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Property: On proper terms

Every Issue

Cite as: (2009) 83(06) LIJ, p.81

It is not terms contracts but their “improper” use that can cause problems for practitioners.

Last month I discussed the recent changes to the Sale of Land Act 1962 in relation to terms contracts.1 I made the point that those changes appear to mean that it is no longer possible to create a terms contract by multiple payments, although it remains possible to create a terms contract by the giving of possession.

This occurs where the contract provides that the purchaser is entitled to possession of the property before final payment, in contradistinction to a cash contract where possession is given on final payment.

The recent case of Munro v Humphries2 illustrates how a cash contract can be converted into a terms contract “accidentally”.

The vendor intended to sell vacant land for cash but the purchaser wanted an extended settlement (10 months) and the right to access the property before settlement to obtain planning and building permits and (probably ambitiously) to commence building.

The estate agent conducting the negotiations on behalf of the vendor did not recognise the significance of such changes and a special condition was handwritten into the contract granting the purchaser “immediate possession”.

Sometime thereafter the purchaser would appear to have had second thoughts about the transaction and sought to avoid on the basis that the contract was a terms contract and that the vendor had failed to comply with the provisions of the Sale of Land Act.

The purchaser argued that the contract had been drawn as a cash contract and that the meaning of the special condition was that the purchaser was only entitled to access to the land during the contract, not to have possession of it during that time. Whether such an argument would have been successful even if accepted is uncertain, but in any event the Supreme Court concluded that the condition meant what it said and the purchaser was entitled to avoid.

One hopes, but doubts, that this might
be a lesson to estate agents not to dabble in the learned art of drafting special conditions. Perhaps a liability for the vendor’s substantial losses might have been a more salutary lesson.

The breach relied on by the purchaser in this case was the failure of the vendor to transfer the property to the purchaser when requested to do so and take a mortgage back.

All terms purchasers have this right,3 but a vendor who has a substantial mortgage over the property (which is common) and is unable to offer substituted security to the vendor’s lender is caught between a rock and a hard place – the vendor must transfer the property “freed and discharged from all mortgages” but does not have the resources to discharge the mortgage.

Failure by the vendor to comply with the purchaser’s request to transfer entitles the purchaser to avoid the contract.4

A purchaser might also be entitled to avoid for breach of these provisions as a result of the vendor’s failure to provide in the contract that the sale is subject to a mortgage and giving the required particulars of the mortgage or failing, if the vendor elects not to give those required particulars, to provide in the contract that the mortgage is to be discharged before preliminary settlement and in fact discharging that mortgage within 90 days of contract.

The standard form contracts in general use do include the necessary wording to satisfy the first requirement (although those words were deleted in Munro v Humphries as it was intended that the contract would be a cash contract) and if the mortgage is discharged within 90 days of the contract, the second requirement will be satisfied.

However, if the vendor fails to comply with any of these requirements (as was the case in Munro v Humphries) the vendor may nevertheless be saved from avoidance if the vendor has acted honestly and reasonably and the purchaser is in no worse a position.5

This will often save a vendor when the purchaser is complaining that the contract became a terms contract because of variations that were agreed to during the course of the contract.

In such cases the Court can be satisfied that the purchaser was aware of the consequences of those variations and thus in no worse a position.6

Byrne J in Munro v Humphries tentatively reached the conclusion that the equivalent provision in the old Act applied to assist the vendor in relation to both a breach relating to failure to disclose information and also a breach relating to the failure, as in that case, of the vendor to comply with the purchaser’s request for a transfer and mortgage back.

However, he could not be satisfied that the purchaser was in “as good a position” despite the vendor’s breach and therefore held that the purchaser was entitled to avoid. He concluded that the vendor’s inability to take title prevented him from commencing construction as an owner-builder and also prevented him from seeking second mortgage funds to assist with the building project.

Terms contracts remain something of a mystery to the average property lawyer.

It is not so much their proper use that creates a problem, rather it is their “improper” use, due to a lack of understanding as to how they are created and of their consequences, that continues to mean that the occasional terms contract will haunt an unsuspecting author.

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