When the boom ends – Avoiding settlement on “off the plan” contracts

Introduction

Pan Urban Watergate Pty Ltd v Graham, a recent Victorian Supreme Court decision, will be closely read by developers who sold “off the plan” apartments to investors during the last period of the recent real estate boom.

Background

Mr Graham was a busy stockbroker.  In mid 2001 he heard from an agent of the proposed Watergate development in Docklands, Melbourne.  The project was yet to be designed when he was first contacted.  He paid a $5,000 fee to secure a level 18 penthouse apartment.  He said he was told that by signing up early, he would obtain the apartment at cost price – a 30% discount.  He said he was told that the price was to be $4,500 to $5,000 per square metre and he would be able to sell the apartment before settlement without any difficulty at a profit of about 20%.  He was given a brochure showing an apartment of 143 square metres with a purchase price of $1,200,000.

In December 2001 he signed a contract and paid a 10% deposit on a $1,067,000 penthouse.  Mr Graham said he did not see the plan when he signed the contract and thought it was the same layout as the earlier brochure.  However, the contract listed the drawing numbers for the penthouse and gave an address for their inspection.  Mr Graham claimed he first received the floor plan in August 2004.

By early 2005, the market had turned and the newly completed penthouse was valued at less than the sale price.  Mr Graham attempted to avoid settlement.  The developer issued proceedings to compel him to complete the sale.  There were four aspects to Mr Graham’s defence:

  • there had been misleading and deceptive representations by the agent;
  • the Contract contravened the Domestic Building Contracts Act 1995 (Vic);
  • the apartment as constructed was different to what the contract required, entitling him to terminate the contract;
  • the contract was so uncertain as to be unenforceable.

Misleading and Deceptive Conduct

The parties bought conflicting evidence as to the representations that were made.  The oral evidence of the parties was given some four years after the discussions occurred.

The agent denied stating that the price would be discounted by 30% to $4,500 to $5,000 per square metre and said that Mr Graham had been informed of the reduced apartment size.  The court concluded that, due to his hectic work schedule at the time, Mr Graham had little reliable recollection of the events and that his account of his dealings with the agent was riddled with inconsistencies.

While in this particular case it appears that the credibility of the parties largely determined the outcome, parties should note that representations that:

  • lead to the formation of a contract; and
  • are incorrect; and
  • are relied upon by the other party to the contract,

entitle the party to whom the representations were made to claim damages for the difference between what they received under the contract and what they would have received if the representations had been true.

In any dealings of this nature, contemporaneous notes as to promises or representations can prove invaluable in the event that disputes subsequently arise.

Domestic Building Contracts Act 1995 (Vic)

The court noted that the amendments made to the Act in 2004 exclude from the effect of the Act, contracts for the sale of land on which a house is being constructed where the house is being constructed as part of a major domestic building contract.

The difference between the contract and the finished apartment

Mr Graham claimed that the 127 square metre apartment was not the 143 square metre apartment he had signed for and that a variation of this nature entitled him to terminate the contract under the variation clause in the contract.  However, his assertion that he was not aware of the amended plan showing the reduction in area was rejected by the Court, proving fatal to this aspect of the claim.

The contract was so uncertain as to be unenforceable

Mr Graham brought this claim on twin bases; that the amended plan was not incorporated into the contract as signed, and that the details of the apartment were insufficiently defined.

The court found that the arrangements as to identification of the plan were not ideal but that there was sufficient evidence to support the incorporation of the amended plan as part of the contract. As to the details of the apartment, the court found that, notwithstanding the general nature of the plans and specifications, there was no relevant uncertainty.

Conclusion

Always read construction contracts and ensure that the plans are as anticipated.  Parties promoting “off the plan” sales can take the following steps to reduce the potential for disputes:

  • clearly identify in the contract,  the plans and drawings (including any recent amendments);
  • ensure that all representations made prior to the contract date are clearly stated, valid and where possible, noted;
  • written marketing material should be clearly expressed;
  • any variations that occur due to design developments should be communicated and acknowledged.

Contributor: Tom Grace

Tom is a former engineer who ran his own construction company for 20 years before becoming a construction lawyer.  He has wide experience in the engineering and construction fields and specialises in the resolution of commercial disputes.

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