Can you rescind a contract for the sale of land due to mental illness?
by Anneka Frayne and Talitha Fishburn
As the incidence of mental illness and the awareness of it continue to grow, there is an increasing likelihood of one or the other party wanting to rescind a contract for the sale of land due to mental illness.
What does it mean to rescind a contract?
With property prices soaring around Australia, there is a lot at stake for anyone entering into a contract for the sale of land. However, if you decide to rescind a contract, it is not as straightforward as simply withdrawing from the sale.
Once both parties have signed the contract, you have entered into an agreement to purchase or sell and there must be strong legal grounds to rescind it.
When a contract is rescinded, it is as if the obligations under it no longer exist – all parties are essentially restored to the position they were in prior to entering the contract.
This differs from terminating a contract, where the contract ceases to be enforceable from the date of the termination. With a termination, the obligations remain and the parties are able to sue each other, despite the contract being terminated.
What constitutes valid grounds to rescind a contract?
You can only rescind a contract in specific circumstances. These include mutual consent, incapacity, fraud, if it is against the public interest, if it was formed under duress or coercion or if there is a failure of, or inadequate, consideration.
With rates of mental illness on the rise, the question arises whether poor mental health or mental illness can be sufficient grounds for rescinding a contract. In particular, to what extent must mental illness be an “impediment” to completing the contract in order for the party to rely on it as the grounds for rescinding the contract.
NSW dispute over buyer’s right to rescind a contract
Over a decade ago, there was a case involving this very question – Brennan v O’Meara  NSWSC 1374. It concerned whether a buyer had a right to rescind a contract for the sale of land due to “mental incapacity”, after exchange of contracts and prior to settlement.
The matter involved Mr Brennan, the vendor, and Mr O’Meara, the buyer. The parties had negotiated a settlement of about 13 months, and Mr O’Meara had early possession of the land.
However various obstacles, including an altercation with a neighbour, rejection of his finance application and the looming global financial crisis, compounded to aggravate Mr O’Meara’s existing mental health problems.
Consequently, Mr O’Meara wanted to withdraw from the contract, and served a notice to rescind pursuant to a special condition on the basis that he had “become mentally ill”. The special condition in the contract provided that:
…should either party… prior to completion… die or become mentally ill, then either party may rescind this Contract by notice… thereupon this Contract shall be at an end… (Emphasis added.)
Mr Brennan disputed the validity of the notice and the court found in his favour. In this case, the court identified that the issue to determine was whether O’Meara had satisfied the special condition – that is, whether Mr O’Meara had “become mentally ill” within the meaning of the special condition.
The contract itself that the parties had signed contained no definition of the term “mentally ill”, nor did it confirm whether it was sufficient to have a diagnosis of a condition, or for that condition to be classified as a mental illness. The court considered section 4 and section 14 of the NSW Mental Health Act 2007, which provided definitions of “mental illness” and “mentally ill persons”.
In Brennan v O’Meara, the evidence did not show Mr O’Meara was unable to function or deal with his affairs. The court decided his notice of rescission was invalid because he was not mentally ill within the meaning of the special condition, ie his diagnosed mental illness did not cause an “impediment” to the fulfilment of his contractual obligations.
Contracts with incapacity provision now often provide definition of mental illness
In the years since Brennan v O’Meara, there have been two significant changes.
First, if a contract for the sale of land has an incapacity provision, it will often now provide a definition of “mental illness” for the purpose of providing greater contractual certainty. An example is as follows:
If any individual being a party to this contract is diagnosed with a mental illness as defined in the Mental Health Act 2007 (NSW) prior to completion then either party may rescind this contract by notice in writing.
Secondly, there has unfortunately been a marked increase in the incidence of mental illness over the past decade. One in five Australians suffers from a mental illness in a given year, and almost half of the population has suffered a mental disorder at some point in their life.
This would seem to raise the likelihood of a situation similar to Brennan v O’Meara occurring again.
Special conditions dealing with mental illness in contracts
If you are concerned that mental illness may impact your ability to complete a contract, it is worth talking to your lawyer about having a special condition included in the contract.
A special condition that deals with mental illness can be drafted, to be separate from the special condition dealing with death and insolvency or bankruptcy. Consider whether the words “becomes mentally ill”, should be used, or whether words such as “…is diagnosed with a mental illness as defined by…” are preferable.
Similarly, your lawyer could draft the special condition dealing with mental illness with more detail, including making it referable to section 4 of the Mental Health Act.
Another option is to draft a standard procedural condition for dealing with automatic rescission, such as the following:
Automatic rescission occurs upon the service of a Notice to Rescind together with a diagnostic report from a registered clinical psychologist or psychiatrist, qualified to practice in New South Wales, stating the person is suffering from a mental illness as defined by the Mental Health Act.
The court found that the evidence did not show that Mr O’Meara was unable to function or deal with his affairs, and therefore was not mentally ill within the meaning of the special condition. His mental illness did not cause an “impediment” to the fulfilment of his contractual obligations.
For more information on Brennan v O’Meara, please see Could the buyer terminate the property sale contract due to mental illness? Which case won?
Talitha Fishburn is a Barrister at Black Chambers.
A version of this article was first published on the website of the Law Society Journal of NSW on 1 December 2021.