27 Mar 2015

Before signing a contract to buy real estate, buyers must make inquiries about what they are buying. Otherwise, they may lose their right to complain that they are not getting what they bargained for. However, this does not mean that sellers (and their agents) can avoid responsibility to make sure the property is properly described in the contract, particularly if they are sophisticated property developers.

The Victorian case of Birch v Robek highlights the need for land developers to be particularly vigilant about describing the size of properties to be sold ‘off the plan’. A 24-year-old flight attendant had paid $35,900 as a deposit for an apartment. She was specifically searching for an apartment with an area over 40m2 internally in order for the bank to lend her 80% of the apartment’s value.

The buyer  was given a brochure describing the apartment as having an “internal area” of 40.5m2. The contract included plans confirming the apartment’s area as 40.5m2. The buyer signed the contract and paid the deposit. Even after examining the contract thoroughly, she was still satisfied that the contract matched the brochure’s description.

After the apartment had been built, the bank inspected it and refused to finance to 80% of its value because the living space was only 32m2. The buyer then terminated the contract and sued to recover the deposit.  There was no suggestion that the developer had been dishonest in describing  the size of the living area or that it had intended to mislead or deceive the buyer  in this or any other regard. The developer countersued to recover the shortfall between the original contract price and the amount it was later sold for. 

In the brochure and architectural plans that were attached to the contract, the size of the apartment was calculated in such a way as to include spaces which were not technically part of the “living area” for the bank’s purposes. The resulting discrepancy comprised 8.5m2, or 12% of the total floor space. This highlights the need for developers to make sure the correct methodology is applied to calculated floor space when preparing architectural plans and plans of subdivision.

The Court held that this 12% discrepancy was so significant that the buyer would not have entered into the contract at all if she had known the true internal area of the apartment. On this basis, the Court allowed the buyer to rescind the contract (i.e. treat it as if it had never existed) and recover the deposit paid under it.

In its defence, the developer argued that the buyer should have asked the architect to clarify the areas shown in the plans. The Court rejected this argument because the areas in the plans were calculated consistently with both the contract and the brochure. Also, the buyer had no reason to suspect that the area was not properly calculated in the plans. She was therefore entitled to believe that she would receive the described area.

The developer’s disclaimer in  the brochure did not help its defence. This standard disclaimer stated that information including the stated dimensions were not representations by the developer or its agent, but merely general information. The court found the measurements in the brochure to be so specific as to override this generic disclaimer.

The developer also argued that the buyer could not terminate the contract because she failed to give 14 days’ notice as required by the contract. Ordinarily, this would be a valid argument. However, the court found this was not an ordinary ‘default’ given that the buyer had not received what she had bargained for. The developer’s counterclaim was dismissed.

The Court also found that the brochure was misleading by representing the apartment as having an internal area of 40.5m2.  This was held to be a breach of the Australian Consumer Law.

The fact that the buyer could successfully make out two separate causes of action relating to a misrepresentation in a brochure reinforces how vital it is for land developers to carefully consider their marketing material before publication.

This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

 

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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