Vendor disclosure and warranty

AIC NSW Regional Seminar

10 April 2017

Tony Cahill

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Scope of this presentation

• Disclosure at general law

• Statutory intervention – “anti-gazumping” legislation

• Some issues regarding section 149 certificates

• Some issues with sewer and drainage connections

• Building certificates

• Recent developments – Swimming pools and home building

• Mine Subsidence inquiries2

General law duty of disclosure

1. The vendor will generally have to disclose any latent defects in title. A latent defect is one which is generally not discoverable on an inspection of the property. Some examples include: drainage or sewerage easements not discoverable from a surface inspection (Micos v Diamond (1970) 72 SR (NSW) 392); restrictive covenants (Re Roe and Eddy’s Contract [1933] VLR 427); or an undisclosed public or private right of way (Ashburner v Sewell [1891] 3 Ch 405).

2. A purchaser’s remedies for failure to disclose a latent defect in title will depend on the gravity of the defect – if “serious” or “substantial”, the purchaser can terminate the contract, or seek specific performance with compensation; otherwise the usual “error or misdescription” remedy of compensation. 3

General law duty of disclosure

3. Whether or not the vendor knew about the defect at the time of making the contract is irrelevant. The purchaser’sstate of knowledge is relevant. If the defect in title is irremovable (that is, could not be rectified by a payment of money – for example, a mortgage would not be an irremovable defect, and so the fact that the purchaser knew of an existing mortgage would not of itself mean the purchaser was taking title subject to the mortgage) and known to the purchaser (which knowledge includes an awareness that it is intended that the purchaser take subject to the encumbrance), then the purchaser will have to “put up with” the defect, absent an express contractual obligation to provide an unencumbered title. 4

General law duty of disclosure

4. A vendor does not have to disclose a patent defect in title –one which is visible to the eye, or which is discoverable by the exercise of reasonable care when inspecting the property. For such defects caveat emptor applies.

5. If the defect is a defect in quality – whether latent or patent –caveat emptor again applies. Some common examples of defects in quality include:

• Town planning restrictions

• Breach of condition of development consent

• Structural danger of a building

• Termite infestation

• Land prone to flooding

• Non-compliance with the Home Building Act 1989 5

Exceptions to caveat emptor

• Fraudulent concealment

• False representations by the vendor

• For contracts involving a house under construction or to be constructed by the vendor, the general law implies a term that the house will be constructed in a proper and competent manner, using proper materials, and the end result will be reasonably fit for human habitation (Barber v Keech (1987) 64 LGRA 116 – now note the Home Building Act 1989).

• Failure to disclose an important defect in quality may be relevant to the exercise of discretion to grant equitable relief

• Competition and Consumer Act 2010 may be relevant, as might statutory regulatory regimes (e.g. Hinton & Ors v Commissioner for Fair Trading, Office of Fair Trading (GD) [2007] NSWADTAP 17).

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Statutory intervention – “anti-gazumping”“For many years purchasers of real property, and those advising them, operated under certain disadvantages derived from contract law and conveyancing practice. With a buoyant and rising real property market, a practice known as ‘gazumping’ grew up. Vendors, who had agreed to sell the subject property, later executed contracts with a different purchaser whilst the first purchaser was still securing the certificates of relevant information concerning the property, necessary for completion of the purchase.

Different views may be held about this practice. For some, it was simply the market forces at work. For others, it indicated a decline in honourable standards and a retreat from agreements solemnly arrived at but not formalised. 7

Statutory intervention – “anti-gazumping” 2Between the two views was an opinion that an attempt should be made to reduce the burden on purchasers of the costs thrown away upon a conveyance which would not proceed and the frustration of dislocated plans, given the frequent interrelationship of one conveyancing transaction with others.

It was to attain the objective of reducing the burden on purchasers, diminishing the risks of gazumping and shifting obligations to the vendor that the Conveyancing (Vendor Disclosure and Warranty) Regulation 1986 (the Regulation) was made, pursuant to section 52A(9) of the Conveyancing Act 1919”.

(Copmar Holdings Pty Ltd v The Commonwealth (1989) NSW ConvR ¶55-451, per Kirby P)

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What investigations must / might be done for a vendor?• those necessary to comply with statutory disclosure

obligations;

• determining whether there has been any residential building work which could be the subject of disclosure under the Home Building Act 1989;

• ascertaining whether there has been any unauthorised building work;

• Compliance with statutory implied terms (e.g. land tax)

• subject to instructions, those necessary to check whether there may be a breach of a statutory warranty – the remedy for breach can be precluded; and

• where documents are attached to a contract for other reasons, checking whether those documents are accurate (not misleading, deceptive or likely to mislead or deceive).

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What investigations must / might be done for a purchaser?• relevant quality reports;

• those investigations necessary to test relevant statutory warranties;

• for residential properties, whether there has been any work subject to the provisions of the Home Building Act 1989, and whether the vendor has complied with any obligations imposed under that Act (see sections 95, 96, 96A and – now –96B);

• land tax clearance; and

• relevant rate and levy inquiries.

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Timing of purchaser investigations• Quality reports should be undertaken prior to exchange

(or at least prior to the contract becoming unconditional).

• Matters relating to the Home Building Act 1989 should also be investigated prior to exchange, since lack of home warranty insurance will frequently be a matter going to quality rather than title.

• Inquiries to test the statutory warranties should be made shortly after exchange of contracts (since the warranty obligations are assessed as at the date of the contract).

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Timing of purchaser investigations 2• Rating inquiries should be obtained shortly prior to

settlement (frequently these can be made at the same time as the testing of statutory warranties; where there will be a substantial delay between exchange and settlement, such as in an off-the-plan purchase, the rating inquiries should be postponed until the proposed plan is approaching registration).

• A search of the Torrens Register can usefully be made shortly after the contract becomes unconditional and should certainly be made shortly prior to settlement.

• Where there is an “optional no CT” (aka an eCT) a CT inquiry to determine whether a CoRD consent has been lodged should be made close to settlement. 12

Some issues regarding section 149 certificatesShould the vendor obtain a section 149(2) certificate, or the additional information under section 149(5)?

• For the purposes of statutory vendor disclosure and warranty, a section 149(2) certificate suffices (see the definition of “section 149 certificate” in clause 3 of the Conveyancing (Sale of Land) Regulation 2010). Following the introduction of the more limited form of section 149(2) certificate in February 2009 (limited to dealing with complying development), the definition was amended to confirm that the limited section 149(2) certificate will not suffice for disclosure and warranty purposes.

• For the purposes of contractual disclosure, the additional information under section 149(5) may disclose information which can be precluded from objection.

• For the purpose of facilitating the transaction, the full s 149 certificate will be welcomed by the purchaser. 13

Some issues regarding section 149 certificates 2When does a section 149 certificate “go stale”?

• For the purposes of statutory disclosure, a section 149 certificate has no expiry date.

• For the purposes of vendor warranty, a section 149 certificate may become problematic the day after its issue, since a change in council policy may mean the certificate no longer shows the “true status” of the property regarding the matters which must be contained in a section 149(2) certificate.

• When the list of prescribed items in a section 149(2) certificate changes, the certificate might no longer satisfy vendor warranty matters.

• For the purposes of satisfying the requirements of an incoming mortgagee, the policy of the individual mortgagee will be relevant.

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Some issues regarding section 149 certificates 3Can a purchaser lose the right to rescind for breach of vendor warranty by affirmation, waiver or election?

• “It is a well known principle of law that a man may by his conduct waive a provision of an Act of Parliament intended for his benefit.” (Sandringham C.C. v Rayment (1928) 40 CLR 510 at 527 per Isaacs J).

• But note “there can be no estoppel in the face of a statute”.

• Whether a provision can be waived in any given case will depend in part on the wording and purpose of the statute.

• There have been cases where a purchaser has been held to have affirmed the contract and elected against the purchaser’s right to rescind for breach of a warranty prescribed under section 52A: Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87; NSW ConvR ¶55-360; Molotu Pty Ltd v Solar Power Ltd (1989) 6 BPR 13,460; NSW ConvR ¶55-490.

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Some issues regarding section 149 certificates 4To what extent does the purchaser’s practitioner need to advise on matters mentioned in the s149 certificate which do not presently affect the property being purchased?

• The standard of care expected of a purchaser’s solicitor in explaining to their client the effect of a section 149 certificate was considered in the case of Luxford v Sidhu [2007] NSWSC 1356.

• The purchasers sued their solicitor alleging negligence in failing to explain the effect of the section 149(2) certificate annexed to the contract, in particular a notation of the existence of SEPP 53 and its (potential) effect on the property.

• The purchasers failed in their claim against their solicitor. 16

Issues relating to Sydney Water

Sewerage Service Diagram or Service Location Print (formerly sewer reference sheet)?

• Two different diagrams are available from Sydney Water – one relating to the connections to the relevant property (and frequently including a sketch of improvements on the property), and another which gives a view of adjoining properties and connections.

• For the purposes of vendor disclosure, it seems either diagram used to fit the requirement (although SSDs prepared since 2009 will not necessarily show the location of a sewer).

• For the purposes of vendor warranty (and general law disclosure), neither diagram is guaranteed to disclose all sewers which might affect a property. Prudently, a vendor could obtain and attach both diagrams; a purchaser testing the warranty may also be well-advised to obtain both. 17

Issues relating to water supply authorities generallyWhat if a diagram is unavailable?

• The vendor disclosure requirement is limited to where the diagram is “available from the authority in the ordinary course of administration”. To forestall inquiry from a purchaser about the lack of a certificate, it may be appropriate to include a special condition explaining the absence.

• For the purposes of statutory warranty and general law disclosure, alternative means of disclosure (attaching plans) or a special condition would be appropriate.

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Issues relating to diagrams

What if the diagram is known to be inaccurate?

• For vendor disclosure compliance, the diagram should be attached despite its inaccuracy.

• For vendor warranty and general law disclosure, the diagram should be accompanied by a special condition explicitly identifying the inaccuracy, and, to the extent possible, disclosing the true position. (perhaps by reference to any available information about plumbing etc).

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Building certificates 1

• Until about 1996, it was considered that, where a purchaser found after exchange of contracts that illegal building work had been undertaken on a property, the possibility that the council could order demolition of the offending work may constitute a defect in the vendor’s title, and the failure to disclose the illegal work in the contract grounded rights in the purchaser.

• See Borthwick v Walsh (1980) 1 BPR 9259; Maxwell v Pinheiro(1979) 1 BPR 9225, and note the discussion in the first edition of Peter Butt’s The Standard Contract for Sale of Land in New South Wales at 564 572.

• On that basis, common practice was for a purchaser to investigate legality of building work after exchange.

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Building certificates 2

• Earlier line of authority has been overruled by the Court of Appeal in Carpenter v McGrath (1996) 40 NSWLR 39.

• That case is authority for the proposition that the risk of the council ordering demolition of a structure passes on exchange – the normal equitable principles apply (as reflected in clause 11 of the standard contract).

• On similar reasoning, the failure of an owner to comply with certain council conditions of consent was held not to be a defect in the vendor’s title – Sullivan v Dan (1997) NSWConvR¶55 805.

• The purchaser is protected where an actual order pre-dates the contract, but not against the potential for an order.

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Building certificates 3

• The Conveyancing (Sale of Land) Regulation 1995, and its predecessor gave some protection to purchasers against illegal building work.

• If the council has issued an order to demolish, repair or make structural alterations to a building, and that order has not been fully complied with as at the date of the contract, that order will constitute an “adverse affectation” which will ground a breach of vendor warranty. The purchaser will then have a statutory right to rescind.

• The more problematic area is whether a mere breach of council requirements, without the further step of the issue of an order, gives rights to the purchasers. This issue was addressed in both the 1986 and 1995 Regulations by the incorporation of an implied term in contracts for the sale of land. The implied term attempted to preclude a blanket removal of rights of purchasers by way of a general clause in a contract, requiring rather that any non compliance be disclosed and clearly described in the contract.

• Problem – since Carpenter v McGrath, no rights to be preserved – hence the introduction of an “upgrading or demolition order” warranty.

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Building certificate options

From the vendor’s perspective, the key question is whether there is any work which will (or may) be caught by the amended Regulation. If so, should the vendor/vendor’s practitioner:

• apply for a building certificate for the whole of the building on the property?

• apply for a building certificate for the relevant part of the building on the property?

• disclose the problem in the contract (and, in this case, how comprehensive and particular does the disclosure need to be)?

• fix the problem?

• remove the offending item or exclude it from the sale? 23

Building certificate options 2

From the perspective of the purchaser or their practitioner:

• Is the Regulation sufficient protection? In particular, if a Building Certificate is required by the purchaser, or perhaps more importantly by its mortgagee, what if the certificate is refused for a reason not on the list? Furthermore, what if the vendor argues that one of the threshold requirements in clause 16 has not been met, and therefore there is no right to rescind.

• Should the purchaser disclose the intended use of the property to the vendor or its representatives? If the purchaser is thinking about developing the site or demolishing the existing building, is there any potential prejudice in releasing this information?

• If a problem arises, the purchaser should ensure that a right to rescind is not lost through waiver (Zucker v Straightlace Pty Ltd (1987) 11 NSWLR 87). 24

Swimming Pools Amendment Act 2012• Five key dates

29.10.12 – Assent, extension of Act to wider class of premises (including backpackers, B&B, farm stay, serviced apartments), narrowing of “exemptions” (in fact concessions NOT exemptions) for “old” pools, some existing pools (on small, large or waterfront properties).

29.4.13 – Swimming pools register, more comprehensive (and expensive) inspection regime, section 22D certificate of compliance.

29.4.14 – Conveyancing and leasing disclosure changes legislated to commence.

28.3.14 – 12 month postponement of 29/4/14 key date.

26.2.15 – further 12 month postponement – now 29/4/16.25

Further swimming pool reform announced

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• September 2015: Swimming Pool Barrier Requirements Discussion Paper.

• Some outstanding issues which will impede an April 2016 implementation – resourcing, multiple safety standards.

• Discussion of different approaches taken in Queensland (disclosure in contract and purchaser can rectify after settlement) and Western Australia (periodic inspection of every pool even if never sold or leased).

• Final report to Government delivered December 2015.

• Changes announced March 2016

Further swimming pool reform -key changes

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• Introduction of a third disclosure path – a certificate of non-compliance.

• If that certificate is attached to the contract, rectification obligations shift to the purchaser.

• Purchaser must rectify (and possible obtain a certificate of compliance to confirm) within 90 days of settlement.

• Vendors of a lot in a strata or community scheme comprising more than two lots are exempt from any vendor disclosure obligation.

• Vendors under an off the plan contract also exempted.

Home Building Amendment Act 2014

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Assent 5 June 2014; relevantly commenced 15/1/15.

Key changes relevant to conveyancing practice:

• Definitions from both Act and Regulation consolidated into a comprehensive Dictionary (Sch 1)

• Home warranty insurance renamed as “insurance under the Home Building Compensation Fund”

• Completion date defined where new building in a strata scheme (new section 3C)

• Distinction between structural and non-structural defects replaced with concepts of “major defects” and “major elements of a building” (s 18E(3) and (4))

Home Building Amendment Act 2014 - 2

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Existing section 95 replaced:

• Abolishes statutory cover for owner-builder work (s 95(1))

• Disclosure by way of a conspicuous note of details of the owner-builder permit and the absence of owner-builder insurance (s 95(2))

• Section does not apply where sale occurs more than 7 years and 6 months after date of the permit (s 95(3))

• Consumer warning requirement applies not only to the owner-builder but to successors in title (s 95(4))

Home Building Amendment Act 2014 - 3

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• New section 96B(1) : A contract for the sale of land comprising a house or unit excluded from the definition of dwellingbecause it was designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation must contain the warning required by this section if work has been done on the land in the previous 6 years that would have been residential building work had the property not been excluded from the definition of dwelling.

• Warning is a “prominent statement” to the effect that the property does not have protection under the Act.

• Prohibition on entering into the contract unless statement attached; contract voidable if no statement in contract.

• Savings and transitional provisions affect ss 95, 96B.

Mine Subsidence Compensation Act• Section 15(5)(a):

(5) Where any improvement has been erected or altered or subdivision has been made in contravention of this section (a contravening improvement or contravening subdivision):

(a) such contravention shall not invalidate any instrument intended to affect or evidence the title to any land, but a purchaser may cancel any contract for sale and recover any deposit or instalment of purchase money paid together with reasonable costs and expenses where such contravention relates to the land purchased,

• Right to cancel has been available since at least the late 1920s (under predecessor legislation).

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A more potent remedy

Compare this provision with the consequences of a breach of statutory warranty under the C(SoL) Reg:

• Availability of “reasonable costs and expenses” under the MSC Act.

• Right to rescind is unfettered under the Act, whereas clause 16(3) of the Regulation limits the right to rescind.

• A disclosure in the contract can preclude C(SoL) Reg rescission right. It appears the MSC right to cancel would operate even if the contract disclosed the true position.

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Testing the Mine Subsidence right to cancel – s 15B(1) to (3)(1) Any person may apply to the Board for a certificate under this section with respect to any improvement erected within a mine subsidence district or land within a subdivision within such a district.

(2) An application for a certificate under this section shall be made in writing, be accompanied by the prescribed fee and state the name and address of the applicant, and the particulars of the improvement or land in respect of which the certificate is required.

(3) Where the Board is satisfied that an improvement referred to in an application under this section was erected in accordance with the Board’s approval and that any alterations to any such improvement were so made, or that any subdivision containing any land referred to in such an application was made in accordance with the Board’s approval, or that any departure from any such approval is such that it need not be rectified, the Board shall, if the application was made in accordance with subsection (2), issue to the applicant a certificate under this section in respect of such improvement or land.

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(not to be confused with s 15C)

15C Certificates of compensation claims paid

(1) Any person may apply to the Board for a certificate under this section stating whether or not on a date specified in the certificate any claim for compensation under this Act had been paid, or was pending, in respect of any improvement or any household or other effects specified in the application.

(2) An application for a certificate under this section shall be made in writing, be accompanied by the prescribed fee and state the name and address of the applicant and the particulars of the improvement or the household or other effects in respect of which the certificate is required.

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Changed procedures from 1/3/17 From MSB “Certificates” homepage accessed 4/4/17

“1. Certificates will be issued electronically to reduce turnaround times.

2. An applicant requesting a 15B Certificate for residential improvements will be required to provide a statutory declaration from the existing landowner confirming the property has been built in accordance with the relevant mine subsidence building regulations. This statutory declaration will replace a physical inspection carried out by Subsidence Advisory NSW, resulting in faster and more efficient issuing of Certificates.

N.B. There will be no change to the current process for obtaining a 15B Certificate for commercial or infrastructure improvements. Subsidence Advisory NSW will continue to undertake an inspection for these requests.” 35

Changed procedures from 1/3/17 (2)From MSB “Certificates” FAQs 4/4/17 (underlining added)

If you are not the current landowner you must organise for the current landowner to complete a statutory declaration on your behalf OR where this is not available, schedule for SA NSW representative to undertake an inspection of the property in order to have a 15B issued.

If no statutory declaration available:

“SA NSW can provide in these instances, a scheduled inspection of the property by an accredited Project Manager.

Please note if you require an inspection it will delay the processing time of your application by 10 business days depending on availability of a Project Manager.” 36

Questions or comments?

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