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What's new and improved? Part 2

What's new and improved? Part 2

By Murray McCutcheon AM and David P Lloyd

Real Property 

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The September 2017 revision of the LIV/REIV contract of sale of land is further explained in the second of this two-part feature.

Snapshot

  • New special conditions bring the contract up to date.
  • Some are standard in all cases, while others are of optional application.
  • This article deals exclusively with the new optional special conditions 9 to 12.
  • Check boxes for these new special conditions as they are not pre-checked.

This is the second of a two-part feature explaining the September 2017 revision of the LIV/REIV contract of sale of land. It addresses new special conditions 9 to 12 which are of optional application. This second part of the feature article needs to be read in conjunction with the first part which was published in the December 2017 edition of the Law Institute Journal.

Special condition 9 – Deposit bond

The box must be checked for the special condition to apply

This is a new special condition.

This special condition has been made available because Victorian practitioners are generally unfamiliar with deposit bonds, as they are not used as extensively in Victoria as in some other jurisdictions.

A contract of sale of land may allow for the purchaser to provide a deposit bond to the vendor in lieu of the payment of a cash deposit. A deposit bond is a type of performance bond specifically designed to support a purchaser’s obligation to pay a deposit under a sale of land contract. It is also sometimes called a “deposit guarantee”.

A deposit bond is a limited form of performance bond. A performance bond is an unconditional undertaking by the issuer to pay a certain sum of money to the person in whose favour it is issued in certain circumstances and on demand. It usually, but not always, requires that the demand be accompanied by production of the document itself, and without reference to any contract of sale in which the bond was given.1 In this respect, it is not dissimilar to a bank guarantee.

Where a demand is made under the bond, the issuer of the bond is not bound to inquire into the reason for the demand being made or the terms of the contract of sale under which the bond was provided in the first place. This is because the bond operates independently of any underlying contract of sale, and payment is not conditional on matters which may arise under the contract of sale.2

A demand under a performance bond may be made at any time unless the applicable contract term provides otherwise, but once the money is received it must be held as though it had been paid as the deposit.3

Deposit bonds are commonly encountered in the context of off-the-plan contracts because of the usually long time between contract and settlement.

The provision of a deposit bond by the purchaser does not of itself infringe the requirements of Division 1 of Part 1 of the Sale of Land Act 1962 relating to off-the-plan contracts of sale as no deposit payment is made except contemporaneously with settlement. However, care must be taken to ensure that the terms of the contract of sale do not allow the vendor to claim on the deposit bond and receive payment directly before registration of the plan of subdivision.4

Special condition 9 entitles the purchaser to provide a deposit bond within seven days after the day of sale if the box is checked. The word “within” means “no later than”.5 The day of sale itself is excluded from the calculation of time.6 The seven day period includes weekends and public holidays.

Provision of a deposit bond effectively postpones the purchaser’s obligation to pay the deposit until settlement of the contract of sale. One practical consequence is that the vendor’s estate agent will be unable to access the deposit for their commission until settlement or termination of the contract by the vendor. In the case of an off-the-plan sale, any deposit paid must in any event be held on trust for the purchaser until registration of the plan of subdivision with no possibility of earlier release. This is unlike cash contracts where the deposit may be released at an early date if the procedure for release of stakeholder deposits under s27 of the Sale of Land Act 1962 is followed.

Where a deposit bond has been provided, the vendor is only entitled to payment of the deposit at settlement, or if the contract of sale is brought to an end in consequence of the purchaser’s default or repudiation of the contract. The vendor will generally only be entitled to claim on the deposit bond if the contract ends in this manner.

The vendor may have limited time to do so in a case where the bond is due to expire as early as 30 days after the due date for settlement. In such a scenario, the vendor will need to act promptly if settlement does not occur on the due date. The vendor should serve a 14 day default notice under general condition 27 without delay, with a view to ending the contract and claiming under the deposit bond before the bond expires. The vendor should be wary of granting an extension of time for settlement unless the deposit bond expiry date is also extended.

Several requirements of the deposit bond are spelt out in special condition 9.1. Specifically, the deposit bond must:

  • be issued by an entity which is regulated by the Australian Prudential Regulatory Authority or the Reserve Bank of New Zealand
  • be for an amount which equals the deposit7 or as much of the deposit as remains unpaid
  • be irrevocable
  • be in a form which is satisfactory to the vendor
  • have an expiry date8 which is at least 30 days after the due date for settlement.9

Special condition 9.3 allows for a replacement bond, having the same terms and conditions as the original one, to be provided at least 30 days before the original bond expires. The 30 day period ties in with special condition 9.4 and allows time for a demand to be made by the vendor while the bond is still in force.

By special condition 9.2, the deposit bond must be delivered to the vendor’s estate agent, legal practitioner or conveyancer.10

Special condition 9.4 provides that where a deposit bond has been delivered, payment of the deposit is due on the first to occur of the following events:

  • settlement
  • the date being 30 days before expiry of the deposit bond.11 Where the purchaser fails to pay the deposit on the 30th day before the bond is due to expire, the vendor will have 30 days in which to make a claim under the bond while it is still
  • in force
  • the date on which the contract ends under general condition 28.2 following breach by the purchaser
  • the date on which the vendor ends the contract by accepting the purchaser’s repudiation of it.

Special condition 9.4 spells out that the deposit must be paid to the vendor’s legal practitioner or conveyancer, as required by s9AA of the Sale of Land Act 1962 in the case of a deposit under an off-the-plan prescribed contract of sale.

Special condition 9.5 allows the vendor to claim on the deposit bond if the purchaser breaches the contract or repudiates it and the contract is ended. In the face of breach of the contract by the purchaser, general condition 27 ordinarily requires the giving of a default notice if the contract is to be terminated by the vendor. If there is repudiation of the contract entirely on the part of the purchaser, the vendor may accept it and bring the contract to an end in that manner.

Where the contract is ended, the vendor may claim on the deposit bond straight away. Special condition 9.5 makes it plain that no prior notice is required to be given to the purchaser. Special condition 9.5 also provides that payment by the issuer of the bond satisfies the purchaser’s payment obligation under special condition 9.4.

Special condition 9.6 provides that the vendor’s rights under the contract arising from default by the purchaser are not limited by special condition 9 except to the extent that payment of the deposit by the issuer of the deposit bond satisfies the payment obligation of the purchaser in respect of the deposit, as provided for in special condition 9.5.

Special condition 9.7 spells out that general condition 11.2 has precedence over special condition 9. The provisions of general condition 11.2 address the amount of the deposit, and to whom it must be paid, in the case of an off-the-plan prescribed contract of sale under the Sale of Land Act 1962.

Special condition 10 – Bank guarantee

The box must be checked for the special condition to apply

This is a new special condition.

New special condition 10 entitles the purchaser to provide a bank guarantee in lieu of a cash payment of the deposit or any other amount due under the contract, but only if the box is checked. A bank guarantee is an unconditional undertaking by the issuer of the guarantee to pay a certain sum of money on demand to the person in whose favour the guarantee is issued. A typical form of bank guarantee was considered in Wood Hall Ltd v Pipeline Authority:12

“The bank unconditionally undertakes and covenants to pay on demand any sum or sums which may from time to time be demanded in writing by the owner up to a maximum aggregate sum of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000.00) . . .”

A demand under a guarantee in this form may be made at any time unless the applicable contract condition provides otherwise, and once the money is received it must be held as though it had been paid as the deposit.13

Bank guarantees are sometimes encountered in the context of off-the-plan prescribed contracts of sale under the Sale of Land Act 1962 because of the usually long time between contract and settlement.

Special condition 10 allows the purchaser to provide a bank guarantee for any amount payable under the contract which is agreed to by the vendor, and at any time.

Several requirements of the bank guarantee are spelt out in special condition 10.1. Specifically, the guarantee must be:

  • issued by a “bank”, meaning an authorised deposit-taking institution under the Banking Act 1959 (Cth)
  • unconditional and irrevocable
  • in a form which is satisfactory to the vendor.

Special condition 10.2 provides that the bank guarantee must be delivered to the vendor’s legal practitioner or conveyancer.14

Special condition 10.3 provides for the purchaser to pay the amount secured by the bank guarantee on the first to occur of the following events:

  • settlement
  • the date being 30 days before expiry of the bank guarantee15
  • the date on which the contract ends under general condition 28.2 following breach by the purchaser
  • the date on which the vendor ends the contract by accepting the purchaser’s repudiation of it.

Special condition 10.3 spells out that the relevant amount must be paid to the vendor’s legal practitioner or conveyancer, as required by s9AA of the Sale of Land Act 1962 in the case of deposit money under an off-the-plan prescribed contract of sale.

Special condition 10.4 requires the vendor to return the guarantee document to the purchaser in exchange for payment of the sum secured by it.

Special condition 10.5 allows the vendor to claim on the bank guarantee if the purchaser breaches the contract or repudiates it and the contract is ended, even if the terms of the bank guarantee do not make the termination due to default or repudiation of the contract a pre-condition to drawing down on the bank guarantee. In the face of breach of contract by the purchaser, general condition 27 ordinarily requires the giving of a default notice if the contract is to be terminated by the vendor. If there is repudiation of the contract entirely on the part of the purchaser, the vendor may accept it and bring the contract to an end in that manner.

Where the contract is ended, the vendor may claim on the bank guarantee straight away. Special condition 10.5 makes it plain that no prior notice is required to be given to the purchaser. Special condition 10.5 also provides that payment by the issuing bank satisfies the purchaser’s payment obligation under special condition 10.4.

Special condition 10.6 provides that the rights of the vendor in the event of default by the purchaser are generally not limited by special condition 10, and special condition 10.7 spells out that general condition 11.2 has precedence over special condition 10. The provisions of general condition 11.2 address the amount of the deposit, and to whom it must be paid, in the case of an off-the-plan prescribed contract of sale under the Sale of Land Act 1962.

Special condition 11 – Building report

The box must be checked for the special condition to apply

This is a new special condition.

Special condition 11 is similar to a contingent condition in favour of the purchaser. It provides for a termination right in favour of the purchaser to be exercised within 14 days from the day of sale where the purchaser obtains a building report which discloses a major building defect, if the box is checked

The 14 day period can be modified by alteration of special condition 11 itself or by a further special condition.

Special condition 11.1(a) indicates that the building report must:

  • be from a registered building practitioner16
  • disclose a defect in a building on the land which is current17 and which is designated in the report itself as a major building defect.18

In order to exercise the termination right, the purchaser must give written notice accompanied by a copy of the report on which the purchaser relies. In addition, the purchaser must not be in default under the contract. For instance, the purchaser may not be entitled to end the contract under special condition 11 if the purchaser has failed to pay a deposit which was due for payment before the termination notice was given. However, a prior breach which has subsequently been remedied will not disentitle the purchaser from ending the contract under special condition 11.

Special condition 11 requires any notice of termination to be given within 14 days after the day of sale. The day of sale is, according to the opening part of the contract, the day by which both parties have signed the contract. The expression “within” means “no later than”.19 The day of sale itself is excluded from the calculation of time.20 The 14 day period does not exclude weekends or public holidays.

The expression “day” means a calendar day rather than a period of 24 hours from any given starting point.21 A day ends at midnight22 so that a notice under special condition 11 may be validly given after working hours.

Special condition 11.3 makes it clear that the termination notice may be given to the vendor’s legal practitioner, conveyancer or estate agent.

Special condition 11.2 provides that if the contract is ended in accordance with special condition 11, all money paid by the purchaser must be immediately refunded. This reflects the position at common law.

Special condition 11.4 allows the building practitioner to inspect the property at any reasonable time for the purpose of preparing the report.

Special condition 12 – Pest report

The box must be checked for the special condition to apply

This is a new special condition.

Special condition 12 is also similar to a contingent condition for the benefit of the purchaser. It provides for a termination right in favour of the purchaser if the box is checked. The termination right may only be exercised within 14 days from the day of sale where the purchaser obtains a pest inspection report which discloses a major pest infestation.

The 14 day period can be modified by alteration of special condition 12 or by a further special condition.

Special condition 12.1(a) indicates that the pest inspection report must:

  • be from a pest control operator licensed under Victorian law23
  • disclose a pest infestation on the land which is current24 and which is designated in the report itself as a major infestation.25

Special condition 12 operates in a similar way to special condition 11. The commentary on special condition 11 is equally applicable to special condition 12 regarding:

  • the entitlement to access the property
  • the exercise of the termination right given by the condition
  • the return of money paid by the purchaser if the contract is ended.

Conclusion

The new and revised special conditions increase the total length of all general conditions of the contract by approximately 50 per cent. This is in spite of strenuous effort to keep the language of the conditions succinct and precise.

They have been prepared on behalf of the LIV in consultation with the Real Estate Institute of Victoria (REIV). The LIV has made them available to the REIV and the Australian Institute of Conveyancers (Vic Division) for provision to their respective members in addition to the LIV’s own members, in order to promote consistent documentation for efficient conveyancing in Victoria. The use of the new special conditions without the consent of, or by arrangement with, the LIV, REIV or the Australian Institute of Conveyancers will constitute an infringement of copyright.

The special conditions can be deleted or amended by additional special conditions where the circumstances of an individual conveyancing transaction genuinely require specific change, as can the general conditions for that matter. However, it may be an infringement of copyright26 and possibly a breach of other laws27 to make surreptitious changes to standard uniform conditions. Apart from that, the practice of adding voluminous, unnecessary, unfair, overly complex, poorly drafted or conflicting special conditions28 into a contract of sale29 is to be discouraged, and indeed condemned. Those unsatisfactory conditions have a real potential to cause significant difficulty for both of the parties and their representatives, and tend to make the conveyancing process unnecessarily inefficient and overly expensive. They are not a sign of legal prowess, but demonstrate a misunderstanding of the proper role of legal practitioners and other professionals in property transactions. The transparent intention of those responsible for such drafting is invariably to enhance the contractual rights of the vendor alone, obviously to the detriment of the purchaser. In contrast, it has always been an imperative of the standard contract to strike a careful balance between the competing rights and interests of both vendor and purchaser.

The new special conditions have been carefully drawn with a view to ensuring that the standard contract retains its rightful place as the pre-eminent contract of sale of land in Victoria.

*Part 1 of this article appeared in the December 2017 edition (91:12) of the LIJ and contains commentary on the new special conditions 1 to 8.

 

Murray McCutcheon AM is the longest serving member of the LIV Property Committee, a member of the Law Council of Australia (LCA) National Electronic Conveyancing Committee and chair of the Electronic Conveyancing Group.30 He is also past chair of the LCA Australian Property Law Group, the LCA Legal Practice Section and the Property Law Reform Alliance. Murray was invested as a Member of the Order of Australia in 2015 for significant service to property and commercial law.

David P Lloyd is a barrister with more than 35 years’ experience in property law. He is the lead author of Sale of Land Victoria (Thompson Reuters, October 2015) and the forthcoming work Victorian Land Contracts, the primary focus of which is the standard contract of sale of land in Victoria. He has been a member of the LIV Property Committee for more than 25 years and is a regular seminar speaker and contributor to the LIJ.

The authors again take the opportunity to acknowledge the significant and invaluable contribution made by Russell Cocks as a co-author of the 2017 special conditions, and the original 2008 contract and all its revisions.

 

1. Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 551.

2. Burleigh Forest Estate Management Pty Ltd v Cigna Insurance Australia Ltd [1992] 2 Qd R 54 at 60; Anaconda Operations Pty Ltd v Flour Daniel Pty Ltd (1999) 16 BCL 230 at [8]; Rejan Constructions Pty Ltd v Manningham Medical Centre Pty Ltd [2002] VSC 579 at [4].

3. Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443, at 454.

4. As happened in Everest Project Developments Pty Ltd v Mendoza (2009) V ConvR 54-755.

5. Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at 34.

6. Forster v Jododex (Australia) Pty Ltd (1972) 127 CLR 421 at 440.

7. As set out in the particulars of sale.

8. Deposit bonds invariably have a limited lifespan, which can vary from months to years.

9. As provided for in the particulars of sale.

10. Assuming, of course, that it has not been renewed as allowed by special condition 9.3 at least 30 days before the expiry date.

11. And not to the vendor directly.

12. (1979) 141 CLR 443.

13. Note 3 above.

14. And not to the vendor directly.

15. Allowing the vendor 30 days in which to make a claim under the guarantee while it is still in force, assuming that the guarantee has an expiry date. A bank guarantee may or may not have an expiry date.

16. Meaning registered under the Building Act 1993.

17. This will exclude a prior defect which has subsequently been repaired.

18. So the question is not whether the defect is a major one on an objective basis, but whether the author of the report so describes it.

19. Note 5 above.

20. Note 6 above.

21. Dougherty v Stockwell (1899) 26 VLR 198.

22. Taig v Fawcett [1962] VR 58, at 60.

23. The Public Health and Wellbeing Act 2008.

24. This will exclude a prior infestation which has since been eradicated.

25. So that the question is not whether the pest infestation is a major one on an objective basis, but whether the author of the report so describes it.

26. And perhaps other intellectual property rights.

27. Such as the Australian Consumer Law.

28. Particularly provisions purporting to make a purchaser liable for substantial penalty fees which are expressed to be payable to the vendor’s representative.

29. Including the disingenuous practice of attempting to embed contractual terms in a section 32 statement.

30. Represents the legal profession, licensed conveyancers and financiers through its members being the Law Council of Australia, Australian Institute of Conveyancers and the Australian Bankers Association.

 


Disclaimer: Views expressed by commentators are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV). No responsibility is accepted by the LIV for the accuracy of information contained in the comments and the LIV expressly disclaims any liability for, with respect to or arising from any such views.

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