The Facts
Buyer and sellers enter into contract for sale of land
On 11 July 2003, a buyer of property and its sellers entered into a contract for sale of land, for a property on Sydney’s lower north shore.
The purchase price was $1.4 million, with a deposit payable of $140,000.
A two-bedroom house was constructed on the property around 1946. Though it was habitable, it was showing signs of its age.
Shortly after entering into the contract, the buyer obtained the owners’ consent to lodge plans with the local council to develop the property.
House damaged in fire and buyer seeks to back out of contract
The original contract settlement date was 11 July 2004, which was extended by agreement to 11 July 2005.
Unfortunately, on 27 April 2005, prior to completion, the house was damaged by a fire.
The vendors undertook repairs, which were completed in time for the 11 July 2005 completion date.
However, on 13 May 2005, the buyer gave the sellers written notice that he was rescinding the contract on the basis that the damage to the house had rendered the land materially different from what he had contracted to buy.
This rescission, if valid, would effectively undo the contract, putting each of the parties into the position that they were in before the contract was entered into. The buyer would then be entitled to the return of the deposit.
Sellers treat buyer’s actions as repudiation of contract and retain deposit
The sellers wrote back to the buyer, disputing his entitlement to rescind the contract and demanding that settlement occur.
When there was no response from the buyer, the sellers wrote to him again, indicating that they were treating his purported rescission as a repudiation of the contract (ie an indication of his refusal to be bound by the contract, without lawful excuse).
The sellers also informed the buyer that they had accepted his repudiation, thus bringing the contract to an end.
However, unlike rescission, which undoes the contract from the start, when a contract is terminated for repudiation, any rights already given to the parties remain valid. This meant the vendors kept the deposit.
Purchaser commences proceedings in Supreme Court
The purchaser then commenced proceedings in the Supreme Court of NSW, seeking a declaration that he had validly rescinded the contract and an order that the deposit be returned to him.
In response, the vendors sought a declaration from the court that the contract had been terminated by their acceptance of the buyer’s repudiation of it and that they were therefore entitled to retain the deposit.
Expert commentary on the court's decision
Supreme Court finds in favour of sellers
In Bakhos v Fenner & Anor [2007] NSWSC 641, the Supreme Court found in favour of the sellers, Regula Fenner and Rolf Fenner, concluding that the rescission by the purchaser, Tony Bakhos, was invalid.
The court recognised the effectiveness of the Fenners’ acceptance of the repudiation of the contract by Mr Bakhos and declared that they were entitled to retain the deposit.
Buyer’s attempts to claim “substantial damage” to property
Mr Bakhos sought to rely on section 66L of the NSW Conveyancing Act 1919 which states:
Section 66K of the Act provides that the passing of risk in respect of the damage remains with the vendor until the time of settlement of the contract, hence in this case the risk had not yet passed to Mr Bakhos.
Section 66J(2) of the Act states that land is “substantially damaged” when the damage “renders the land materially different from that which the purchaser contracted to buy”.
Buyer’s attempt to rescind contract found to be invalid
The court found no substantial damage, rejecting Mr Bakhos’s assertion that the land was materially different from what he had contracted to buy.
The court considered that the damage was put right within a few weeks of the fire and before the date on which Mr Bakhos had the right to call for completion.
Further, although the court acknowledged that there was considerable damage to the furniture and carpets, it said that this was not its concern.
Rather, its concern was with the structure of the property itself, and as to this, it accepted the expertise of the Fenners’ engineer.
In reaching its conclusion of no substantial damage, the court also had regard to the nature of the property and the amount of the purchase price it made up.
The court noted that the house itself was a two-bedroom brick and tile house which was well over 50 years old and showing signs of its age. The court took the view that the structure could only have been a minor factor in appraising what was of economic significance in a purchase of $1.4 million.
The court also referred to Mr Bakhos’s plans for redevelopment. It said that although there was no evidence as to what these plans were, it was in no way surprising that he would have plans to develop the property and it was extremely improbable that the house was material in the valuation of the property or his decision to buy the property.
As the land was not substantially damaged within the meaning of section 66 of the Act, Mr Bakhos’s purported rescission of the contract was invalid.
Contract terminated by valid acceptance of repudiation
The court said that irrespective of whether the land was substantially damaged, Mr Bakhos’s 13 May 2005 notice of rescission made it quite clear that he was unwilling to complete the contract.
Because he was not entitled to rescind under section 66 of the Act, his notice of rescission instead constituted an anticipatory breach of his obligation to settle on 11 July 2005.
This was a repudiation of the contract, which the Fenners accepted.
Consequently, the contract was terminated and the Fenners were entitled to keep the deposit.
Carefully assess the situation before rescinding a contract for sale of land
Before taking any action to rescind a contract for the sale of land, it is very important to know whether you are entitled to do so.
If you are unsure, always obtain advice from a lawyer who specialises in property and litigation.
If a property you have sold or bought is damaged by a fire, an unpreventable natural disaster, or by any other means, you must be sure that the damage is substantial, and that this damage renders the land materially different to the land that was purchased, taking into consideration all of the circumstances of the case.
Before rescinding a contract, always assess your circumstances and weigh up all the options. Seeking an agreement between parties to contracts for sale of land is always the safest and most cost-effective way to resolve a dispute. This will help to avoid expensive and stressful litigation.