HG Property Litigation Alerts: Representations as to unobstructed ocean views & the effect of bankruptcy on deposits - 6 May 2015

When a buyer’s characteristics can determine whether they are misled about the features of a property

Orchid Avenue Pty Ltd v Hingston & Anor [2015] QSC 42 per McMurdo J

This case highlights the importance of buyers making their own enquiries when purchasing properties for reasons that relate to features external to the property, such as ocean views. 

The first and second defendants, Mr and Mrs Hingston (Buyers), entered into a contract with the plaintiff (Seller) to purchase an apartment “off the plan” in the Hilton Surfers Paradise Hotel and Residences development (Hilton Development).  The apartment was located on the 52nd floor and faced east towards the ocean.  The agreed price for the apartment was $3.15 million. 

The plan for the Hilton Development was registered in August 2011 and settlement became due on 8 September 2011.  However, the Buyers refused to complete the contract. 

The Seller claimed damages for breach of contract quantified by the contract price less the market value on termination of the contract, less the commission saved.  Between when the contract was entered into and September 2011, the value of the apartment had fallen by $1.5 million. 

The Buyers defended the Seller’s claim on the basis that they were induced to enter into the contract because of misleading and deceptive conduct by the Seller in breach of the then section 52 of the Trade Practices Act 1974 (Cth), entitling them to effectively avoid completing the contract. 

The Buyers asserted that representatives at the sales office for the Hilton Development made representations that the views of the ocean would be unobstructed by any other building and would be protected from being obstructed because the council would not approve a building that would obstruct those views. 

The Buyers claimed that when the representations were made in March 2008, the views from the Hilton Development were unobstructed.  However, by the time the settlement date came around, the “Soul” development had been constructed.  The Soul development has 77 floors and is situated between the Hilton Development and the coastline, such that it obstructed the Buyers’ view. 

The Court was ultimately not satisfied that the representations were made by the Seller to the Buyers for the following reasons:

  1. construction of the Soul development had already commenced in February or March 2008, which was around the time the representations were allegedly made;

  2. it was publicly advertised that the Soul development would have 77 floors;

  3. Mr Hingston was an experienced property investor;

  4. Mr Hingston had seen the boarding around the Soul development site while it was being constructed;

  5. the existence of the Soul development and its proposed height was obvious;

  6. the locality of central Surfers Paradise made it unlikely that there would be a change in planning laws such that a nearby building could not be constructed to the height of the Hilton Development;

  7. there was, in fact, no such change in law; and

  8. the Buyers did not complain about the obstructed views until close to the due date for settlement, however, the height or likely height of the Soul development must have become obvious by at least 2010.

In light of the above, the Seller was successful in its claim.  Damages were awarded to the Seller together with interest of over $300,000 and costs.

What happens to a deposit if the buyer is declared bankrupt before settlement?

Majet & Anor v Goggin & Miller as Trustees of the Bankrupt Estate of Brett-Hall & Anor [2015] QSC 38 per Henry J

This case highlights the importance of considering the effects of bankruptcy carefully in terms of what they might mean for deposits paid for contracts for the sale of land. 

The dispute in this matter concerned who was entitled to a $139,000.00 deposit that was paid towards the purchase of a residential property that did not settle.  Both the Applicants (the Sellers) and the First Respondent (the Trustees) asserted that they were entitled to the deposit. 

What happened?

The Sellers entered into a contract with Mr Herbert Ratcliff Brett-Hall (the Buyer) for the sale and purchase of a residential property at Port Douglas for $1.39 million.  However, prior to settlement, the Buyer was declared bankrupt and the Trustees were appointed to administer his estate.  Shortly after being appointed, the Trustees sought to “disclaim” the contract under the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) so that the Trustees would be released from the obligation to complete the contract and purchase the property. 

The Court was required to consider the consequences of the Trustees disclaiming the contract, particularly in respect of the fate of the deposit. 

The timeline of the events that led to the dispute can be summarised as follows:

  • 6 December 2013 - the Buyer committed an act of bankruptcy;
  • 15 January 2014 - the Buyer entered into the contract of sale with the Sellers;
  • 4 February 2014 - the Buyer paid the deposit of $139,000.00 under the contract;
  • 14 March 2014 - the Buyer was declared bankrupt and a sequestration order was made against his estate; the Trustees were appointed and effectively assumed the Buyer’s responsibility as buyer under the contract;
  • 29 April 2014 - the Trustees disclaimed the contract as unprofitable by a notice to the Sellers of disclaimer of onerous property under section 133(1A) of the Bankruptcy Act;
  • 22 May 2014 - the Sellers’ solicitor wrote to the Trustees stating, in reference to the Trustees’ disclaimer of the contract, that their “anticipatory breach and/or repudiation of the contract ... entitles [the Sellers] to terminate and forfeit the deposit”;
  • 28 May 2014 - the Trustees wrote to the Sellers’ solicitor noting that the deemed commencement of the bankruptcy was on 6 December 2013, prior to the entry into the contract, and cited section 115(1) of the Bankruptcy Act alleging that any property held or received after 6 December 2013 was held on trust for the benefit of the estate’s creditors;
  • 14 June 2014 - the date on which the contract was meant to settle, as provided by the contract.

The issues and the law

The issue was what was the impact of the Trustee’s disclaimer on the rights and liabilities of the parties to the contract?

The disclaimer was made pursuant to subsections 133(1A) and 133(2) of the Bankruptcy Act, which are as follows (with our emphasis):

“(1A)  Subject to this section, the trustee may at any time, by writing signed by him or her, disclaim any contract that forms part of the property of the bankrupt whether or not the trustee has endeavoured to assign the property or exercised any rights in relation to it.

(2)  A disclaimer under subsection (1) or (1A) operates to determine forthwith the rights, interests and liabilities of the bankrupt and his or her property in or in respect of the property disclaimed, and discharges the trustee from all personal liability in respect of the property disclaimed as from the date when the property vested in him or her, but does not, except so far as is necessary for the purpose of releasing the bankrupt and his or her property and the trustee from liability, affect the rights or liabilities of any other person.”

The contract’s provisions governing the parties’ rights to the deposit were as follows:

“2.2 Deposit

(1)        The Buyer must pay the Deposit to the Deposit Holder ... The Deposit Holder will hold the Deposit until a party becomes entitled to it. ...

2.4 Entitlement to Deposit and Interest

(1)        The party entitled to receive the Deposit is:

(a)        if this contract settles, the Seller;

(b)        if this contract is terminated without default by the Buyer, the Buyer; and

(c)        if this contract is terminated owing to the Buyer’s default, the Seller.”

Therefore, where the contract was terminated, the entitlement to the deposit turned on whether there was default by the “Buyer” – in this case, the Trustees.   

The Sellers argued that the Trustees’ disclaimer constituted a default under the contract such that the Sellers were entitled to the deposit under clause 2.4(1)(c) of the contract.  The Sellers also argued that the consequence of the disclaimer is that while the Trustees may be released from liability to complete the contract, the Seller’s right to the deposit pursuant to the contract is preserved by the proviso in section 133(2) of the Bankruptcy Act (emphasised above). 

On the other hand, the Trustees argued that the deposit remained the beneficial property of the Buyer unless and until the Sellers became entitled to it upon settlement under clause 2.4(1)(a).  Critical to their argument was that the disclaimer did not give rise to a default under the contract because, by operation of law, the disclaimer relieved the Trustees of any obligation to further perform the contract.  Therefore, the Trustees submitted that the deposit should be paid to them as it remained the beneficial property of the Buyer, or alternatively, that it should be paid to them as the contract was terminated without default by the Buyer as provided for in clause 2.4(1)(b). 

The Court considered that, pursuant to section 133(2) of the Bankruptcy Act, the disclaimer only determined the rights, interests and liabilities of the Buyer and his property in respect of the contract; it did not determine the Sellers’ as they were preserved by the proviso. 

As to the effect of the disclaimer, the Court said:

“The disclaimer of a contract is of its nature a manifestation or an unwillingness or inability to perform the contract and is prima facie a repudiation of the contract by anticipatory breach.”

The Court found that this was clearly the position with respect to the disclaimer in this case, and that “there is nothing in s133(2) that removed [the Seller’s] right to promptly terminate because of the anticipatory breach heralded as a matter of fact by the notice of disclaimer”

The Court went on to say that:

“The fact the disclaimer ended the buyer’s liabilities in respect of the contract did not make the act of disclaimer any less the buyer’s default under the contract.  The contract was terminated owing to that default.  On the face of it the [Sellers] are entitled to the deposit pursuant to clause 2.4(1)(c) of the contract.”

The Court noted that there is one exception to this rule in Section 133(2), and that is that the disclaimer will affect the rights and liabilities of any other person “so far as is necessary for the purpose of releasing the bankrupt and his or her property and the trustee from liability”.  However, the Court found that this exception did not apply as the Buyer’s “liability” with respect to the deposit was discharged when it was originally paid pursuant to the contract, which was long prior to the disclaimer.  Once paid, the deposit was instead subject to certain “rights”, which were set out in clause 2.4 of the contract. 

The Court therefore concluded that the disclaimer by the Trustees constituted a default by the Buyer under the contract, and that the Sellers were entitled to keep the deposit pursuant to clause 2.4(1)(c) of the contract.

For more information on Property Litigation matters, please contact HopgoodGanim's Litigation and Dispute Resolution team.

HopgoodGanim is a legal firm of trusted experts. Founded 40 years ago, the HopgoodGanim of today remains fiercely independent and proud of our sustained growth and ongoing success. We deliver exceptional commercially-focused legal advice to clients throughout Australia and internationally and in addition to our corporate and commercial teams, we also house one of Australia’s most highly regarded family law practices.