On 3 May 2013, the Supreme Court of Victoria handed down its decision in Lockwood v PSP Investments Pty Ltd [2013] VSC 10 (Lockwood).

This decision considers a critical issue in off the plan developments – what amendments can be made to a proposed plan of subdivision between the time that a contract is entered into and registration of the plan of subdivision, without giving a purchaser a right to terminate their contract?

This issue may arise in the context of all off the plan developments; land subdivisions, apartment and commercial developments.

Section 9AC of the Sale of Land Act 1962 provides that:

if changes are made to a proposed plan of subdivision after a contract is entered into and before it is registered, the vendor must notify purchasers within 14 days of making the amendment; and
a purchaser may rescind its contract if the amendment “will materially affect the lot to which the contract relates”.

In Lockwood, the purchaser entered into 8 separate contracts – 4 contracts for apartments and 4 contracts for car park lots. At the time the contracts were entered into, the proposed development comprised 86 apartments, 10 car park lots and common property over 8 levels in Windsor. Ultimately, the proposed plan of subdivision was amended (based on Council requirements) so that the car parks were converted to common property. Other amendments were also made to the plan of subdivision which increased the common property and varied the lot liabilities and entitlements of the apartments in the development.

As a matter of timing, the vendor did not notify the purchaser of the changes to the plan of subdivision until after the plan of subdivision was registered. The vendor conceded that the car park contracts were incapable of completion (given the car parks no longer existed as separate lots) but offered the purchaser 99 years leases in their place. The purchaser rejected that offer.

The purchaser asked the Court to determine whether the deletion of the car park lots and other changes to the plan of subdivision permitted the purchaser to also rescind the apartment contracts under section 9AC of the Sale of Land Act. The Court considered the following key issues:

did the deletion of the car park lots from the plan of subdivision “materially affect the lot” in the context of the apartment contracts, even though the apartment lots themselves were not varied?
did changes to common property, including to each apartment’s lot liability and entitlement, “materially affect the lot”?
were each of the 8 contracts to be considered separately or as a single transaction?

Does amendment to the plan need to be detrimental to “materially affect the lot”?

It is often suggested that in order for an amendment to “materially affect the lot”, the amendment must in some way be detrimental or prejudicial to the rights of a purchaser. In Lockwood, the Court rejected this position.

Referring to the Court’s recent decision in Besser v Alma Homes Pty Ltd [2012] VSC 460 (Besser), the Court noted that in considering the materiality of an amendment to a plan, one must consider “the totality of the scheme and arrangement by which the property is to be subdivided”.

Critically, the Court determined that the amendments need not be detrimental in order for the purchaser to terminate the contract, as section 9AC makes no reference to the material effect being deleterious or adverse. A purchaser is not required to prove any detriment. Notwithstanding, the Court did note that it may be easier to establish materiality if the amendment does have a detrimental effect.

Taking the Court’s reasoning further, even an amendment which on its face may be considered to be a benefit to a purchaser, may give the purchaser a right to rescind their contract if the effect is nevertheless material. The Court noted that by way of evidence a purchaser need only produce “the contracts containing the initial plan and the amended plan”.

The Court also noted that the vendor had breached its obligation under section 9AC to advise the purchaser of an amendment to the plan which was made after the contract was entered into and before registration of the plan, within the 14 day period required by the section. Importantly, the Sale of Land Act does not confer an express right on a purchaser to terminate a contract based solely on such a breach.

Can changes to common property, including lot liability and entitlement, “materially affect the lot”?

The Court decided that a change to a lot entitlement could materially affect a lot – even though in this case, the lot entitlement of the purchaser increased. This was consistent with the Court’s earlier decision in the Besser case.

Were the 8 contracts to be considered separately, or as a single transaction?

It is not uncommon for a vendor and purchaser to enter into separate contracts for lots in the same development. There may be various reasons for doing so (including funding or lending arrangements such as superannuation fund borrowing, desire to on-sell lots separately, etc).

Section 9AC unequivocally gives to the purchaser a right to rescind the contract of sale for the lot “to which the contract relates”. In Lockwood, the 8 separate contracts were not expressed to be collateral, and the Court did not imply such a term into the contracts. On a literal reading, each contract was required to be considered in isolation.

Despite this, the Court concluded that while each lot was the subject of a separate contract, it formed the part of the whole development proposal in which the purchaser invested prior to its completion – the separate contracts were to be considered effectively as a single transaction for the purposes of section 9AC of the Sale of Land Act.

The Court considered the circumstances objectively and considered that it would be “entirely artificial to look only at each individual contract, on a standalone basis, when considering the impact of an amendment to the plan on a particular lot and contract.” It is not clear whether that would also be the position where related purchasers entered into separate contracts.

Interestingly, the Court concluded that even if the 8 contracts were to be considered in isolation, the amendment to the plan of subdivision would have materially affected each lot because of the increase in common property which resulted in a greater proportion of common property for which each lot owner would be responsible.

The Court’s decision

Ultimately, the Court held in favour of the purchaser on the basis that the amendment to the plan of subdivision denied the purchaser the benefit of four contracts for the purchase of car park lots which the Court considered formed the part of a package of rights acquired by the purchaser in the development.

The purchaser was entitled to terminate all 8 contracts and receive a refund of the deposit paid.

Issues to consider for developers

when considering whether an amendment to a plan of subdivision materially affects a lot, consideration must be given to all contracts which the purchaser has entered into as a single transaction – not each contract separately. It is also likely that lenders will consider separate contracts to the same purchaser as a risk factor in determining whether sales qualify as pre-sales.
when considering an amendment to a plan of subdivision, regard must be given to the effect of the amendment on the project as a whole. Is the amendment likely to change the context in which the purchaser has entered into contract?
consider whether amendments to a plan of subdivision (including changes to common property and lot entitlements and liability) “materially affect a lot” not only in the context of a detrimental effect – any material affect may give rise to a right to rescind.

For further information please contact:

Victor Di Felice
Principal
03 9611 0162
vdifelice@sladen.com.au

Sarah Rizk
Principal
03 9611 0111
srizk@sladen.com.au