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Property: Put up or shut up

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Cite as: September 2014 88 (09) LIJ, p.76

A recent decision has confirmed enforceable contractual terms regarding the condition of a property at settlement.

One of the innovations introduced by the 2008 standard contract of sale is a procedure designed to deal with the problem of deterioration of the property between the day of sale and the proposed settlement date.

Such deterioration is typically discovered by the purchaser when exercising the right given by General Condition 22 to “inspect the property during the seven days preceding and including the settlement day”. Consequently, the parties are time poor when it comes to resolving such a problem. GC 24 was introduced to provide a procedure to quarantine a dispute in relation to the condition of the property at settlement and allow the transaction to settle notwithstanding that the side issue had not been resolved.

GC 24.1 establishes that the property remains at the risk of the vendor until settlement and GC 24.2 requires the vendor to deliver the property “in the same condition it was in on the day of sale”. Thus the purchaser has contractual rights if the property is in a deteriorated condition at settlement, however GC 24.2 includes the qualification that any such deterioration must exceed “fair wear and tear”. This means that a purchaser must accept minor deterioration and the example of a hot water service that no longer works is a common example of “fair wear and tear”.

But deterioration beyond fair wear and tear would not automatically give the purchaser the right to delay settlement or make a unilateral deduction from the amount due at settlement for the estimated cost of rectification. Perpetual Trustee Company Ltd v Lindlirum Pty Ltd [2009] VSC 182 found that deterioration beyond fair wear and tear might only enable a purchaser to seek compensation after settlement. It may be concluded that there are three levels of deterioration:

  1. fair wear and tear – the purchaser must accept;
  2. minor deterioration – entitles the purchaser to compensation but not to delay settlement or seek a deduction in the purchase price; and
  3. major deterioration – entitles the purchaser to delay settlement.

GC 24.4 is designed to deal with minor deterioration by establishing a process where the purchaser nominates an amount (not exceeding $5000) to be deducted from the purchase price and paid to a stakeholder pending resolution of the dispute after settlement, but only if the purchaser pays an equivalent amount to the stakeholder from the purchaser’s own funds. Thus the purchaser can be confident that funds will be available after settlement if the dispute is decided in favour of the purchaser, but the vendor can equally be confident that, if the dispute is decided in favour of the vendor, the vendor will receive the full price and there will also be funds available to satisfy the vendor’s costs in defending the claim.

Patmore v Hamilton [2014] VSC 275 is the first case to consider GC 24 and provides some clarification. The Court approved the purchaser’s method of calculating the amount to be deducted as being based on a quotation for the cost of rectification. The Court also approved the purchaser’s nomination of the selling agent as the stakeholder. Importantly, the Court held that the vendor was obliged to submit to the procedure and once the purchaser had submitted the quotation, nominated the stakeholder and arranged for payment of the deducted amount and the purchaser’s equivalent contribution, the vendor was obliged to settle and resolve the dispute after settlement. The Court concluded that GC 24 means that the vendor is obliged to comply with the condition.

The vendor had argued that the deterioration was covered by fair wear and tear, but the Court held that substantial water penetration through a tiled roof was beyond fair wear and tear. The vendor also argued that GC 24 was not compulsory and that the vendor had not agreed to the appointment of the agent as stakeholder and that the purchaser had not made the payments to the stakeholder. The Court held that the purchaser had established a willingness to make the necessary payments to the nominated stakeholder and that the vendor, by refusing to accept the nomination, was the cause for non-payment. The purchaser was therefore entitled to end the contract and reclaim the deposit. Additionally, the purchaser was entitled to legal costs generally and on an indemnity basis for the trial. All this over a dispute involving $2640.

Now that GC 24 has been confirmed as an enforceable contractual term, vendors may be more prepared to negotiate a compromise. By requiring the purchaser to “put up or shut up” GC 24 sifts out frivolous claims and a vendor who is faced with a purchaser that invokes GC 24 should consider making a concession so that the settlement can bring an end to the relationship between the parties.


RUSSELL COCKS is author of 1001 Conveyancing Answers. For more information go to www.russellcocks.com.au.

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