The Facts
Contract for sale of land contains mental illness clause
A seller and a buyer entered into a contract for the sale of land near Grafton in NSW in November 2007, intending to settle 13 calendar months later.
In the contract was a special condition, clause 33, which referred to the ability of the contract to be rescinded (i.e. cancelled without any consequence or penalty) by either party, prior to completion, if either party died or became mentally ill.
Seller allows buyer to occupy land subject to occupation fee
Prior to settlement of the contract, the seller agreed for the buyer to occupy the land, subject to the contract, with an occupation fee of $13,000 plus GST per quarter, paid in advance.
During the time the buyer occupied the land, he had two problems. The first was that he was having trouble with one of his neighbours. The second was that his finance approval fell through, due to the global financial crisis.
The buyer was forced into the position of attempting to sell eight other properties which he owned, in order to raise the funds required to pay the seller for the Grafton property.
Seller offers buyer extension of time to settle
In early December 2008, the seller offered to give the buyer an extension of time to settle the contract, due to the financial difficulty the buyer was facing.
However, the real estate agent responded to the offer, suggesting that the buyer was unable to settle or continue paying the occupation fee at the agreed rate. The seller then made another offer to the buyer, but that offer was not accepted.
Seller issues Notice to Complete, buyer serves Notice of Rescission
The contract did not settle, so the seller issued a Notice to Complete to the buyer, requiring settlement on or before 3pm on 30 January 2009.
On that day, the buyer served a Notice of Rescission, stating that he terminated the contract in accordance with clause 33(a) of the contract, because he was suffering from a number of mental illnesses. These included panic attacks, anxiety, possibly depression and possibly bipolar disorder.
Seller serves Notice of Termination when contract is not completed
The seller then served a Notice of Termination on the buyer, on the basis that the buyer had not settled the contract in accordance with the Notice to Complete.
The seller then commenced proceedings in the Supreme Court, seeking a declaration that the Notice of Termination was effective, and a declaration that the Notice of Rescission issued by the buyer was invalid.
The buyer made a cross-claim that his Notice of Rescission was effective and the seller’s Notice of Termination was invalid.
Supreme Court finds in favour of property seller
In the case Brennan v O’Meara [2009] NSWSC 1374, the Supreme Court of NSW found in favour of the seller, Mr Peter Brennan. The court found that Mr Brennan’s Notice of Termination was effective.
The Notice of Rescission by the buyer, Mr Matthew O’Meara, was found to be invalid and of no effect.
Did the buyer become mentally ill prior to completion of the contract?
The court found that there was only one issue in this case, that is, whether Mr O’Meara had “become mentally ill” within the meaning of clause 33(a) of the contract, which read as follows.
Without in any way limiting, negating or restricting any rights or remedies which would have been available to either party at law or in equity had this clause not been included herein, should either party (and if more than one person comprises that first party then any one of them), prior to completion:
There was no definition of the term “mentally ill” itself in the contract.
The contract also did not confirm whether it was sufficient to have a diagnosis of a condition, for that condition to be classified as a mental illness.
“Mentally ill persons” under the Mental Health Act
The court considered section 14 of the NSW Mental Health Act 2007, which provides as follows.
A person is a mentally ill person if the person is suffering from mental illness and, owing to that illness, there are reasonable grounds for believing that care, treatment or control of the person is necessary:
“Mental illness” as defined by the Mental Health Act
Section 4 of that Act defines “mental illness” as follows.
A condition that seriously impairs, either temporarily or permanently, the mental functioning of a person and is characterised by the presence in the person of any one or more of the following symptoms:
When can you rely on an exit clause in a contract?
It is important to know when you can rely on a “get out clause”, or exit clause, in a contract for sale of land. In this particular case, someone who had a previous mental health condition was found not to have “become mentally ill” after the exchange of contracts.
However, if, for example, an elderly person entered into a contract and then had a severe fall, or some other kind of incident which caused mental distress and dementia, the outcome could be different.
There will always be a need for evidence of the person’s condition and it is important to speak with a solicitor who is competent in negotiation to help you in a case such as this.
What constitutes “mental illness” or a “mentally ill person”?
The judge made a decision in this case that the mental state of the buyer, Mr O’Meara, did not satisfy the definitions of either mental illness, or of a mentally ill person. The medical reports did not show that he was unable to function or deal with his affairs, nor that he lacked mental or emotional capacity to engage in or complete business transactions, nor that he was unable to work at any stage.
Further, contemporaneous notes taken by the real estate agent and the mortgage broker also made it clear to the court that Mr O’Meara was capable of managing his affairs.
Therefore, Mr O’Meara did not satisfy the conditions of clause 33(a) in the contract for sale, where the person is no longer able to meet their obligations under the contract due to becoming mentally ill.
Purpose of exit clauses in contracts
Contract clauses which allow the contract to be terminated in the event of a party becoming mentally ill will typically also cover other circumstances, such as death, bankruptcy and liquidation.
Exit clauses of this nature are directed at circumstances and events which cause an impediment or a delay in the fulfilment of contractual obligations.
It could not be said that Mr O’Meara’s condition created such an impediment or delay, so he was not entitled to make use of the exit clause to terminate the contract.
For more information please see Can you rescind a contract for the sale of land due to mental illness?