Caveat venditor - future lot contracts

Developers, selling agents and other professionals in the real estate industry should take heed of looming amendments to the Sale of Land Act 1970 (WA).

Status of the amendments

The Sale of Land Amendment Bill 2016 (WA) was introduced to the Parliament on 23 June 2016 and currently remains before the Legislative Assembly.

Background

The Bill was introduced in response to the decision of the Court of Appeal in Barker v Midstyle Nominees Pty Ltd [2014] WASCA 75.

Barker was an appeal against an earlier decision of the Supreme Court in Midstyle Nominees Pty Ltd v Jordan [2013] WASC 85, brought by buyers under contracts for the sale and purchase of lots in a proposed strata subdivision. Each contract contained a clause to the effect that the contract was conditional upon the seller becoming the owner of the land to be subdivided.

The seller was not the owner of the land at the time the contracts were made, with the result that the seller was in breach of section 13 of the Act. That section essentially prohibits a person from selling a lot in a subdivision or a proposed subdivision unless he or she is the owner of the land in question.

At first instance, the Supreme Court held that a contract that contravenes section 13 of the Act is not void, but can be rescinded by the buyer at any time before the seller becomes the owner of the relevant lot or proposed lot.

However, the Court of Appeal held that such a contract is illegal and unenforceable by the would-be seller, even after the seller becomes the owner.

Industry concerns

The Court of Appeal's decision in Barker was at odds with common industry practice, and has resulted in uncertainty in the property development industry.

As noted in the Explanatory Memorandum for the Bill, sellers will be reluctant to enter into contracts for the sale of a lot in a proposed subdivision of land which they do not yet own (a "future lot contract"), and the decision has already negatively affected funding arrangements in the industry.

The Bill aims to provide certainty to all parties in this context.

Validation of future lot contracts

New sections will validate a future lot contract, even if it contravenes section 13, provided that the seller complies with the three requirements set out below.

Requirement 1 - seller's condition

A future lot contract must contain a condition that requires the seller to become the owner of the relevant lot within 6 months of the contract date, or within such other period as may be agreed between the seller and the buyer.

Requirement 2 - warning to buyer

A future lot contract must contain a warning to the buyer that the seller is not the owner of the relevant lot. This warning must be in an approved form.

Requirement 3 - deposit holding

A future lot contract must contain a clause requiring the deposit to be paid to a specified deposit holder within 2 business days of receipt, to be held in trust for the party entitled to receive those moneys under the future lot contract. The deposit holder must be a lawyer, real estate agent or settlement agent.

Consequences of failure to satisfy requirements

Harsh consequences apply if a future lot contract fails to satisfy any of the three requirements referred to above.

• The contract is illegal and void.
• The buyer is entitled to recover his or her deposit.
• The seller becomes liable to pay a penalty of $100,000.

The current standard penalty for a breach of the Act is only $750.

Further, if a deposit under a future lot contract is not paid on to the specified deposit holder within 2 working days of receipt (in accordance with the required clause), the buyer may elect to terminate the contract and recover the deposit.

Finally, if a seller fails to notify the buyer that the seller has become the owner of the relevant lot within 10 business days of that occurring, the buyer may also elect to terminate the contract and recover the deposit.

Application to existing contracts

There will be no retrospective application of the amendments to any contract made prior to the amendments coming into force.

Disclaimer: This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter without taking legal advice. The author disclaims liability to any person who relies on this post.