The Facts
Buyer and sellers exchange contract for sale and purchase of land
On 19 January 2018, a buyer and seller exchanged contracts for the sale and purchase of a property in Kissing Point Road, South Turramurra, in NSW. The sale price was $2.83 million, with a 10% deposit of $283,000.
The buyer was a company. The sole director and secretary of that company signed the contract as guarantor.
On exchange of contracts, the buyer paid a five per cent deposit of $141,500. A clause in the contract provided for the balance of the deposit to be paid “on or prior to completion”.
The date for completion was 19 July 2018, being six months from the date of exchange.
Under the contract, if the buyer did not complete on the due date then the sellers could issue a notice to complete, making time of the essence. The new completion date set out in the notice to complete had to be “not less than 14 days after the date of service of the notice”.
Buyer unable to settle, sellers issue notice to complete
As the 19 July 2018 settlement date approached, the buyer gave notice that it may not be able to settle on that date because it could not finalise its finances in time. However, it stated that it could settle by 21 August 2018.
At 6:22am on 20 July 2018, the sellers issued the buyer with a notice to complete, requiring completion of the sale on or before 3pm on Friday 3 August 2018.
The notice to complete stated that time was of the essence, and that unless the buyer completed within the time specified, the sellers would be entitled to terminate the contract.
Sellers agree to extend completion date under notice to complete
The buyer subsequently notified the sellers that its finance had been approved, but that the bank had arranged a new valuation of the property, which was $510,000 less than the purchase price.
The buyer needed more time to organise the shortfall in funds and requested that the date for completion under the notice be extended to 23 August 2018. The sellers agreed to this extension.
Buyer still unable to settle and sellers terminate contract
On 23 August 2018, the buyer notified the sellers that it had failed to rectify the shortfall in funds.
On 27 August 2018, the sellers terminated the contract by notice to the buyer and sent the buyer and guarantor a demand for payment of the balance of the deposit, plus interest, and reserved their rights to claim damages.
Buyer claims sellers repudiated contract, legal proceedings commence
In response, the buyer alleged that the sellers’ purported termination was invalid and amounted instead to a repudiation of the contract by the sellers. The buyer gave notice that it accepted the sellers’ repudiation, that it was itself terminating the contract and demanded that the sellers repay the five per cent deposit already paid.
In November 2018, the sellers commenced legal proceedings against the buyer and the guarantor in the Supreme Court of NSW.
Prior to the hearing date, the sellers sold the property to another purchaser for $2.23 million, which was $600,000 less than the original sale price which the buyer had agreed to pay.
Expert commentary on the court's decision
Supreme Court finds in favour of seller
In Cole v Raykir Holdings Pty Ltd [2019] NSWSC 1017, the Supreme Court of NSW found in favour of the sellers, Mitchell and Katherine Cole, declaring that the contract for sale was validly terminated by them on 27 August 2018.
The court held that the buyer, Raykir Holdings Pty Ltd, and the guarantor, Ekaterina Charonova, were liable to pay the Coles $458,500.00. This amount was the difference between the initial sale price ($2.83 million) and the subsequent sale price ($2.23 million), less the part deposit released prior to termination ($141,500.00).
Notice to complete makes time of the essence for completion of contract
The court had to determine whether the notice to complete served on 20 July 2018 was valid, and whether it made time of the essence. This turned on whether the completion date set out in the notice was not less than 14 days after the date of service of the notice, as required by the relevant clause in the contract.
The court noted that “the general rule of construction is that where an instrument requires a period of time to be computed to a particular date, the date [of service] itself is not included and thus the period commences at the end of that day”.
However, the court also stated that this general rule can give way according to the context. Unlike the general rule, the clause in the contract operated so that 20 July 2018, the date the notice was served, was included in the notice period.
On that basis, the specified date for completion, 3 August 2018, was no less than 14 days after the date of service. Therefore, the notice to complete was valid, and it was effective to make time of the essence for completion.
Given that the notice to complete was valid, the court rejected Raykir’s argument that the extension of the notice was invalid because the original notice was invalid.
The court also found that the Coles gave no reason to Raykir to believe that their asserted position, that time for completion had been made of the essence, was no longer maintained.
Sellers entitled to terminate for breach of contract
The court noted that the evidence clearly established that Raykir Holdings was not in a position to complete by 24 August 2018. Therefore, it would have been useless for the Coles to perform their obligation to complete by that date.
Accordingly, the Coles were excused from performance of the obligation to complete and became entitled to, and did, terminate the contract.
Sellers entitled to terminate for repudiation of contract
The court noted that the Coles could have also terminated the contract on the basis that Raykir Holdings had repudiated the contract.
According to the court, “the relevant test for repudiation is whether the conduct of one party is such as to convey to a reasonable person in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it”.
The court concluded that the conduct of Raykir Holdings was such as to convey to a reasonable person in the position of the Coles a renunciation of the essential obligation to complete by 24 August 2018.
Buyer liable for damages under contract
In those circumstances, clause 9 of the contract entitled the Coles to keep or recover the deposit to a maximum of ten per cent of the purchase price.
This clause also entitled them to recover the deficiency on the resale of the property, with credit for any of the deposit kept or recovered.
Clause allowing for part payment of deposit on completion unenforceable as penalty
Raykir Holdings argued that the Coles could not recover the unpaid balance of the deposit because the relevant clause in the contract was penal in nature.
The court concluded that despite the relevant clause describing the balance owing as a deposit, that balance lacked the character of a deposit. This was because it would not have to be paid before the actual completion of the contract.
In any event, the court pointed out that the practical significance of this argument was doubtful given that under clause 9, credit had to be given for any amount of the deposit recovered in the calculation of the deficiency on resale.
Guarantor also liable for damages under contract
The court noted that when a provision in a contract of guarantee is ambiguous, it should be construed in favour of the guarantor.
However, the guarantee in the present case expressly provided that the guarantor would be personally liable for the due performance of the buyer’s obligations under the contract “to the same extent as if that person were the Purchaser under this Contract”.
The court therefore found that Ms Charonova had promised to be personally liable for the due performance of the obligations as if she herself were the buyer, Raykir Holdings.
Further, the court stated that because the obligation of Raykir Holdings to make a payment under clause 9 was clearly an obligation “under this Contract”, Ms Charonova was personally liable for that payment.
The court also pointed out that even if the guarantee had been limited to a promise by Ms Charonova that Raykir Holdings would perform its obligations under the contract, the failure by Raykir Holdings to perform the essential obligation to complete would have caused Ms Charonova to breach the contract of guarantee.
Delayed settlement contracts when finance is required are inherently risky
This case demonstrates that entering into a delayed settlement contract when finance is required is inherently risky for both the purchaser and the vendor.
Finance approval is usually for a three-month period, after which it is usually necessary to re-apply. A bank, or the like, generally does an independent valuation of the property on application for finance approval.
If the property value goes down during formal finance approval or prior to a subsequent reapplication, the buyer may find itself with insufficient funds to settle. This exposes the buyer to significant legal and financial risk.
If the buyer is unable to complete, the seller may be able to terminate the contract and recover damages, such as the difference between the original purchase price and the resale price. Depending on the wording of the contract, the buyer may also forfeit their deposit.
Delayed settlement contracts can also be risky for the seller, especially if the seller needs the funds from the sale of the property to settle on the purchase of another property.
Court is reluctant to enforce payment of a deposit payable at completion
We can also see that the court is reluctant to enforce the balance of the part payment of a deposit unless it is accounted for independent of completion and on a specific date other than on completion.
Guarantors should ensure they understand the scope of their guarantee
Before acting as guarantor, a person should carefully consider the wording of the proposed guarantee in order to understand its scope.
In this case the court interpreted the wording in the guarantee literally, and that wording was such that the guarantor was liable for damages.