of termination under GC 21 just meant that the purchaser not be in breach of the Contract [76]. To this end, the Court held that at the time that the notice was served on 18 December, the purchaser was not in breach of her obligation to pay the deposit. The full deposit was not due until the end of that day. [61]

The court also found that the purchaser was entitled to rely on the first building report to terminate the contract pursuant to GC 21. While the report did not use the exact phrase ‘major building defect’ referenced in GC 21, instead only using the term ‘major defects’, the court was satisfied that the substance of the report read as a whole identified and disclosed major defects in a structure on the land sufficient to meet the requirements of GC21. [87]

Rescinding contracts of sale is fraught with risk and should only be done after careful consideration of the contract and surrounding facts. Practitioners acting on both sides need to understand the meaning of contractual clauses providing the right to rescind and consider how the courts will interpret them. In some situations, it may be necessary to obtain expert advice about likely consequences.

• LPLC Conveyancing Series webinar, Breaches and risk management
• LPLC Conveyancing Series webinar, Best practice for purchasers, contains details about the meaning of major building defects and refers to a number of relevant cases.