Changing minds: off-the-plan contracts aren't as certain as you might think

After many years as a conveyancing solicitor I identified three immutable rules of real estate. The first is that salespersons move fast. The second is that solicitors move slowly. And the third, the reason for the first two, is that buyers and sellers alike can change their minds.

When real estate consumers - particularly buyers - change their minds part-way through contracts, their conveyancing solicitors are expected to change pace and play a different role. Suddenly our clients want us to be “contract killers.”

“How fast can you get us out?” ask clients, having second thoughts about yet-to-be-settled contracts. More buyers than sellers in these circumstances essentially want their lawyers to help them escape contractual obligations by locating and taking advantage of available loop-holes.

No worries if solicitors’ cold-footed residential buyer clients are within their 5 days cooling-off period. Simply pull the plug, have your clients pay the cooling-off penalty and everything is rosy. Tough luck for cold-footed sellers with no comparable rights at law!

What if the cooling-off period has already passed (or was waived initially), and there are no obvious ways out?

Many conveyancing solicitors, who prefer to remain comfortable “contract completers” (and not upset sources of referred clients), will decline the challenge. Anxious clients are often then passed to professional “contract killers”.

These sharp-eyed specialists speedily take clients’ instructions, review all the circumstances, consider all documents and correspondence then look for statutory loopholes, contractual let-outs and any other escape routes.

In recent years developers have increasingly found themselves facing purported terminations of crucial off-the-plan contracts. Only this month (December 2010) The Courier Mail reported on millionaire entertainment venue operator Harvey Lister’s bid to get out of a $9.28 million contract for a sub-penthouse in the $850 million Oracle two-tower complex on the Gold Coast, while days later the National Australia Bank appointed receivers for the development company involved. With multi-million dollar projects like this nearing completion, apparently binding contracts made years earlier are at risk of being undone by swift- and- sure- footed lawyers.

These frequently lethal legal eagles sometimes act for buyers whose financial circumstances, in some cases, have deteriorated. Many buyers, even from secure financial positions, discover their lenders are no longer willing to provide funds for the settlements of long-term contracts. Why? Because contract prices now exceed current market values. Such properties will be worth considerably less as settlements loom than when buyers first signed up. According to The Australian investors who bought into the Oracle have taken losses of up to $1million: “One Oracle apartment owner…was aware of people who had settled on apartments located on the 44^th floor for $3.5million and had since sold for $2.5million.”

Then there are buyers with no funding worries, but who want out because other things have changed - such as relationships broken down or better investments coming up. The fate of more than a few developers’ contracts is ultimately determined by the courts, but it’s an uncertain business.

This year (2010) a buyer needed a Supreme Court order to escape a contract for an almost-completed fourth-floor unit on Queensland’s Sunshine Coast when the balcony views were more of roof-tops than rolling swells. She relied successfully on a special condition requiring “uninterrupted ocean views”. In another case the same Court believed developer Mirvac’s salesman over buyers of a luxury “Tennyson Reach” apartment who unsuccessfully alleged misrepresentations about anticipated “filtered or through-tree” Brisbane River views.

The same developer won again in court when an off-the-plan buyer, also of an apartment in “Tennyson Reach”, tried to back out because the balconies would be smaller than originally promised.

Mirvac also went to court over another million-dollar-plus sale, again in the same development, after a buyer claimed to be “materially prejudiced” by the inadvertent omission of a closed circuit television security system from a Disclosure Statement’s assets list. Although the system would be installed, the court decided for the buyer.

This month (December 2010) Maris Dunworth, wife of well-know Rugby Union test-player David Dunworth, badly lost her case against Mirvac. After unsuccessfully alleged misleading and deceptive conduct, she was ordered to complete her $2.16millionTennyson Reach contract, pay interest of more than half a million dollars and indemnity costs which may come to almost a hundred thousand dollars.

By the same token, developers have also lost contracts (and court cases) when buyers successfully terminated on the basis of salespersons’ unfounded and misleading promises about future values. A Gold Coast investor won on this ground by producing two witnesses who had been told the saleslady’s same porkies.

Occasionally a buyer escapes an unwanted contract in reliance on a hitherto untested technicality. When this happens, and there are wider implications across the property industry, governments may quickly legislate to close the loop-hole -except for existing contracts where the issue has been legally raised. Recent radical amendments to Queensland’s Property Agents and Motor Dealers Act, the contract killers’ favourite “book of incantations” (as one Supreme Court Judge described it) clearly resulted from real estate and property industry pressure.

A few years ago, after the Queensland Court of Appeal ruled that a developer’s off-the-plan contract was validly terminated because the wording of one clause did not comply strictly with a statutory consumer-protective formula, all hell broke loose at the big end of town. An army of developers, aware that their unsettled contracts contained similar defective clauses, successfully lobbied the Government to change the law retrospectively.

Much the same developer-friendly, property-industry-and-revenue-protective, retrospective result occurred in Victoria when a Tribunal ruled that developer Mirvac (again!) could not enforce its standard contract because deposit clauses breached the law. Most of the State’s off-the-plan contracts would have been similarly at risk without the urgent legislative relief the Government helpfully provided.

Sometimes unhappy buyers settle their contracts then go to court. One such buyer successfully sued, post-settlement, the estate agent who mislead him about waterfront-access to the multi-million-dollar Sydney Harbour home of actors Paul and Linda Hogan.

Some years after sales of units in the upgraded Canberra International Hotel settled, disgruntled buyers sued the marketing agent and developer for rescission of their contracts and for damages. These investors failed to convince the ACT Supreme Court that anything in the project’s promotional brochure constituted misleading conduct.

Finally, I must confess my own contract killing role over the past ten years. Most, if not all, of my terminations of clients’ recently-entered-into contracts have been successful with none ever going to court. Invariably the folk I act for are novice property investors who find themselves cold-called then stitched-up by marketeers, before being bound to over-priced off-the-plan apartments and town house contracts or to over-priced house-land packages. Usually I have given only preliminary advice to the sort of investors described earlier who wanted out of long-done deals at the eleventh hour - before passing them onto colleagues who need to be more litigious contract killers.