The Supreme Court decision of Willis v Crosland [2021] VSCA 320 provides some helpful guidance on whether a purchaser who discovers building defects before settlement can terminate the contract and recover their deposit.
In this article we examine the case and explain the key elements of the decision, which were:
- was the purchaser in breach itself at the time it terminated the contract? (because if it was, it would not have been entitled to terminate the contract); and
- did the building report which the purchaser relied on, comply sufficiently with the strict requirements of the contract to enable it to terminate?
It’s important to point out here that this case turned on the particular wording of the relevant provisions of the standard form LIV/REIV contract for the sale of land (we’ll refer to this as the LIV/REIV Contract). This form of contract is used for the vast majority of property sales in Victoria. However some contracts have special conditions that delete this provision or change the way the contract deals with building defects, and there are still some older versions of the contract being used, which do not have the same provisions in them in relation to building defects.
So keep in mind that the decision in this case may not be applicable to your contract.
General Condition 21 in the LIV/REIV Contract is the key provision, but it is an optional clause and will only apply if the corresponding selection box set out in the Particulars of Sale at the front of the contract is “checked”. In many contracts this is not the case.
Background
On 4 December 2019, the purchaser and the vendor entered into a contract, using the LIV/REIV Contract, for the sale of land at Bullengarook in Victoria. The property included a residence, stables and surrounding paddocks.
Assuming the ‘Building Report’ option in the Particulars of Sale has been selected, General Condition 21 authorises the purchaser to terminate the contract if it obtains a building report which discloses a current defect in a structure on the land and designates it as a ‘major building defect’. However the clause states that the purchaser can only exercise this termination right if the purchaser ‘is not then in default’.
The purchaser engaged a registered building practitioner to undertake a building and pest inspection of the property. His report dated 6 December 2019 identified a number of defects with the residence on the property which it described a ‘major defects’ (the report included some explanation of the difference between major and minor defects). These included a leaky toilet, rusted chimney, cracks to the external walls, and several issues with the veranda including missing beams and downpipes.
The purchaser asked for the purchase price to be reduced by $25,000 on account of the building defects identified, but the vendor declined.
At 7:51pm on 18 December 2019 the purchaser’s solicitor sent an email to the vendor’s solicitor terminating the contract on the basis that the building report disclosed ‘major building defects. At the time of the email, the purchaser had paid $185,000 towards the deposit of $187,500, leaving the amount of $2,500 outstanding. The time for payment of the deposit was midnight that day.
The purchaser commenced proceedings in the County Court of Victoria for return of the deposit of $185,000 and consequential relief. The critical issue for the court to consider was whether the purchaser’s notice of termination was a valid and effective termination of the contract. The vendor contended that the remaining balance of the deposit due ($2,500) could not be paid before midnight, which meant that the purchaser was in default, at the time she served the notice of termination under General Condition 21.
Decision
Trial Judge decision
The trial judge in the County Court agreed with the vendor and held that the termination was ineffective because at the time the notice was given the purchaser had not established that the balance of the deposit could be paid before midnight, and therefore was not ‘ready, willing and able’ to perform the contract at the time it issued the termination notice.
The reference to being ‘ready, willing and able’ comes from a line of authorities which say that if one party has defaulted at settlement, the other party cannot terminate the contract unless it is, itself, ready, willing and able to settle at that time.
The purchaser appealed to the Supreme Court and argued that the question of whether she was ‘ready, willing and able’ to perform was not the relevant enquiry in circumstances where she was exercising a contractual right to terminate, and the court should instead consider whether she was in actual breach (i.e. ‘in default’) at the time the notice of termination was given, contrary to the express wording in General Condition 21.
Appeal decision
The Supreme Court agreed with the purchaser – the enquiry as to whether the purchaser was ‘ready, willing and able’ to pay the balance of the deposit was not the relevant question, but rather the question was whether, at the relevant time, the purchaser was entitled to terminate the contract based on a proper interpretation and application of General Condition 21.
The requirement under that clause that the purchaser be ‘not then in default’ at the time of termination meant that she must not be in breach of the contract. The purchaser submitted that she had until midnight on 18 December 2019 to pay the full deposit, which meant that when her solicitor served the notice at 7:51pm, the time for performance of the payment had not yet arrived, and therefore she was not in breach of her obligation to pay the full amount of the deposit at the time of termination. The Court agreed with this analysis – the time for performance had not fallen due, which meant that the purchaser was not in breach. The question of whether, and if so how, the balance of the deposit could be paid by midnight was not relevant.
Having found that the purchaser was non ‘in default’ at the time her solicitor issued the termination notice, the court then had to determine whether the required grounds for valid termination set out in General Condition 21 existed.
General Condition 21 entitles a purchaser to terminate the contract if it has obtained a building report from a registered building practitioner that ‘…..discloses a current defect in a structure on the land…’ and the registered building practitioner ‘…designates it as a major building defect’ (our emphasis).
The vendor submitted that the report relied upon did not expressly designate any defect in the building as a ‘major building defect’. Their argument was that the right to terminate under General Condition 21 only arose where a structure carries a ‘major building defect’ as identified by the building practitioner. The report obtained by the purchaser instead used the words ‘major defect’. According to the vendor, none of the items identified in the report – the leaky toilet, rusted chimney, cracks to the walls and veranda issues – ought to fall within the concept of ‘major building defect’ enabling termination under General Condition 21.
The Court held that, although desirable, it was not essential for the registered building practitioner to use the precise form of words of the LIV/REIV Contract. Read as a whole, the report satisfied the two requirements of General Condition 21, that:
- the report ‘discloses a current defect in a structure on the land’; and
- the registered building practitioner ‘designates it as a major building defect’. In this regard the report clearly identified and disclosed defects in the residence, being a structure on the land. The summary page of the report identified them as ‘major defects’. Therefore, the vendors could not go behind the report and challenge it on the basis that the defects it identified as major defects were not properly characterised as major.
Consequently, the appeal was allowed, confirming that the contract was validly terminated and the vendor was required to return the purchaser’s deposit.
Conclusion
In summary, if the contract is in the LIV/REIV format and the parties have activated the ‘building report’ provisions:
- the building report must identify any major building defects. Although the report may not need to follow the exact wording of the contract, it is advisable for a purchaser to ensure it does do so, since the right to terminate will be dependent on the report meeting the requirements of the relevant clause, and getting the wording right in the report will avoid the cost and risk of having to ask the court to decide; and
- a purchaser who seeks to terminate under the General Condition 21 must not be in default itself at the time it does so. This is determined strictly by reference to the time of termination and it is not relevant to look forward and predict whether the purchaser will be in default at a future time, for any reason.
Hunt & Hunt’s Property Team can assist you with any questions about the right of a purchaser to terminate a contract because of building defects.
~ with Philippa Thorne, Graduate at Law
