Luxury river front property for sale - flooded only once (or twice)

What do you do when a property you have contracted to sell is damaged (by flood, fire or whatever) before settlement? What do you do if you are the buyer of that property? These critical questions arose for more than a few sellers and buyers across Queensland during the State's extensive flooding of December 2010 and January 2011.

A year later, with Queenslanders currently remembering and revisiting those dark days, these questions are still of concern to all involved in selling, buying or renting a home.

In one instance last year, the buyer and seller of a flood-damaged property could not agree on what to do. So they took the matter to court. Queensland's Court of Appeal in the recent case of Dunworth v Mirvac ultimatelyruled that a woman buying a $2.155 million river-front apartment in Mirvac Queensland Pty. Ltd's up-market Tennyson Reach development had validly terminated her 2007 off-the-plan contract because of significant damages caused to the apartment by the January 2011 flooding. Despite quite technical legal arguments raised by the seller/developer's Queen's Counsel and Senior Counsel during two hearings the appeal court finally found for the buyer. Even before the flooding took place, every apartment in Mirvac's complex of high-rise buildings had dropped drastically in value from the 2007 off-the-plan sale prices. Needless to say values on most, if not all, flood-affected Queensland properties have dropped even further since the floods. Sales of such properties have, of course, been very few and far between.

After Mrs Dunworth had earlier attempted to escape her now over-priced purchase contract on the basis of alleged false, misleading and deceptive representations by Mirvac particularly regarding the apartment's elevation, Mirvac obtained a Supreme Court order obliging Mrs Dunworth to settle the contract (and pay some $500,000 interest) by 8^th February, 2011. Less than a month before that date, along with thousands of other Brisbane and Ipswich properties on or near the river, the Brisbane River flooded this ground-floor apartment (as it had similarly in 1974 inundated the land on which Mirvac built more than 30 years later).

Although Mirvac generously offered on 24^th January 2011 to restore the extensively damaged and apparently uninhabitable apartment to original condition at its own cost over a period of four months (and waive its right to default interest), Mrs Dunworth rejected this offer. Instead, she promptly purported to rescind the contract in reliance on Section 64 of Queensland's Property Law Act 1974. This Section permits such a buyer's action where, before the "date of completion" of a residential contract, the property is so damaged as to be "unfit for occupation". (Similar provisions exist in the Residential Tenancies and Rooming Accommodation Act 2008 whereby both landlord and tenant have the right to terminate the tenancy.)

Because her contract was still subject to the earlier specific performance order Mrs. Dunworth applied to the Supreme Court firstly for a declaration she had validly cancelled the contract, and secondly for a dissolution of the extant order. Mirvac in turn applied for that earlier order to be varied by replacing 8^th February 2011 with 8^th June 2011, and thus secure sufficient time for the apartment to be cleaned and restored. In court Mirvac's lawyers pointed to the shortness of time available to respond to Mrs Dunworth's application and the absence of a full report on the extent of damage. Whether the property was rendered unfit for occupation by the time the notice of rescission was given, whether the damage was able to be rectified and how long restoration would take were all matters which would require evidence. These were, in the primary judge's opinion, matters "strongly arguably relevant to the assessment of unfitness".

The judge decided that Mirvac ought to be given the opportunity to lead evidence on these matters at trial, and found there were legal questions and related factual questions about the application of Section 64, including the date at which unfitness must be established, the meaning of unfitness and the relevance, if any, of the damage being capable of repair. "In my view," the judge said, "there are matters which should go to trial".

Accordingly the judge ordered the settlement variation sought by Mirvac to 8^th June 2011 without prejudice to Mrs Dunworth's right to maintain that she had validly terminated under Section 64. The proceedings were to be placed on a court list for a later trial.

Mrs Dunworth promptly took her case to the Court of Appeal.

On appeal Mirvac conceded that the apartment had been unfit for occupation at the time of rescission. Hence the only major legal question to be answered was whether Section 64's "dateof completion" could include a "date for completion" ordered by a court against a defaulting buyer. Section 64 applied in either case, the court held. No ruling was given otherwise on the interpretation of this Section, although the court noted that it "gives no right to a vendor to maintain the contract in order to attempt to repair the damage". The possibility of restoration does not preclude rescission, the court explained, "where the premise of the provision has been met."

While Mrs Dunworth was at last off the contractual hook, their Honours hinted (with hindsight) how developer Mirvac could have fared better: Mirvac might have initially terminated for breach of contract when its buyer did not settle on time after the apartment was completed. In pursuing a legal enforcement of the contract Mirvac had clearly not taken into account the risk of a major flood, the likelihood of resulting damage and a consequent Section 64 rescission.

(It has been subsequently reported in The Courier Mail that Mirvac's Tennyson Reach development will not be completed. Rather, Brisbane City Council will buy the remaining area of undeveloped land for parkland with Mirvac providing appropriate facilities in stages.)