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MARCH 2013

Purchaser Liable for $2.8 M in losses

The Court of Appeal has recently overturned a decision of the High Court and found that even though the purchasers of a property were correct in their interpretation of a disputed provision of the agreement concerning the settlement date, they were nevertheless liable to the vendor who subsequently cancelled the agreement and sued to recover a substantial shortfall on the resale. 

Factual Background

On 1 December 2006, the parties entered into an agreement for the sale and purchase of a property in Milford.  The purchase price of $5.995 million, was to be paid in instalments as follows:

  • A payment of $2.75 million on 18 December 2006. 

  • 7 quarterly instalments of $61,875.00 from 18 March 2007. 

  • The balance of $2,811,875.00 being payable on 18 December 2008.

The agreement stated the possession date to be 18 December 2006, although it did not expressly identify a specific settlement date. 

A dispute arose as to when both possession and title were to pass.  The purchasers’ position was that this was to occur on 18 December 2006.  The vendors’ position was that only possession was to be given on 18 December 2006 with the transfer of title being deferred until 18 December 2008 by which time the final instalment of the purchase price would have been paid.  18 December 2006 came and went without the issue being resolved and without the purchasers making any payment, although they subsequently lodged a caveat against the title of the property. 

On 19 December 2008, the day after the final instalment of the purchase price was due, the vendors served a settlement notice on the purchasers requiring them to settle the transaction.  The purchasers failed to settle in accordance with the settlement notice and the vendors’ then cancelled the agreement and resold the property on 4 May 2009. 

Perhaps unsurprisingly in light of the change in market conditions between when the agreement was first signed on 1 December 2006 and the resale in May 2009, there was a significant loss on the resale of $1.565 million.  It was not disputed that the vendors had taken all reasonable steps to market the property.  The vendors therefore issued proceedings seeking to recover the loss on the resale, together with interest and costs. 

The High Court Decision

The High Court noted that the original agreement was poorly worded but that the purchasers’ interpretation of the provisions of the agreement detailing the settlement date was in fact correct.  The Judge noted that the provisions of the agreement stipulated that the settlement date was the possession date and also took into account the fact that there was a special provision in the agreement acknowledging that the vendors would be lodging a caveat against the title to the property and noted that there would be no such requirement if the title were to remain in the vendors’ names until 18 December 2008.  The High Court therefore dismissed the vendors’ claim on the basis that the purchaser had not breached their contractual obligations and that loss suffered attributable to the vendors’ failure to settle on 18 December 2006 when they were obliged to do so. 

The Appeal

On appeal to the Court of Appeal, the vendors did not challenge the High Court’s findings as to the correct interpretation of the settlement date.  Rather, the basis for the appeal was that irrespective of the fact that the purchasers’ interpretation of the provisions of the agreement may have been correct, they never in fact tendered any payment on 18 December 2006 or any time thereafter.  It was argued that the contract required the purchasers to make a specified payment on 18 December 2006 and they failed to tender that payment.  As the vendors had never waived tender the vendors contended it was the purchasers who were in breach of the agreement.  Alternatively, the vendors argued that even if the requirement to tender payment of the instalment due on 18 December 2006 had been waived and the vendors were therefore in breach for failing to give title on that date, the contract nevertheless remained on foot.  Therefore, the purchasers were still contractually bound to make payment of the full amount of the contract price on 18 December 2008 and their failure to attend to settlement on that date entitled the vendors to issue a settlement notice before subsequently cancelling the agreement and reselling the property.

After examining in detail the various events leading up to 18 December 2006, the Court concluded that at no stage did the vendors lawyer ever indicate to the purchasers not to bother to tender settlement. Accordingly, the Court concluded that the purchasers (who bore the burden of proof) were not able to satisfy the Court that it would have been a foregone conclusion that tender would have been futile. In those circumstances, the purchasers failure to tender the payment on 18 December 2006 was itself a breach of the contract. Furthermore, it meant that the vendors were not in breach of the agreement.

Tender

The general principle is that a vendor’s obligation on settlement to convey the property is interdependent with the purchaser’s obligation to make payment of the purchase price in accordance with the contract.  Furthermore, it is for the purchaser to begin the process for settlement by taking or transmitting the settlement sum to the vendor.  Therefore, a vendor cannot be shown to have breached their contractual obligation to convey the property unless there has first been a proper tender by the purchaser and in response the vendor has refused to or is unable to transfer title.  However, the exception to this is that it is unnecessary for the purchaser to tender settlement if the vendor has by words or conduct indicated that formal tender by the purchaser would be futile.  However, the Court noted that the conclusion that going through the motions of tendering would have been a futile exercise is not one that is to be drawn lightly and it is normally prudent for the purchaser to carry out a formal tender except in the clearest of cases.   

After examining in detail the various events leading up to 18 December 2006, the Court concluded that at no stage did the vendor’s lawyer ever indicate to the purchasers not to bother to tender settlement.  Accordingly, the Court concluded that the purchasers (who bore the burden of proof) were not able to satisfy the Court that it would have been a foregone conclusion that tender would have been futile.  In those circumstances, the purchasers’ failure to tender the payment on 18 December 2006 was itself a breach of the contract.  Furthermore, it meant that the vendors were not in breach of the agreement. 

The Court also added that it was satisfied that the contract remained alive as at 18 December 2008 and remained alive until it was cancelled by the vendors on 27 March 2009. 

Outcome

The Court of Appeal concluded that that purchasers were liable for the vendors’ losses on the resale of $1.565 million together with interest on the unpaid instalments of the purchase price, commission and legal costs in respect of the resale.  These losses totalled $2.881 million. 

While the purchasers might feel aggrieved at the outcome in light of the fact that their interpretation in relation to the settlement date was found to have been correct.  However the fact that they were correct in terms of the dispute, did not allow them not to perform their own obligations under the contract which, as noted above, included the obligation to tender payment of the instalment that was due on 18 December 2006 in the absence of any compelling evidence that doing so would have been futile.  Had the purchasers taken the step of tendering settlement of the instalment due on 18 December 2006, the outcome for the purchasers would have been very different.  In particular, either the vendors would have refused tender (in which case they would not have been liable for any losses on resale as the vendors would have been in breach).  Alternatively, title would have been conveyed to them in accordance with their understanding of the agreement. 

It should not be overlooked that the dispute would not have arisen in the first place had a well drafted agreement been prepared in initially.  We therefore recommend that parties purchasing real estate seek advice from us prior to signing any agreement.  This is even more so in circumstances where there are unusual aspects to the transaction.