Gayed v Yuan
[2023] VCC 1992
•2 November 2023
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-22-03259
| SAM GAYED NARDINE ELZAHABY | First plaintiff Second plaintiff | |
| v | ||
| MING YUAN | Defendant | |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 10, 11, 12 & 18 October 2023 | |
DATE OF JUDGMENT: | 2 November 2023 | |
CASE MAY BE CITED AS: | Gayed & Anor v Yuan | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 1992 | |
REASONS FOR JUDGMENT
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Subject:SALE OF LAND – DEFAULTING PURCHASERS – FORFEITURE OF DEPOSIT
Catchwords: Contract for sale of land – contract not subject to finance – purchasers default – forfeiture of deposit – discretion under section 49(2) of the Property Law Act 1958 (Vic) – no basis for return of deposit
Legislation Cited: Conveyancing Act 1919 (NSW); County Court (General Civil Procedure) Rules 2018; Property Law Act 1925 (UK); Property Law Act 1958 (Vic)
Cases Cited:Ashdown v Kirk [1999] 2 Qd R 1; Baird v Chambers [2010] NSWSC 272; Barrett v Beckwith (No 2) (1974) 1 BPR 9439; Bidaisee v Sampath (1995) 46 WIR 461; Blanco v Wan [2021] NSWSC 273; Bridge v Campbell Discount Co Ltd [1962] AC 600; Brien v Dwyer (1978) 141 CLR 378; Burger v Longboat Holdings Group2 Pty Ltd [2021] VSC 469; Chambers v Borness [2014] NSWSC 890; Chatham v Coral Park Pre-training & Breaking Pty Ltd (2020) 66 VR 171; Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342; Garratt v Ikeda [2002] 1 NZLR 577; Hall v Burnell [1911] 2 Ch 551; Havyn Pty Ltd v Webster [2005] NSWCA 182; Higgins v Statewide Developments Pty Ltd [2010] NSWSC 183; Howe v Smith (1884) 27 Ch D 89; Karfoal Pty Ltd v Lorence (2002) 11 BPR 20,129; Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353; Lexane Pty Ltd v Highfern Pty Ltd [1985] 1 Qd R 446; Midill (97PL) Ltd v Park Lane Estates Ltd [2009] 1 WLR 2460; Nassif v Caminer (2009) 74 NSWLR 276; Omar v El-Wakil [2002] 2 P & CR 36 (CA); Pearl v Nannegari [2021] VSC 468; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30; Poort v Development Underwriting (Victoria) Pty Ltd [1976] VR 779; Simcevski v Dixon (No 2) (2017) 53 VR 357; Smyth v Jessep [1956] VR 230; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Wilton v Farnworth (1948) 76 CLR 646; Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | --- | Self-represented |
| For the Defendant | Ms J Anthony-Shaw | Oakfair Lawyers |
HIS HONOUR:
Introduction
1In June 2019, the plaintiffs entered a contract of sale with the defendant (“Yuan”) to purchase the property at 32 Linckens Crescent, Balwyn in the State of Victoria (“the Property”). The purchase price was $3,190,000. The plaintiffs were unable to complete the purchase because they could not obtain the necessary bank loan to conclude the transaction. Yuan accepted the plaintiffs’ repudiation of the contract and leased out the Property for some time before selling it again in October 2021 for $3,500,000. The main issue is whether the plaintiffs are entitled to recover from Yuan any part of the deposit of $319,000 which they paid.
Background
2The plaintiffs are husband and wife. The first plaintiff (“Gayed”) is a businessman and the second plaintiff (“Elzahaby”) is a psychiatrist.
3When the plaintiffs bought their first house in Bendigo, they obtained a bank loan for 90% of the purchase price. When considering the purchase of the Property, they spoke to several banks including Westpac Banking Corporation (“Westpac”), the Commonwealth Bank of Australia (“CBA”) and the Australia and New Zealand Banking Group Limited (“ANZ”). Westpac confirmed orally that this policy still applied and it would lend 90% of the purchase price where a borrower was a health professional.[1] It was on the basis of this informal advice that the plaintiffs pursued the purchase of the Property. It was only after they had signed the contract to buy the Property that the plaintiffs learned that Westpac’s lending criteria had changed and the bank would finance an amount limited to 85% of the purchase price.
[1]The CBA and the ANZ said they would limit their lending to 85% of the purchase price.
4In February 2019, Elzahaby was working in Melbourne but the family, comprising Gayed, herself and their three children, lived in Bendigo. The plan was for the family to move to Melbourne by January 2020 in time for the start of the school year.
5In about April 2019, the family began looking for a house in Melbourne. In June 2019, they found the Property and were very keen to buy it. The plaintiffs engaged Helen Henshall (“Henshall”) of Rogers & Every Lawyers in Bendigo to act as their solicitor on the conveyancing transaction.
6The plaintiffs made an initial offer of $3.2 million for the Property. The offer was subject to two conditions. First, the purchasers’ solicitor was to review the contract and either confirm or reject it within 7 days. Second, the contract was subject to a building inspection within 7 days. This offer provided for settlement on 6 November 2019 or earlier by mutual agreement. The standard condition about the sale being subject to finance was struck out. The plaintiffs said that the agent handling the sale on Yuan’s behalf, Ms Annabelle Feng (“Feng”) of RT Edgar, told them that Yuan would not sell the Property with a “subject to finance” condition. There was no direct evidence on the reason for Yuan’s attitude but I infer it was because she planned to be in the United Kingdom with her family. If the contract were unconditional, Yuan would have expected it to proceed. If the contract contained a finance condition, Yuan would have appreciated that the sale could fall through and she would need to find another buyer. Yuan was in fact in the United Kingdom, not Australia, in December 2019 when settlement was due to occur.
7On 21 June 2019, Gayed paid $10,000 into the estate agent’s trust account. He did this in anticipation of the conditions to the offer being satisfied and Yuan signing the contract. Feng acknowledged receipt of the money on the same day and asked that Gayed tell her when he wanted to perform the building inspection.[2]
[2] Exhibit P3, p. 240
8The building inspector examined the Property on 24 June 2019 and prepared his report.
9On 25 June 2019, Henshall emailed Yuan’s solicitors and Feng asking that a proposed special condition 13.20, which she attached, be inserted into the proposed contract of sale. Henshall also asked that special conditions 13.7, 13.10 and 13.18 be deleted from the proposed contract of sale. The proposed special condition 13.20 read as follows:[3]
“13.20 Agreement to Extend the Date of Settlement
The Vendor and the Purchasers hereby acknowledge and agree, that should the Purchasers be unable to complete settlement on the 6th November 2019, then the settlement date shall be extended to the 6th February 2020.
The Vendor further agrees that she will not charge the Purchasers with payment of any penalty interest or penalty costs during this extended period of three months.
The Purchasers further agree to provide the Vendor with a minimum of 21 days prior written notice should they not be in a position to complete settlement on the 6th November 2019 and further, should the Purchasers be in a position to complete settlement between the 6th November 2019 and the 6th February 2020, they shall provide the Vendor with a minimum of 21 days prior written notice.”
[3]Exhibit D2, pp. 8-9
10Cecilia Yek (“Yek”) of Oakfair Lawyers, the solicitors for Yuan, responded to Henshall by email on 26 June 2019. She advised that Yuan was prepared to extend the time for settlement to 6 December 2019 with no penalty interest or costs provided the plaintiffs agreed to an amended form of special condition 13.20 in the following terms:[4]
[4]Exhibit D3, pp. 10-12
“13.20 Agreement to Extend the Date of Settlement
The Vendor and the Purchasers hereby acknowledge and agree, that should the Purchasers be unable to complete settlement on the 6th November 2019, then the settlement date shall be extended to the 6th
February 2020December 2019.The Vendor further agrees that she will not charge the Purchasers with payment of any penalty interest or penalty costs during this extended period of
three monthsone month.The Purchasers further agree to provide the Vendor with a minimum of 21 days prior written notice should they not be in a position to complete settlement on the 6th November 2019 and further, should the Purchasers be in a position to complete settlement between the 6th November 2019 and the 6th
February 2020December 2019, they shall provide the Vendor with a minimum of2110 days prior written notice.The Purchasers confirm that the contract is unconditional, and they shall not object to a s27 early release of deposit request if it is accompanied by a confirmation from the Purchaser’s mortgagee that the amount outstanding is not more than 80% of the sale price.
If the settlement is further delayed by the Purchaser past 30 December 2019, whether with or without the Vendor’s consent, then:
(a) if land tax is assessed or deemed to be assessed as payable by the Vendor, the Purchaser shall pay for the entire land tax on a proportional basis, in full without adjustments against the Vendor; and
(b) the Purchaser shall pay penalty interest in accordance with Special Condition 13.5, as from 6 November 2019 together with all penalty costs until the settlement date or termination of contract.”
11The plaintiffs agreed to the vendor’s proposed special condition 13.20 and, on 28 June 2019, Yuan signed the contract for the sale of the Property.
12Elzahaby agreed that when the plaintiffs made the offer to purchase the Property in June 2019 they knew that:
· special condition 13.20 made no reference to the contract being subject to loan approval;[5]
· their offer was not subject to finance;
· their offer was unconditional;
· they had not obtained the finance for the purchase;
· there was a risk that they might not be able to complete the sale transaction.[6]
[5]T 150
[6]T 147-8
13Gayed sent a copy of the building report to Feng on 25 June 2019. In a covering email, he suggested to her that they meet at the Property to address the issues in the report before proceeding with the contract.[7]
[7]Exhibit D7, p. 389
14Ultimately, Gayed discussed the building report with Yuan and advised the agent on 27 June 2019 that the only costly item was the replacement of the first floor frames and windows where the timber was affected by fungal decay.[8]
[8]Exhibit D7, p. 397
15Also on 27 June 2019, Gayed advised Feng by email that he was working with the bank to issue the 10% deposit. He said that he had noticed that the Property was still on the market and that open for inspections were scheduled. He said he was not happy with this because the bank was proceeding with the paperwork. He said that if the agent did not change the status of the house on its website to “under contract” and cancel the inspections scheduled for the coming Saturday, he would have to ask his bank to stop processing his application.[9]
[9]Exhibit D7, pp. 397-8
16Yuan signed the contract on 28 June 2019. As a result of the matters raised in the building report, Yuan agreed to a reduction in the purchase price. The contract price became $3.19 million with a payment of $319,000 due on 1 August 2019 ($10,000 of which had already been paid).
17On 31 July 2019, Gayed advised Feng that his bank had informed him that the process had been delayed and that they would make payment by 10 August 2019. The reason given by the bank was that the valuation of the plaintiffs’ Bendigo house was taking longer than anticipated. Gayed apologised for the delay and said the bank reassured him that the figures were okay and there should be no concerns.[10]
[10]Exhibit D7, p. 404
18On the morning of 1 August 2019, Henshall emailed the vendor’s solicitors to advise that her clients were unable to advance the funds needed to pay the balance of deposit monies which were due that day. She said that the CBA could not provide the funds until 9 August 2019. Henshall asked that the vendor grant an extension of time until 9 August 2019 for the plaintiffs to pay the deposit and that such an extension not incur any penalty payments.[11]
[11]Exhibit D5
19On the evening of 1 August 2019, Feng emailed Gayed to ask about progress with the 10% deposit. Gayed responded by email later the same night advising Feng that his solicitor had emailed the vendor’s solicitor.[12]
[12]Exhibit D7, p. 405
20By email dated 6 August 2019, the vendor’s solicitor advised Henshall that the vendor agreed to extend the date for payment for the balance of the deposit until 9 August 2019. The solicitor said that if the balance of the deposit were not paid by that date, penalty interest would be payable on any money owing under the contract during the period of default and such interest would accrue from 1 August 2019.[13]
[13]Exhibit D5
21Henshall acknowledged this email three minutes later, thanking the solicitor for her response.[14]
[14]Ibid
22On 12 August 2019, Dimitri Hatzimouratis emailed Gayed to advise that the CBA was ready to settle.[15] However, he said that the bank was awaiting confirmation from Westpac and another external company which enabled them to complete a refinancing settlement quicker than usual. Mr Hatzimouratis said that he was doing everything he could from his end to finalise the matter because he was aware how important it was to pay the deposit. He said that the loan had been formally approved “so it is a question of when and not if, so you are welcome to forward this email on to the estate agent if they are getting uneasy about the situation.” He also said he was happy to phone the agent to explain the position.[16]
[15]Because Westpac reduced the loan percentage to the same amount as the ANZ and CBA, the plaintiffs ultimately went with the CBA because they had a history of banking with that company.
[16]Exhibit D7, p. 407
23Gayed forwarded the email to Feng shortly after. Later that evening, Feng advised Gayed that she had read the message from the bank. She asked when he could arrange the 10% deposit to be paid into the firm’s trust account.
24On 13 August 2019, Henshall sent an email to the vendor’s solicitors confirming that the vendor had agreed to extend the date for payment of the balance of deposit monies until 9 August 2019. She informed the vendor that her clients were unfortunately still waiting upon the CBA to provide the funds necessary to pay the balance of deposit monies. She said that the plaintiffs were frustrated and disappointed with the CBA and wanted to apologise to the vendor for the inconvenience caused. Henshall asked that the solicitors seek advice on whether the vendor would extend the time for payment of the balance of the deposit monies to 20 August 2019.
25Although there seemed to be no direct evidence on the point, I infer from the absence of controversy that the vendor granted the additional extension. The plaintiffs paid $309,000 on 14 August 2019.[17]
[17]T 170-1
26During the afternoon of 15 November 2019, Henshall sent the vendor’s solicitors a letter regarding the completion of the sale transaction. The letter, so far as is material, was in the following terms:[18]
“We note that settlement is due to be effected on the 6th December 2019.
We have today been advised by the Purchasers that the Commonwealth Bank of Australia is not able to fully fund the amount required to settle and the Purchasers will be approximately $160,000.00 “short” of the balance due to settle.
We have been instructed by our clients to seek your client’s agreement to the following :-
1.The Vendor will accept the approximate sum of $3,030,000.00 (plus/minus adjustments) on the 6th December 2019 to complete settlement.
2.The Vendor will allow the Purchasers to repay the approximate sum of $160,000.00 over a 12 month period of time at an interest rate and terms of repayment mutually agreed upon between them.
3.The said sum of approximately $160,000.00 to be secured by way of a registered 2nd mortgage over the Linckens Crescent Balwyn property.
[18]Exhibit D6
We have been instructed by our clients to convey to your client, that they are extremely sorry and disappointed that they have caused inconvenience to your client, they have been working with the CBA for many months now in an endeavour to rectify the problem but the CBA have advised that due to the Royal Commission into Banking, the property not meeting the required lending valuation ratio and the general tightening up in lending, they find themselves in this unfortunate predicament.”
27On 19 November 2019, Celine Ng (“Ng”) of Oakfair Lawyers acknowledged receipt of Henshall’s letter. She said that the vendor was unable to accept the plaintiffs’ proposal. She said that their instructions were that, if settlement did not take place on 6 December 2019, a notice of default and rescission would be issued in accordance with the contract of sale. Ng otherwise reserved her client’s rights under the contract of sale and noted that time was of the essence.[19]
[19]Exhibit D6
28On 6 December 2019, Henshall again emailed Ng to advise that “my clients … unfortunately and much to their disappointment and regret … are unable to complete settlement of this matter”. She said that the plaintiffs were “unable to secure sufficient finance to enable settlement to take place”.
29On 9 December 2019, Yek emailed Henshall and said that the vendor was very disappointed at the outcome. She said that:[20]
“… our client accepts your client’s repudiation of the contract and reserves all her rights under the contract. As such the contract is now at an end, and all monies paid by your client is forfeited [sic] pursuant to General Condition 28.4(a). Our client will be putting the property back on the market for sale.
Take notice that as the contract is now terminated by reason of your client’s repudiation, our client may take legal action against your client on the grounds of breach of contract, for all loss, damage, interest and costs suffered by our client.
Please remove your caveat from our client’s property by tomorrow, 30 January 2020, as the contract is already ended [sic] by reason of your client’s repudiation, and your client no longer has any interest in our client’s property.”
[20]Exhibit D4, p. 95
30The plaintiffs’ solicitor later confirmed by email that her clients withdrew their caveat over the Property on 9 December 2019.
31After the repudiation of the contract, Yuan was unsure what to do with the Property. She was overseas in the United Kingdom in December 2019 with one of her children. Yuan said that she felt under significant pressure at this time because the family had decided to move overseas to live. Because the Property was unsold and vacant, Yuan had to continue paying the bank interest on the mortgage, insurance and other expenses.[21] Yuan said that she did not intend to return to Australia to live. Rather, she planned to divide her time between the United Kingdom and China where her ageing parents lived.[22]
[21]T 189
[22]T 190
32A friend of Yuan’s told her that they knew someone interested in renting the Property. The friend also introduced Yuan to the agent whom she engaged to arrange rental of the Property. The agency was Rent Exchange and the agent was Peter Daicos. Yuan said that she had little to do with making arrangements to lease out the Property. She said that, mostly, her son dealt with Daicos regarding the lease.
33There was no dispute that:
(a) Yuan rented out the Property from around 1 February 2020 until 31 July 2021;
(b) Yuan sold the Property to a new buyer in October 2021 for $3.5 million. This was $310,000 more than the contract price agreed between the plaintiffs and Yuan in 2019. While Yuan derived rental income from leasing out the Property, she also continued to pay interest on the mortgage registered over the Property and other expenses. Because the plaintiffs did not complete the purchase transaction, Yuan could not discharge the mortgage registered in the bank’s favour over the Property;
(c) after Yuan accepted the plaintiffs’ repudiation of the contract for the sale of the Property, she retained and did not return the sum of $319,000 which the plaintiffs had paid as a deposit in accordance with the terms of the contract.
Issues
34The main issue in this case is whether the plaintiffs are entitled to the repayment of $309,000 (or some lesser sum) which they advanced as a deposit under the contract of sale to purchase the Property. The deposit totalled $319,000 but the plaintiffs accept that the defendant should retain the initial part of the deposit payment, namely, $10,000. This judgment addresses any bases that might exist for repayment of the remainder of the deposit (or some part thereof) under statute, common law or equity.
35The parties agreed that the issues to be determined by the court were as follows:
(1)Are the plaintiffs entitled to be repaid the payment of $309,000 they made to the defendant under the contract of sale between the parties, pursuant to section 49(2) Property Law Act 1958 (Vic)?
(2)Are the plaintiffs entitled to be repaid the payment of $309,000 they made to the defendant on some other basis under common law or equity?
(3)Alternatively to issues (1) and (2), are the plaintiffs entitled to repayment of some other amount by the defendant?
(4)If the plaintiffs are entitled to repayment of any amount paid to the defendant under the contract of sale, is the defendant entitled to set-off any loss and damage suffered as a result of the plaintiffs’ default?
(5)If the defendant is entitled to set-off, what is the amount of that set-off?
Issue 1: Are the plaintiffs entitled to be repaid the payment of $309,000 they made to the defendant under the contract of sale between the parties, pursuant to section 49(2) Property Law Act 1958 (Vic)?
36Section 49 of the Property Law Act 1958 (Vic) (“PLA”) reads as follows:
(1) A vendor or purchaser of any interest in land, or their representatives respectively, may apply to the Court, in respect of any requisitions or objections, or any claim for compensation, or any other question arising out of or connected with the contract (not being a question affecting the existence or validity of the contract), and the Court may make such order upon the application as to the Court may appear just, and may order how and by whom all or any of the costs of and incident to the application are to be borne and paid.
(2) Where the Court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the Court may, if it thinks fit, order the repayment of any deposit.
(3) This section shall apply to a contract for the sale or exchange of any interest in land.
37The section, especially section 49(2), confers upon courts a broad discretion to order repayment of the deposit “if it thinks fit”. The provision is based upon the Property Law Act 1925 (UK). The equivalent provision in New South Wales is section 55(2A) of the Conveyancing Act 1919 (NSW).
38In the context of conveyancing transactions, a deposit plays more than one role. First, it constitutes money paid as an earnest of performance. It signifies the making of a contract and shows that the party proffering the deposit is serious about the contract and will perform it.[23] Secondly, it constitutes security for due performance of the contract by the purchaser.[24] Thirdly, it is a part payment of the purchase price.[25]
[23]Havyn Pty Ltd v Webster [2005] NSWCA 182 at [130]; Howe v Smith (1884) 27 Ch D 89 at 95; Brien v Dwyer (1978) 141 CLR 378 at 386, 392, 397 and 401; Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342 at [26]
[24]Poort v Development Underwriting (Victoria) Pty Ltd [1976] VR 779 at 785
[25]Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342 at [23]
39There is no jurisdiction under common law or equity to relieve against the forfeiture of a reasonable deposit. The customary deposit in conveyancing transactions in Victoria is 10%. There were cases where equity would not grant specific performance of a contract due to a valid objection to the vendor’s title but the court could not require the vendor to return the deposit.[26] Hence, the statutory jurisdiction embodied in section 49(2) was created to enable courts to grant relief in appropriate circumstances.
[26]Victorian Law Reform Commission Report No. 20 (2010) at [3.90]
Legal principles
40In Simcevski v Dixon (No 2),[27] Riordan J conducted a detailed review of the case law regarding the operation and application of section 49(2) of the PLA. His Honour noted the differing constructions of the provision which have been adopted from time to time and the principles which have developed when considering applications by purchasers for the return of their deposits. The review included an examination of the different approach or emphasis evident sometimes between cases in Victoria, New South Wales and the United Kingdom. Ultimately, His Honour determined[28] that the principles to apply in exercising the discretion were as set out by Carnwath LJ in the Court of Appeal in Midill (97PL) Ltd v Park Lane Estates Ltd (‘Midill’)[29] and Santow JA in Havyn Pty Limited v Webster.[30]
[27](2017) 53 VR 357
[28]Ibid at [116]
[29][2009] 1 WLR 2460
[30][2005] NSWCA 182
41In Midill,[31] the plaintiff agreed on 24 December 2005 to pay £4 million to buy shares in a company whose sole asset was the property at 97 Park Lane London. In the circumstances, the parties treated the dispute as one about the purchase of land. Settlement date was 8 April 2006. Midill was to pay the purchase price in three tranches: £400,000 as a deposit on signing the contract of sale; £800,000 on 8 February 2006; and the balance upon completion. Midill could not complete the contract on 8 April 2006. The vendor served notice to complete on 11 April 2006 requiring completion by 27 April 2006. Midill did not complete the sale. On 5 May 2006, the vendor sought to rescind the contract. Midill alleged that the notice to complete was invalid. The vendor sold the property on 14 September 2006 for £4.3 million. Later, the owner of the shares repaid £800,000 to Midill. The principal issue was whether the vendor was entitled to retain the £400,000 deposit. The trial judge refused to return the deposit and the Court of Appeal dismissed the appeal.
[31][2009] 1 WLR 2460
42The Court of Appeal placed considerable weight upon the earlier judgment of the same court in Omar v El-Wakil.[32] It was said that the evidence in that case was confused and the facts complicated. In essence, the parties made two agreements on 22 January 1992. Under one agreement, Omar sold a car hire business to a company controlled by El-Wakil for £110,000. Under the other agreement (“the Corringham agreement”) El-Wakil sold Omar a property for £350,000 of which £110,000 was to be paid on signing the contract and the balance on completion. For various reasons for which both parties had some responsibility, the two transactions failed. One issue in the case was whether Omar should be treated by virtue of the first agreement as having paid a deposit of £110,000 under the second agreement and if so, whether the court should order the deposit be repaid to El-Wakil under section 49(2) of the Property Law Act 1925 (UK).
[32][2002] 2 P & CR 36 (CA)
43Carnwarth LJ quoted from the judgment of Arden LJ who delivered the leading judgment, where she said:
“The starting point must be that although section 49(2) is expressed in open-textured terms leaving it to the courts to determine the organising principles, the court must bear in mind that the payment in question was a “deposit”, that is an earnest for performance and that accordingly there should not be relief simply because the Corringham contract never took place …
The context here is of a conveyancing transaction. It is common knowledge that if a purchaser pays a deposit he is likely to forfeit it if he does not fulfil the contract. Moreover deposits are very usual features of conveyancing transactions and conveyancing transactions are common. It is important that there should be certainty attaching to the consequences of paying a deposit.
As the judge did not exercise his discretion under section 49(2), or alternatively declined to exercise it on the basis no deposit had been paid, it is open to this court to do so. For the reasons given, I would start from the position that the deposit should not normally be ordered to be repaid. Are there any mitigating circumstances in the present case?
…
Furthermore in my judgment, in a situation where a purchaser could not himself perform, the circumstances which make it appropriate for the court to exercise its discretion under section 49(2) in his favour must be exceptional. Inability to complete is exactly the risk the deposit was intended to guard against. Accordingly I would not exercise the discretion conferred by section 49(2) in Mr Omar’s favour and would dismiss the appeal on that point.”[33]
[33]Midill (97PL) Ltd v Park Lane Estates Ltd [2009] 1 WLR 2460 at [45]-[46] citing Arden LJ in Omar v El-Wakil [2002] 2 P & CR 36 at [35]-[38]
44Then, Carnwarth LJ noted that Arden LJ’s judgment contained the most recent and considered guidance of a majority of the court and that her approach was in line with the balance of judicial opinion including that of the Privy Council. His Lordship concluded by saying:
“The critical point, on which Arden LJ echoed Lord Nicholls,[34] is that the deposit is ‘an earnest for the performance of the contract’, which can be retained by the seller if the buyer defaults, without any necessary regard to the question of actual loss or its amount. That principle, as the Privy Council made clear, is not ‘overruled’ by section 49(2). There needs to be ‘something more’; or, as other judges have said, something special or exceptional to justify overriding the ordinary contractual expectations of the parties.” [35]
[34]This referred to the Privy Council opinion Lord Nicholls delivered in Bidaisee v Sampath (1995) 46 WIR 461
[35]Midill (97PL) Ltd v Park Lane Estates Ltd [2009] 1 WLR 2460 at [52]
45In Havyn Pty Ltd v Webster,[36] Havyn sought to recover a forfeited deposit and damages arising from a failed conveyancing transaction. The facts were largely undisputed. Webster, the vendor inherited a two-storey block of six flats from her grandfather in 1998. She rented them out through an agent, Terry Torpy. In August 2002, she decided to sell the property and retained Torpy for this purpose. He prepared a coloured advertising brochure which said that each flat contained an area of approximately 63 square metres. Mr Torpoy calculated the area himself based upon him “pacing out” the bedroom and living areas in the flats to arrive at an approximate area. The brochure contained a comment to the effect that all measurements were approximate only and that while the vendor thought them correct, they were not guaranteed.
[36][2005] NSWCA 182
46The director who controlled Havyn was Peter Meyerratken. He lived in the adjoining property. He examined the building and was interested to buy the property for the purpose of refurbishment and resale.
47He bought the property at auction on 19 September 2002 for $3.130 million. He paid a deposit of $313,000 and was due to settle the contract six weeks later on 31 October 2002.
48After the auction, Mr Meyerratken incorporated Havyn and the vendor agreed to proceed as if Havyn were the contracting party.
49Havyn could not settle on 31 October 2002 because it lacked the necessary funds. On 1 November 2002, Webster’s solicitors issued a notice to complete specifying the final date as 18 November 2002. The parties later agreed to extend the time for completion to 2 December 2002 with time being of the essence.
50On 21 November 2002, Mr Meyerratken discovered that the area of each flat was less than 63 square metres and, the following week, his solicitors wrote to the vendor’s solicitors noting this fact and complaining about the misrepresentation. The solicitors disputed the efficacy of the notice to complete and advised that they were lodging a caveat to protect Havyn’s interest.
51Settlement did not proceed on 2 December 2002. Later that same day, Mr Meyerratken received a report from an architect he had retained. This showed that none of the flats had an area exceeding 60.1 square metres and that the smallest flat was 56.2 square metres.
52Notwithstanding this, on 3 December 2002, Havyn tried to obtain another extension of time to complete the contract. However, Havyn rejected Webster’s condition of the further extension, namely, that Havyn release her from any claims based upon the alleged misrepresentations.
53On 4 December 2002, Webster issued a notice of termination of the contract and, a few days later, asked Havyn to remove the caveat. Havyn refused.
54On 16 December 2002, Webster issued proceedings seeking a declaration that she had validly terminated the contract, damages for breach of contract, and an order for removal of the caveat.
55On 23 December 2002, Havyn filed a cross-claim seeking an order to allow for completion of the contract within a reasonable time together with a reduction in the purchase price as compensation for the misrepresentation. Alternatively, Havyn sought to rescind the contract and obtain a refund of the deposit or a declaration that Webster was not entitled to terminate together with an order for specific performance. A final alternative was that Havyn recover its deposit under section 55(2A) of the Conveyancing Act 1919 (NSW).
56Santow JA, with whom Tobias JA and Brownie AJA agreed, reviewed the authorities in detail and said that while it was not a precondition of the court exercising its discretion under section 55(2A) that the applicant establish special circumstances, the concept of exceptional or special circumstances was not irrelevant to a proper understanding of the boundaries of the discretion. His Honour said that a proper approach to the exercise of the discretion required an appreciation of the legal context of the established nature of the deposit as an earnest of performance. It was the relevance of that concept to the exercise of the statutory discretion which was denoted by the concept of special or exceptional circumstances. His Honour said that the concept of the “justice of the case” could not be allowed to expand into an arbitrary distributive remedialism, meted out by the court according to its view of where the merits lay, divorced from context.[37]
[37]Havyn Pty Ltd v Webster [2005] NSWCA 182 at [149], [150]
57Santow JA summarised his conclusions as follows:
“(a) Section 55(2A) confers upon the Court a statutory jurisdiction to return forfeited deposits which was not previously available either at common law or in equity. Therefore, it would be wrong to seek to confine the jurisdiction conferred by the words of the statute by analogy with the jurisdiction of common law and equity to relieve against penalties or forfeiture.
(b) Notwithstanding this, it is important for a Court in considering the scope of the discretion conferred by s55(2A) to bear in mind that a deposit is an earnest of performance. That fact forms part of the context in which the discretion falls to be exercised, and means that a Court will not lightly be moved to order the return of a deposit paid as an earnest of performance, and forfeited in accordance with the express terms of the contract when performance does not occur.
(c) That context is significant when considering the justice and equity of the case, and whether the Court “sees fit” to order the deposit to be returned. It does not involve putting a gloss on the words of the statute requiring the applicant to show “special circumstances” (or satisfy any like test) before a deposit will be returned.
(d) In particular, this principle mandates against characterising a forfeited deposit as a windfall to the vendor, merely because it is forfeited.
(e) In considering an application under s55(2A), it will often be material for the Court to consider a number of factors, including (though not exhaustively) the nature of a deposit, the terms of the contract providing for its forfeiture and the circumstances in which the deposit was forfeited.
(f) Considering the circumstances of this case, the factors enumerated above and the relative unreasonableness of the conduct of the vendor compared to the purchaser following the former’s misrepresentation, it is appropriate for the deposit to be returned, although for different reasons than those adopted by the trial judge.” [38]
[38]Havyn Pty Ltd v Webster [2005] NSWCA 182 at [173]
58Relying upon the cases referred to above, Riordan J summarised the applicable principles as follows:[39]
[39]Simcevski v Dixon (No 2) (2017) 53 VR 357 at [118]-[121]
“The discretion under s 49(2) of the Victorian Act is broad; but it must be exercised judicially and conditioned by what is just and equitable in the circumstances of the case.
It is not a precondition to the exercise of the discretion that exceptional circumstances be established; but the exercise of the discretion must be conditioned by the recognition of the critical function of the deposit.
Accordingly, where:
(a)the purchaser is in default; and
(b)the vendor is contractually entitled to forfeit the deposit;
the Court will have regard to the purpose of the deposit being in earnest of performance. In this context, it ‘requires some exceptional circumstances to justify a departure from the agreed terms’. In my opinion, any difference between this approach and a requirement that the purchaser must establish ‘grounds in support of an application to repay the deposit … sufficient to warrant a departure from holding the purchaser to its obligations under the contract’ to be more apparent than real.
In addition to the rights under the contract, matters that may be taken into account, in determining whether the exercise of the discretion is just and equitable in the circumstances, include the following:
(a)Whether the amount of the deposit can be regarded as mutually fair and proportioned security for due performance by the purchaser.
(b)Whether the cause of the termination was the result of any of the following:
(i)The conduct of the vendor; although requirement for strict compliance with the terms of the contract is not, of itself, a basis for exercising the discretion.
(ii)The conduct or neglect of the purchaser.
(iii)The ordinary risks in conveyancing transactions.
(iv)External factors, such as another statute or other rights, have intervened in some way in the land or its use, particularly in between signing the contract and the date for settlement.
(c)Whether, as a consequence of the termination, the vendor will suffer damage; or whether the vendor can be adequately compensated. However, the fact that the vendor may make a profit, even a substantial profit, on the resale or otherwise is not, of itself, a basis for exercising the discretion.”[40]
[40]His Honour’s summary has been followed in Burger v Longboat Holdings Group2 Pty Ltd [2021] VSC 469 at [186]; Pearl v Nannegari [2021] VSC 468 at [47]; Chatham v Coral Park Pre-Training & Breaking Pty Ltd (2020) 66 VR 171 at [273], [275]
59In the later case of Chatham v Coral Park Pre-training & Breaking Pty Ltd[41] Daly AsJ reviewed Simcesvki[42] and a range of other cases regarding the operation of section 49(2) of the PLA. Her Honour made several observations about the operation of the court’s discretion in this context. Her Honour noted that:
· the order for the return of a deposit to a defaulting purchaser is the exception rather than the rule;
· it would be rare for a court to exercise its discretion in favour of a purchaser in the absence of some disentitling conduct by the vendor. This might comprise misleading or deceptive conduct, unconscionable behaviour, or possibly, an unduly harsh enforcement of the vendor’s contractual entitlements;
· where the purchaser proves misleading and deceptive conduct, a court is more inclined to order the return of the deposit if the contravening conduct induces the purchaser to enter a contract which it would not otherwise have entered;
· given the risk of the loss of deposit which each purchaser faces if they do not complete the purchase, the fact that the forfeiture of the deposit would cause hardship to a defaulting purchaser is not especially relevant. Nonetheless, the financial consequences of the failed transaction could be relevant particularly where the consequences might be considered lopsided;
· because section 49(2) gives the court a broad discretion, it is permissible to impose conditions upon the return of the deposit. This ameliorates the “all or nothing” nature of the remedy under section 49(2);
· the conduct of the purchaser and the reasons for the purchaser’s default in completing a purchase are relevant to the exercise of the discretion.
[41](2020) 66 VR 171
[42]Simcevski v Dixon (No 2) (2017) 53 VR 357
60While each case involving section 49(2) depends on its own facts in determining whether and precisely how to exercise the discretion, in both Barrett v Beckwith (No 2)[43] and Karfoal Pty Ltd v Lorence[44] the court refused to order the return of the deposit. In the former case, the vendor was blameless and the only ground argued for the return of the deposit was the undue financial advantage which would accrue to the vendor. In the latter, the purchaser failed to complete the contract because there were problems obtaining finance. The vendor had no responsibility for the purchaser’s difficulty. The court refused the deposit even though the vendor later sold the property for a higher price.
[43](1974) 1 BPR 9439
[44](2002) 11 BPR 20,129
61By comparison in Chambers v Borness[45], the court did order the return of the deposit. However, the deposit was $445,650 being 15% of the purchase price. The purchaser had moved into the property before settlement and paid a licence fee of $70,332, spent $105,000 on improvements to the house and paid rates, taxes and outgoings. Further, the parties agreed that the vendor had a claim to mesne profits of $95,230 and additional damages of about $71,400 and interest of about $60,000. The court considered that it was unjust for the vendor to have the benefit of the plaintiff’s expenditure (in addition to the vendor’s acknowledged claims) totalling at least $300,000, while simultaneously retaining the deposit.
[45][2014] NSWSC 890
Plaintiffs’ submissions
62The plaintiffs argued, correctly, that section 49(2) of the PLA conferred a broad discretion on the court which could not be destroyed by the vendor purporting to forfeit the deposit or by the terms of the contract.[46]
[46]Plaintiffs’ closing submissions at [1], [2], [5]
63The plaintiffs enumerated a lengthy list of factors which they said should persuade the court to exercise its discretion in their favour.
(a) Substantive versus procedural fairness
64The plaintiffs relied upon Blanco v Wan[47] to contend that, even if they received procedural fairness in relation to the contract of sale, they suffered substantial unfairness. The point made in oral submissions was that, even if a 10% deposit is customary for contracts for the sale of land in Victoria and New South Wales, the judge in Blanco found that the purchaser in that case was not obliged to pay the second tranche of the purported deposit when the contract failed. The plaintiffs argued that the purchaser in that case paid only 4% of the purchase price as a deposit, not the full 10%, and it was said that the trial judge, in so ruling, relied upon the concept of substantive fairness in finding a smaller deposit was reasonable. Thus, the purchaser did not have to pay the full sum.
(b) Deposit is penal in nature
[47][2021] NSWSC 273
65The plaintiffs argued that the deposit was penal in nature relying upon the decision in Bridge v Campbell Discount Co Ltd[48]. They said that if the deposit were deemed penal, the court could provide relief against forfeiture.
(c) Determining the penal nature of a deposit
[48][1962] AC 600
66The plaintiffs argued that the deposit in this case was penal because it was out of all proportion to the actual damages suffered by the vendor.[49] They submitted that the deposit substantially exceeded the damages which Yuan suffered. This made obvious the punitive nature of the forfeiture of the deposit. The difference showed that the deposit amount was not a genuine pre-estimate of the damage which Yuan suffered.[50]
(d) Examining damages
[49]Plaintiffs’ closing submissions at [15]
[50]Ibid at [17]
67The plaintiffs contended that the court should examine the nature of the damages allegedly suffered by Yuan. A vendor who suffered no loss should not recover a windfall. Here, the plaintiffs argued that Yuan complained she incurred a substantial tax obligation when selling the Property for the second time. This related to the capital gains tax which Yuan paid.[51] This showed that she made a profit on the transaction and her complaint reflected her view that the tax eroded her substantial profit or gain which became subject to capital gains tax. The plaintiffs said that Yuan herself caused the liability to capital gains tax by leasing out the Property after the plaintiffs defaulted and before she sold the Property for a second time.
[51]This is dealt with later in these reasons.
68The plaintiffs accepted that Yuan could recover the loss of $38,192 suffered in the financial year ending 30 June 2020 even though this included part of the year when the plaintiffs were not in breach of contract. However, the plaintiffs said that they should not be liable for the total loss of $91,666 which Yuan said she incurred in the time between when the plaintiffs repudiated the contract and Yuan re-sold the Property.
69The plaintiffs also complained of Yuan’s “punitive stance”[52] during the hearing where she emphasised the plaintiffs’ attempts to obtain extensions of time and failed to address the fact that the problem with completion was due to a “systemic banking issue” rather than the plaintiffs’ negligence.[53]
(e) Windfall
[52]Plaintiffs’ closing submissions at [25]
[53]Ibid at [25]
70The plaintiffs contended that because Yuan later sold the Property for $3.5 million, which was $310,000 more than the contract price on the repudiated contract, she obtained a windfall sum where that profit almost equalled the forfeited deposit.[54] In the context of this case, it was unfair that Yuan would retain the plaintiffs’ deposit and make the extra profit.
(f) Melbourne market and likely loss
[54]Ibid at [26] – [27]
71The plaintiffs submitted the 10% deposit did not represent a genuine pre-estimate of Yuan’s likely loss in the event of default. They noted that Feng said she was involved in an average of about 40 contracts of sale per year. This is the equivalent of a sale every nine days and means that the vendors should not be greatly concerned about potential missed selling opportunities or having to resell a property at a lower price. The real estate market was said to have grown at a rate of 6.6% per annum in the past 10 years.[55] Because the market appreciated in that time to that extent, the plaintiffs said that the 10% deposit was disproportionate and excessive.
(g) The earnest of performance test
[55]The plaintiffs adduced no admissible evidence for this contention.
72The plaintiffs contended that a large deposit becomes problematic where it is disproportionate to, or comfortably exceeds, a genuine pre-estimate of possible loss suffered by the innocent vendor. An excessive sum as deposit no longer serves as a guarantee of performance but veers towards unconscionability.
73The plaintiffs submitted[56] that the court’s rationale in Dojap[57] was that a deposit must reflect a genuine pre-estimate of loss. They said that it was for this reason the court in Dojap[58] ordered the return of the deposit. This was a case where the deposit constituted 25% of the purchase price.
[56]Plaintiffs’ closing submissions at [31]
[57]Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573
[58]Ibid
74The plaintiffs emphasised that the statute granted the court a broad discretion to be exercised as it thinks fit.[59] They said the court should not be bound by the 10% deposit but should be more flexible as the court was in Blanco’s[60] case. Thus, the court should use its discretion in assessing what level of deposit reflects a mutually fair and proportionate security for due performance.[61]
(h) The financial structure of the transaction
[59]Plaintiffs’ closing submissions at [32]
[60][2021] NSWSC 273
[61]Plaintiffs’ closing submissions at [36]
75In conducting this exercise, the plaintiffs argued that the court should take note of the role of the plaintiffs’ bank in the transaction. The plaintiffs urged the court to reflect on the fact that:
· the deposit constituted 24% of Yuan’s equity in the Property;
· the deposit would have constituted 65% of the plaintiffs’ equity in the Property had they completed the sale
(i) Impact of the forfeited deposit
76The plaintiffs stressed that the loss of the deposit would have a major impact upon them. In the financial year ending 30 June 2022, $319,000 constituted 37% of the defendant’s annual taxable income. That amount exceeded the plaintiffs’ annual household income by more than 115%. The deposit monies were said to represent the plaintiffs’ life savings.[62]
(j) Business specific considerations
[62]Ibid at [40]
77The plaintiffs argued that another problem with the customary 10% deposit was that it failed to take account of the variety of circumstances in which it could be used. Such a percentage might be appropriate with construction companies and developers who could have significant costs associated with procuring machinery and mobilising a workforce. However, transactions like the one between the plaintiffs and Yuan are not of that kind and do not present the same potential loss for a vendor.
(k) Media articles
78The plaintiffs included in the court book a couple of media articles addressing the situation which has arisen in this case. The plaintiffs contended that the media involvement highlighted the inequity of which the plaintiffs complain and the undue enrichment of the vendor reflected in the outcome of the aborted contract. It was said that this did not reflect a proper standard of fairness and justice.[63]
(l) Contract template and subject to finance clause
[63]Ibid at [42] – [43]
79The purchasers contended that Yuan’s estate agent, Feng, struck out or removed the “subject to finance” provision from the contract of sale for the Property. They said that the presence of the provision in the standard template showed that the provision was customary in such transactions – its removal was a deviation from the normal. As a result of Feng’s actions in deliberately striking out the clause, the plaintiffs said that they were forced to agree to the amendment.
(m) Parties’ conduct
80The plaintiffs contrasted their conduct with that of the vendor. The plaintiffs argued that they acted in good faith and did not intentionally default on the contract of sale. The breach was accidental and arose from unforeseen circumstances.[64] The plaintiffs said that they were willing to accept responsibility for any actual loss which Yuan suffered, but they should not be responsible for Yuan’s windfall gains.
[64]Ibid at [46]
81By way of contrast, the plaintiffs said that Yuan behaved badly in deleting the subject to finance clause from the contract. They said the fact that the clause featured in the standard document meant that it was a common clause which should not have been removed. Further, they said that Yuan wanted the 10% deposit and this was an excessive sum. Then, after the breach, Yuan retained the deposit monies, taking unmeritorious advantage of the plaintiffs’ difficulty. They said that, as a result of the terms of the contract and the circumstances which obtained, the vendor suffered no loss from the repudiation of the contract. In fact, the plaintiffs said that Yuan was in a better position than if the plaintiffs had completed the contract in accordance with its terms.[65] She was said to have won a windfall by obtaining undue benefits at the plaintiffs’ expense. Yuan was unjustly enriched and overcompensated.[66] Accordingly, it was punitive and unjust for Yuan to retain the deposit and she should return the $309,000.
[65]See Plaintiffs’ closing submissions at [50]
[66]Ibid at [48]-[50]
Defendant’s submissions
82Yuan’s submissions commenced with a discussion of the principles of pleading as set out in the County Court (General Civil Procedure) Rules 2018 (“the Rules”) and the leading authorities. Yuan said that the plaintiffs’ pleadings were of a particular scope and set out the case which she came to court prepared to meet. For that reason, Yuan objected to certain claims and allegations which were raised by the plaintiffs at the hearing but were not included within the filed pleadings. Matters to which Yuan objected included allegations that:
· Yuan took unconscionable advantage of the contractual breach to achieve false enrichment;[67]
· Yuan misrepresented the position to the plaintiffs thereby creating an estoppel which rendered it unconscionable for the vendor to insist upon its legal rights;
· the vendor did not give a proper or sufficient notice of default to the plaintiffs when they failed to perform the contract.
[67] I infer that the plaintiffs meant unjust enrichment.
83Yuan argued that the plaintiffs’ point about no proper or sufficient notice of default was inappropriate in circumstances where the plaintiffs pleaded that they could not settle the contract of sale, they defaulted on payment and as a result, the vendor issued a default notice and ended the contract on the grounds of the plaintiffs’ breach.
84The defendant pleaded or admitted that:
· she did not agree to the plaintiffs’ final proposed variation of the contract of sale;
· she was under no obligation to so agree;
· the plaintiffs offered no consideration for the final proposed variation;
· the plaintiffs defaulted on making payment under the contract of sale, the plaintiffs repudiated the contract and the defendant accepted the repudiation;
· she retained the deposit sum of $319,000;
· she was entitled to retain the deposit due to the plaintiffs’ default and repudiation and under general condition 28.4(a).
85The defendant noted that the plaintiffs admitted that she was under no obligation to agree to the requested variations to the contract of sale. She said that from the agreed correspondence, the plaintiffs also knew that Yuan required settlement by 6 December 2019 and that time was of the essence.
86There was no issue before the court about the plaintiffs having repudiated the contract of sale by the failure to settle and Yuan’s acceptance of that repudiation. Thus, there was no basis to question the sufficiency of any notice from the defendant given under, or in accordance with, the terms of the contract of sale.
87Next, Yuan made submissions about the vendor having no obligation to issue a notice of default where a purchaser repudiated the contract of sale. Repudiation went well beyond defaulting in some respect and rendered the notice unnecessary. If the purchaser paid the deposit and then defaulted, the general rule was that the vendor had an implied right to forfeit the deposit even without an express forfeiture clause. The forfeiture was not conditional upon the vendor suffering a loss as a result of the repudiation.
88The vendor discussed the law about section 49(2) of the PLA and why she was entitled to retain the deposit. She set out the general principles and referred to relevant cases which address the point. She argued that she engaged in no conduct which compromised her rights or provided an appropriate basis for the court to return the deposit to the plaintiffs.
89Yuan contended that the court should not grant the plaintiffs equitable relief in the form of relief against forfeiture. She accepted that equity might intervene when the exercise of the vendor’s rights resulted from fraud, mistake, accident, or was otherwise unconscionable in some material respect. But she said that there was no proper basis for invoking or using such equitable discretion in the present case. She contended that she had not done anything wrong or conducted herself in a way which could merit the description of “unconscionable”. She said there was simply no basis to order the return of the $309,000 on equitable grounds.
90Finally, Yuan argued that, if the court found some basis which justified the making of an order under section 49(2) in the plaintiffs’ favour, the court should not return the whole of the deposit monies. Rather, it should set-off various costs and expenses incurred by Yuan as a result of the plaintiffs’ failure to settle the contract on the due date. These costs included:
· agent’s commission on the sale of $31,500;
· legal costs of the defendant’s solicitors $3,033.80;
· interest of $3,781;
· $91,644 being the net loss on mortgage and upkeep payments.
Analysis
91Given the various arguments raised by the plaintiffs, I propose to address them in order before making some other observations.
Issues raised by the plaintiffs
(a) Substantive versus procedural fairness
92I am satisfied that insofar as the plaintiffs relied upon the Blanco[68] decision, they have mischaracterised the case.
[68]Blanco v Wan [2021] NSWSC 273
93Blanco was the vendor of a property and Wan was the purchaser. The property sold after auction on 8 December 2018 for $2.055 million. The deposit was said to be $205,500 or 10% of the purchase price. The contract specified 11 June 2019 as the settlement date. The contract said that the vendor would accept the 10% deposit by a payment of $80,000 on exchange of contracts (which occurred on 8 December 2018) and the balance of the deposit on or before settlement. Wan as purchaser acknowledged the deposit was 10% and that in the event she defaulted under the contract, she would forfeit the 10% deposit. The unpaid balance of the deposit would become payable immediately upon default. Wan did not settle on 11 June 2019 and Blanco issued a notice to complete on 14 June 2019. This required completion by 1 July 2019. When Wan did not settle on that day, Blanco issued a notice of termination on 2 July 2019. Blanco resold the property on 12 November 2019 for $2.1 million.
94Blanco issue proceedings seeking a declaration that:
· the termination of the contract was valid;
· he was entitled to the $80,000 paid as part of the deposit together with interest; and
· an order for payment of the outstanding balance of $125,500.
95Wan said that the agent misrepresented the position to her and that she was subjected to undue pressure to sign the contract. She said she did so without fully appreciating its contents and without obtaining any independent legal advice. She argued that the notice to complete was invalid in form and substance.
96Darke J found that Blanco terminated the contract validly and was entitled to retain the $80,000 plus interest. However, His Honour held that Blanco was not entitled to recover the outstanding balance of $125,500.
97The court said that the vendor under a contract for the sale of land is generally entitled to forfeit a reasonable deposit (of no more than 10% of the price) upon termination for the purchaser’s breach. This general proposition is underpinned by an acceptance that the principles concerning penalties and forfeitures do not apply to such stipulations in contracts for the sale of land.[69] The exception from the usual law applies only to payments which can properly be classified as having the character of a deposit.[70]
[69]Blanco v Wan [2021] NSWSC 273 at [64]
[70]Ibid at [65]
98A deposit in a conveyancing context:
· operates as an earnest to bind the bargain;
· constitutes a form of security for the purchaser’s obligations under the contract; and
· forms part of the purchase price.
99The terms of the contract in Blanco were such that the second payment was not required to be paid at a time when it could properly be regarded as an earnest of performance.[71] The obligation to pay the outstanding balance before settlement was enlivened only if the purchaser defaulted within the meaning of Additional Condition 58 of the contract of sale.
[71]Ibid at [75]
100His Honour decided that the further balance of $125,500 which Wan did not pay was not fairly described as a deposit and therefore, Blanco was prevented by the principles relating to penalties and forfeiture from recovering the same. The case law suggests that there needs to be some appropriate temporal relationship between the making of the agreement and the payment of the deposit.
101The court’s reasoning was not governed by concepts of substantive or procedural unfairness. Nor did the reasoning involve a finding that a payment of 4% of the purchase price constituted a reasonable deposit.
(b) Deposit is penal in nature
102Bridge v Campbell Discount Co Ltd[72] did not involve a sale of land. Rather, it was a case where Bridge bought a car under a hire purchase agreement and returned the car when he could not make the agreed payments. The hire purchase agreement provided that Bridge make an initial payment of £10 and thereafter make 36 monthly payments. After making all those payments, Bridge had the option to buy the car for £1.
[72]Bridge v Campbell Discount Co Ltd [1962] AC 600
103Bridge made the first payment on 20 August 1959 but on 3 September 1959, he wrote to the defendant advising that due to unforeseen circumstances, he could no longer make any future payments and he proposed to return the car.
104The company sued Bridge for two thirds of the purchase price less the deposit and instalments received. The trial judge dismissed the claim as a penalty and the company appealed successful to the Court of Appeal. The House of Lords reversed the Court of Appeal and restored the initial judgment.
105Clause 6 of the hire purchase agreement provided that the hirer may at any time terminate the hiring by giving notice of termination in writing to the company and thereupon, the provisions of clause 9 would apply. Clause 9 said that if the agreement was terminated for any reason before the vehicle became the property of the hirer, the hirer would forthwith pay the owners as agreed compensation for depreciation of the vehicle such further sums as were necessary to make the rentals paid and payable equal to two thirds of the hire purchase price.
106The House of Lords held that Bridge did not exercise his option under clause 6 but breached his obligations under the hire purchase agreement. The amount which the company alleged due under clause 9 was held not to be a genuine pre-estimate of damage but a penalty.
107The current case bears little similarity to the facts in Bridge.[73] The deposit paid by the plaintiffs in this case was fixed at 10% of the purchase price. Upon default, Yuan did not seek to recover any additional funds from the defaulting purchasers but simply forfeited the 10% deposit as she was entitled to do under the contract. The 10% deposit in this conveyancing transaction was customary, it was representative of the risk associated with non-performance in transactions for the sale of land, and it was not penal in nature.
(c) Determining the penal nature of the deposit
[73][1962] AC 600
108A major problem with the plaintiffs’ argument on this point is that it is contrary to clear principle. It is well-established that the law regarding penalties does not apply to the forfeit of a reasonable deposit paid in connection with the purchase of land when the purchaser fails to complete the transaction.
109When a purchaser pays a deposit in connection with a conveyancing transaction, it is excluded by common law from the doctrine of penalty. Because the deposit is an earnest to bind the bargain, equity does not regard it as a penalty and equitable relief against its forfeiture is not available.[74] This is so provided the deposit is a reasonable amount, customarily 10% of the purchase price. This remains the case even if the amount bears no correlation to the anticipated loss of the vendor if the purchaser fails to settle and the vendor later sells the land for a higher price.[75]
[74]Lexane Pty Ltd v Highfern Pty Ltd [1985] 1 Qd R 446 at 455; Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd [1993] AC 573 at 578-579; Ashdown v Kirk [1999] 2 Qd R 1 at 8; Havyn Pty Ltd v Webster [2005] NSWCA 182 at [131]-[134]; Federal Commissioner of Taxation v Reliance Carpet Co Pty Ltd (2008) 236 CLR 342 at [26]; Midill (97PL) Ltd v Park Lane Estates Ltd [2009] 1 WLR 2460 at [43], citing Bidaisee v Sampath (1995) 46 WIR 461 at 467-468 (PC); Kazacos v Shuangling International Development Pty Ltd (2016) 18 BPR 36,353 at [26]
[75]Garratt v Ikeda [2002] 1 NZLR 577; Midill (97PL) Ltd v Park Lane Estates Ltd [2009] 1 WLR 2460 at [52], [54]
110I note that in cases such as Smyth v Jessep[76] and Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd[77] where the deposits comprised 40% and 25% respectively of the purchase price, the court ordered the return of the deposits.
[76][1956] VR 230
[77][1993] AC 573
111The plaintiffs’ submissions about the penal nature of the deposit are, in my view, largely misguided. The plaintiffs advanced no judicial pronouncements, textbook references, or expert opinion to support the proposition that:
· a 10% deposit is generally penal in nature;
· the 10% deposit in this case was penal due to factors such as the upward trend in Melbourne house prices over the last decade (of which there was no admissible evidence);
· the relationship which the deposit bore to the vendor’s equity in the Property or that the plaintiffs’ annual household income was important or relevant;
· the ready availability of other buyers in the market (of which there was no admissible evidence) was relevant;
· the concept of a penal deposit can apply to a 10% deposit for the purchase of a house in suburban Melbourne; and
· any disproportionate discrepancy between the deposit paid and the actual loss suffered by a vendor upon breach by a purchaser showed that the deposit was penal and should be refunded to the purchaser.
(d) Examining damages
112Several of the points made by the plaintiffs depend or rely to varying degrees upon the notion that the deposit should represent a genuine pre-estimate of the vendor’s loss in the event that the contract of sale terminates due to the repudiation by the purchaser.[78] This reliance is mistaken. As referred to earlier, the doctrines of penalties and forfeiture do not apply to reasonable deposits (such as a 10% deposit) paid by purchasers in conveyancing transactions.
[78]See, for example, the arguments raised in the plaintiffs’ closing submissions at [63]-[64], [75]
113This case falls within the category of cases where the purchasers of land under a contract of sale defaulted in the performance of their obligations, resulting in the failure of the contract.
(e) Windfall
114Even if Yuan received a windfall benefit[79] by retaining the deposit and selling the Property for a higher price in a subsequent contract, that of itself is not a sufficient basis to exercise the section 49(2) discretion in favour of the purchaser. There is no inherent unfairness in an otherwise innocent vendor exercising their rights in accordance with the contract governing the relationship between the vendor and purchaser.
(f) Melbourne market and likely loss
[79] See plaintiffs’ closing submissions at [68]
115The point about the Melbourne market and likely loss is erroneous. It assumes that a deposit should represent a genuine pre-estimate of loss. It also assumes that markets move smoothly, and in only one direction, and that sales of property occur at regular and consistent intervals. I reject the notion that a 10% deposit in relation to the sale of land is disproportionate and excessive. It is, and has been for many years, the customary deposit in such transactions.
(g) The earnest of performance test
116The plaintiffs’ submissions on the proportionality of the 10% deposit are misplaced. The contract of sale provided that the price was $3.19 million with a deposit of $319,000 payable by 1 August 2019 (of which $10,000 had been paid) and the balance of $2,871,000 was payable at settlement. This was scheduled for 6 December 2019.
117The reference to the $10,000 which had been paid reflected that the plaintiffs had earlier signed a contract of sale for a purchase price of $3.2 million. They paid the $10,000 at that time. After the plaintiffs’ building inspector conducted an inspection of the Property and drew attention to various defects, the parties negotiated a new purchase price of $3.19 million and signed another contract to that effect.
118The deposit payable was 10% of the purchase price. This was entirely normal and uncontroversial. It was consistent with customary practice in at least Victoria, New South Wales and the United Kingdom. The fact that the deposit was paid in two separate payments was of no significance in the context. The $10,000 was treated as paid at the time of signing the agreement and the balance of the deposit was due within about six weeks. The payment date for the deposit balance was 1 August 2019, a little over four months before the settlement date of 6 December 2019. The failure to pay a deposit in accordance with the terms of the contract constitutes the breach of an essential term and hence, a repudiation of the contract.
(h) The financial structure of the transaction
119The plaintiffs’ arguments about the financial structure of the transaction[80] are not convincing. The question of the relationship between the deposit amount and the parties’ equity in a property is not specifically recognised as a material factor in these cases. Banks frequently provide finance to enable purchasers to buy property. That is a common, not an unusual, occurrence.
(i) Impact of the forfeited deposit
[80] Plaintiffs’ closing submissions at [73]
120I do not doubt that the loss of a deposit would have an impact upon the plaintiffs. However, because deposits are an earnest to bind the bargain and a security for performance, part of their purpose is to ensure the purchasers act carefully in signing contracts of sale. A deposit is designed to guard against the risk of non-performance by a purchaser. For this reason, a deposit will most likely be forfeited if the purchasers default on the contract.
(j) Business specific considerations
121I do not consider the plaintiffs’ submissions about the customary 10% deposit to be of any weight. As shown from the authorities and my analysis above, this amount is standard for residential conveyancing transactions in Victoria.
(k) Media articles
122It seems that the plaintiffs, or at least Gayed, had some role in involving the media in this case. However, the media articles are not relevant to any issue in the case. Further, given that the authors were not called and considering the nature of parts of the contents, the articles are probably inadmissible in any case.
(l) Contract template and subject to finance clause
123The plaintiffs’ submissions on the issue of the template do not advance the plaintiffs’ case. The “subject to finance” clause was struck out from the contract before it was executed.
124The plaintiffs are educated and intelligent people. Gayed is an engineer with a Master of Business Administration. Elzahaby is a doctor with a specialist qualification as a psychiatrist. While they came to Australia only about 10 years ago from Egypt, they speak and understand English and, as shown in their written submissions, have an excellent command of written English.
125The evidence is clear that they understood the risks to which they exposed themselves in signing the contract to purchase the Property in June 2019. In particular, they knew that:
(a) the offer to purchase was not subject to finance but was unconditional;
(b) at the time of signing, they had not obtained finance required for the purchase;
(c) there was a risk that they might not be able to complete the transaction.
126I accept that the plaintiffs would have preferred the subject to finance clause to remain in the contract. However, the vendor’s agent said that the vendor would not execute a contract with such a condition.
127I note in this context that the standard form Real Estate Institute of Victoria/Law Institute of Victoria contract provides, inter alia, for a “subject to finance” condition, subject to lease details and terms contracts on page three of the contract. However, the “subject to finance” condition was explicitly discussed between the agent and the plaintiffs and was expressly removed or excluded from the written document before the plaintiffs made their offer. The defendant was clear on this point and the plaintiffs understood that their offer to purchase the Property was unconditional.
128While the removal of the clause was not optimal for the plaintiffs, Yuan’s conduct in wanting an unconditional contract was, from her perspective, reasonable and justified. Such behaviour could not properly be characterised as misleading or deceptive, improperly overbearing or unconscionable. There was an open and transparent negotiation between the plaintiffs and the vendor’s agent about the Property. The plaintiffs were very keen to obtain the Property, so much so that they told the agent to stop conducting open inspections of the Property while they conducted negotiations to buy it.[81]
[81] Exhibit D7
129During the negotiations to buy the Property, the plaintiffs were represented by Henshall as their solicitor. There was no direct evidence on the point but I assume that Henshall would have told the plaintiffs that, once they signed the unconditional contract for the Property, they were bound to complete the contract or suffer the consequences. There is long-standing authority to the effect that, in the absence of fraud or special circumstances, a person cannot escape the consequences of signing a document (even if they do not understand it).[82] Unless a person is prepared to take the risk of becoming bound by the terms of the document, the best protection is not to sign such document until they understand it or are satisfied with it.[83]
[82] Wilton v Farnworth (1948) 76 CLR 646 at 649 per Latham CJ
[83] Ibid. See also Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [57]
130In this case, I find that:
· the plaintiffs examined the contract of sale before signing it;
· the plaintiffs had a solicitor acting for them regarding the purchase of the Property;
· the plaintiffs understood what they were signing and its unconditional nature;
· the plaintiffs were not misled or deceived about the contract of sale, its meaning or significance;
· the plaintiffs were not induced to enter the contract of sale by false representations, duress or other conduct which could be described as unconscionable;
· Yuan did not act in any way in connection with the contract of sale which might impugn the effectiveness or enforceability of the contract; and
· the plaintiffs knew the risks of defaulting on the contract.
131I accept that the plaintiffs’ case was that Westpac gave oral approval before they signed the contract whereby the bank would lend the plaintiffs up to 90% of the purchase price. Relying on this, the plaintiffs signed the contract of sale only to subsequently find that Westpac reduced the loan limit to 85% of the purchase price. The plaintiffs have sued Yuan for the return of the deposit in circumstances where, it appears, they would not, or at least might not, have entered the contract without the bank telling them that it would finance 90% of the purchase price. This was consistent with the plaintiffs’ earlier experience in buying their home in Bendigo. It seems that, if the plaintiffs’ evidence represents the truth of the matter, about which I make no finding, the bank is more responsible for the plaintiffs’ predicament than the vendor.
(m) Parties’ conduct
132An order for the return of the deposit to a defaulting purchaser is the exception and not the rule.[84] The plaintiffs need to show some exceptional circumstances sufficient to justify the court departing from the agreed terms of the contract and the normal operation of common law contractual principle. Here, the plaintiffs cannot point to any circumstances sufficient to satisfy the court that it is appropriate to exercise the discretion in their favour.
[84]Chatham v Coral Park Pre-Training & Breaking Pty Ltd (2020) 66 VR 171; Pearl v Nannegari [2021] VSC 468 at [46] – [47] and cases cited therein.
133As observed earlier, the plaintiffs had a solicitor acting for them when negotiating to buy the Property and entering the contract. They understood what they were doing, the significance of signing the contract and the potential risk to which they were subject by entering an unconditional contract before they had secured the finance they needed to complete the transaction.
134The vendor did not engage in any conduct which might reasonably disentitle her from relying upon and enforcing her rights as a result of the plaintiffs’ inability to perform the contract. Neither directly, nor indirectly through her agents, did Yuan engage in misleading or deceptive conduct or unconscionable behaviour towards the plaintiffs. The vendor made no false representations to the plaintiffs in relation to the contract. Indeed, in relation to the “subject to finance” clause, the agent made clear to the plaintiffs before they signed that this clause appearing in the standard form contract was being struck out and that the vendor would not enter into a contract for sale of the Property which contained such a clause. Put simply, the vendor did not cause or contribute to the plaintiffs’ repudiation of the contract.
135The inability of the plaintiffs to perform the contract in accordance with its terms was due to factors within their control. The Property was expensive but they were very keen to buy it. The plaintiffs had to borrow a substantial amount to obtain the Property. While they had oral approval from the bank before signing the contract, they did not obtain a binding commitment from the bank to lend either a particular amount or a particular percentage of the purchase price. To that extent, the plaintiffs voluntarily assumed the risk that the bank might change its mind or not provide the required level of funding. Because of the parties’ discussions about the deletion of the “subject to finance” clause before entering the contract, the plaintiffs were well aware of the risk before they committed to the contract with Yuan.
136The question of a purchaser requiring finance to complete a contract is one which commonly arises in connection with conveyancing transactions. It is not a novel, unexpected or unusual risk. Rather, it is an issue frequently faced in conveyancing.
Additional observations
137Apart from addressing specific matters raised by the plaintiffs, there are a number of other observations I wish to make.
138People in the community commonly engage in conveyancing transactions. It is important that parties engaging in such transactions have commercial certainty regarding their rights and obligations under standard form contracts of sale. Courts must be careful to do justice between the parties in each case. However, courts should be mindful that because purchasers pay a deposit as an earnest of agreement and a guarantee of performance, they should not encourage an attitude whereby defaulting purchasers who repudiate their obligations under a contract of sale expect to recover the deposit from the vendor if the latter sells the property at a higher price. In my view, it is not usually unjust or inequitable for an innocent vendor to insist upon due performance of the contract and, upon default by a purchaser, to forfeit the deposit.
139The plaintiffs’ failure to settle caused problems for the vendor. I accept Yuan’s evidence that after signing the contract, she moved to the United Kingdom with her child and she was there in early December 2019 when the plaintiffs failed to complete the contract. Yuan had sold the Property with no intention of returning to Australia to live.[85] The family had decided to leave Australia and live overseas.[86] Yuan planned to move between the United Kingdom and China where her elderly parents lived.[87]
[85]T 190
[86]Ibid
[87]Ibid
140I also accept that Yuan was disappointed and upset by the plaintiffs’ failure to settle. She wanted to finalise this issue in Australia so she could move forward with her life overseas. The termination of the contract meant that she was left with a vacant property which was still subject to a significant bank mortgage and concomitant interest payments. The vendor also had to pay insurance and some other expenses. Yuan was not sure what to do with the Property[88] and felt under pressure[89] due to the financial ramifications, the pandemic virus in China and concern for her son in the United Kingdom and her parents. Ultimately, a friend approached Yuan to tell her that she knew someone interested in renting the Property. The friend introduced Yuan to the agent, Peter Daicos of Rent Exchange,[90] and Yuan rented the Property out from around February 2020 to July 2021. Letting the house provided some income to offset the continuing expenses associated with Yuan’s ownership of the Property.
[88]T 189 and 221
[89]T 189 and 220
[90] Exhibit D10
141I note too that, because the plaintiffs did not complete the contract, Yuan did not receive in December 2019 the sum of $2.871 million she expected to receive. She was deprived of the use of this money and could not deploy it to pay down the mortgage, invest it elsewhere or otherwise use it as she saw fit. Yuan’s counsel made no reference to this matter but the topic has arisen in other litigation about section 49(2) of the PLA or an equivalent provision.[91]
[91] Barrett v Beckwith (No 2) (1974) 1 BPR 9439
142Although Yuan later sold the Property in October 2021 for $310,000 more than the sale price agreed with the plaintiffs, that fact alone is not normally a sufficient basis to warrant the making of an order under section 49(2) of the PLA.[92] Neither the contract nor the Property was special. The evidence did not disclose any particular reason why the Property increased in value. It appears to have been due to nothing more than a normal market increase over the period of time which elapsed between the two contracts. To that extent, the increase was not remarkable but rather could probably have been anticipated in June 2019 as a likely outcome if the sale were delayed more than two years.
[92]Baird v Chambers [2010] NSWSC 272 at [16] per Ball J; Higgins v Statewide Developments Pty Ltd [2010] 14 BPR 27,293 at [135] per Barrett J; Nassif v Caminer (2009) 74 NSWLR 276; Simcevski v Dixon (No 2) (2017) 53 VR 357 at [122]
143The plaintiffs contended that rather than suffering a loss, the vendor enjoyed a windfall and stood in a better position financially than if the breach of contract had not occurred. Hence, by retaining the deposit they said that Yuan had been unjustly enriched and overcompensated.[93] The authorities are clear that the mere fact of a vendor receiving a windfall payment is generally not a sufficient basis of itself to justify a return of a deposit to a defaulting purchaser.
[93] D’s closing submissions at [50]
144Further, in my view, the reference to unjust enrichment implies that the vendor has acted improperly in some way to enrich herself at the plaintiffs’ expense. I find that Yuan has not acted improperly or taken unfair advantage of the plaintiffs. She has done no more than assert her rights under a contract freely entered into by the plaintiffs.
145Issue 5 deals with the potential amounts which Yuan might seek to set-off if she were ordered to return the $309,000 deposit to the plaintiffs.
146That issue affects the question of whether Yuan received a windfall. I am not satisfied that Yuan was better off financially because the plaintiffs breached the contract of sale.
147Yuan suffered some financial loss because in the financial years ending 30 June 2020-2022, the income from leasing out the Property was less than the expenses incurred. While the second sale of the Property generated a price $310,000 higher than the price which the plaintiffs paid, it was also a causative factor in Yuan incurring a substantial capital gains tax (“CGT”) liability. Accordingly, overall Yuan lost money due to the failure of the contract repudiated by the plaintiffs. This was in addition to the inconvenience and stress of having to deal from afar with the problem of the unsold property.
148One area of some controversy was the CGT liability which Yuan incurred when she sold the Property in 2021. Generally speaking, where a property is bought for one price and later sold at a higher price, the owner will be subject to CGT unless an exemption applies.
149A person’s main residence is usually exempt from CGT if the owner meets the following conditions: the owner is an Australian resident and the dwelling has been home to the owner, any partner and dependants for the whole time the person owned it; and the dwelling has not been used to produce income – it was not rented out or used as business premises. There are a couple of other conditions which do not apply in this case.
150A person who satisfies the eligibility conditions pays no tax on a capital gain when a CGT event occurs.
151Had the plaintiffs completed the contract in December 2019, CGT would not have been an issue because Yuan was an Australian resident at the time of contracting and the Property was her main residence. However, after July 2019, Yuan was no longer an Australian resident and by October 2021, she lived overseas so the Property was not her main residence. She incurred a liability of $369,325.35 on the successful later sale of the Property.
152The plaintiffs contended that Yuan became subject to the CGT because she leased the Property out after the sale to the plaintiffs collapsed. While it is correct to say that the house was rented out between February 2020 and July 2021, I consider that, by February 2020, Yuan had already lost the ability to claim the exemption. She was no longer an Australian resident after July 2019 and the Property was not her main residence because she lived overseas.
153Yuan gave evidence about having to make a substantial payment of tax. Her tax return supported her oral evidence. There is no doubt that she was obliged to pay, and did pay, the CGT on the sale of the Property.
154Yuan’s counsel advised the court that:
(a) Yuan made no claim in the proceeding seeking indemnity from the plaintiffs in relation to the CGT payment; and
(b) Yuan did not seek to set-off the amount of the CGT liability against the deposit monies paid by the plaintiffs.[94]
The reasons for Yuan’s position in this regard were not made clear.
[94] T 229-30
155Although the issue of set-off does not strictly arise here and the defendant’s set-off claim is limited to the pleaded categories pleaded in the defence, the payment of CGT is relevant to the broader consideration of the discretion. But for the plaintiffs’ repudiation of the contract, the sale of the Property would have been completed in December 2019 and Yuan would not have been liable for such a tax – the tax payment which Yuan made was larger than the plaintiffs’ deposit.
Notice of default
156The plaintiffs also sought to make something of Yuan terminating the contract by accepting the plaintiffs’ repudiation without issuing a notice of default. Doing my best to understand the plaintiffs’ point, I think the question was whether Yuan as the vendor could rely upon general condition 28.4 to retain the deposit when she did not give the notice contemplated by the general condition.
157General condition 27 provides:
27. Default Notice
27.1A party is not entitled to exercise any rights arising from the other party’s default, other than the right to receive interest and the right to sue for money owing, until the other party is given and fails to comply with a written default notice.
27.2The default notice must:
(a) specify the particulars of the default; and
(b)state that it is the offended party’s intention to exercise the rights arising from the default unless, within 14 days of the notice being given –
(i) the default is remedied; and
(ii) the reasonable costs incurred as a result of the default and any interest payable are paid.
158General condition 28 is in the following terms:
28. Default Not Remedied
28.1All unpaid money under the Contract becomes immediately payable to the Vendor if the default has been made by the Purchaser and is not remedied and the costs and interest are not paid.
28.2 The contract immediately ends if:
(a)the default notice also states that unless the default is remedied and the reasonable costs and interest are paid, the Contract will be ended in accordance with this general condition; and
(b)the default is not remedied and the reasonable costs and interests are not paid by the end of the period of the default notice.
28.3If the Contract ends by a default notice given by the Purchaser:
(a) the Purchaser must be repaid any money paid under the Contract and be paid any interest and reasonable costs payable under the Contract; and
(b)all those amounts are a charge on the land until payment; and
(c)the Purchaser may also recover any loss otherwise recoverable.
28.4 If the Contract ends by a default notice given by the Vendor:
(a)the deposit up to 10% of the Price is forfeited to the Vendor as the Vendor’s absolute property, whether the deposit has been paid or not; and
(b)the Vendor is entitled to possession of the property; and
(c)in addition to any other remedy, the Vendor may within one year of the Contract ending either:
(i)retain the property and sue for damages for breach of contract; or
(ii)resell the property in any manner and recover any deficiency in the Price on the resale and any resulting expenses by way of liquidated damages; and
(d)the Vendor may retain any part of the Price paid until the Vendor’s damages have been determined and may apply that money towards those damages; and
(e)any determination of the Vendor’s damages must take into account the amount forfeited to the Vendor.
28.5The ending of the Contract does not affect the rights of the offended party as a consequence of the default.
159The evidence shows that the vendor did not serve a default notice when the plaintiffs, through their solicitor, advised Yuan’s solicitor on the morning of Friday 6 December 2019 that they were unable to secure sufficient finance to settle the contract and they were unable to complete settlement of the transaction.
160On 9 December 2019, the vendor’s solicitors advised the plaintiffs’ solicitors in writing that she accepted the plaintiffs’ repudiation and reserved all her rights under the contract.
161I find that, because the plaintiffs repudiated the contract and the vendor accepted the repudiation on the next working day, there was no utility in sending a default notice to the plaintiffs because the contract was at an end (save for any accrued rights).
162Clause 28.4 assumes that the contract ends due to a default notice given by the vendor to the plaintiff. This raises the question of what entitlement the vendor has to forfeit the deposit in the absence of such a notice.
163The decision of Plumor Pty Ltd v Handley[95] indicates that the vendor retains its rights to the deposit. In that case, the plaintiff agreed to sell a residential property to the defendant for $1.705 million with a $173,000 deposit. The defendant was an individual not normally resident in Australia. As a result, he was subject to provisions within the Foreign Acquisitions and Takeovers Act 1975 (Cth).
[95] (1996) 41 NSWLR 30
164The contract included a special condition whereby the contract was subject to the purchaser obtaining the consent of the Foreign Investment Review Board to the purchase within 14 days. If he failed to obtain the consent within that time, or such further time as the parties agreed, then either the purchaser or the vendor could rescind upon giving written notice. The purchaser was to apply for consent within 24 hours of signing the contract.
165The buyer did not obtain the requisite approval within 14 days and no further time was agreed. By letter dated 25 May 1994, the defendant’s solicitor purported to rescind under the special condition. On 14 June 1994, the vendor’s solicitor purported to terminate on the ground that the buyer’s rescission constituted a wrongful repudiation of the contract.
166The court found that the failure to obtain the approval within 14 days was due to the buyer breaching his contractual obligations by failing to do all that was reasonably necessary to obtain the consent.
167The court accepted that the vendor’s letter of 14 June validly terminated the contract of sale in reliance upon the buyer’s repudiation.
168The defendant argued that the termination for repudiation due to the buyer’s anticipatory breach did not fall within clause 9 of the contract which expressly provided for the retention of the deposit by the vendor where the purchaser failed to comply with an essential aspect of the contract.
169Notwithstanding this argument, the court held that the plaintiff vendor was entitled to retain the deposit. The court said that this outcome did not depend upon an express term of the contract. Rather, the entitlement was inherent in the character of a deposit as an earnest or guarantee of performance by the purchaser.[96] There was nothing in the contract of sale to exclude that entitlement where there was a termination at general law as a result of the purchaser’s repudiation.
[96]Plumor v Handley (1996) 41 NSWLR 30 at 39. This proposition is consistent with authorities such as Howe v Smith (1889) 27 Ch D 89 and Hall v Burnell [1911] 2 Ch 551 which describe the nature of a deposit as an earnest to the bind the bargain and guarantee for the fulfilment of the contract.
170For the reasons set out above and where:
· the deposit was a reasonable amount and represented a mutually fair and proportionate security for due performance of the contract by the purchasers
· the deposit was paid in the context of the sale of land
· the plaintiffs signed an unconditional contract understanding the risk to which they were subject
· the vendor did not, directly or indirectly, conduct herself in a manner which could be described as misleading, deceptive or unconscionable; nor did she materially contribute to the plaintiffs’ inability to obtain finance
· there was no windfall in the vendor’s favour and, even if there were, that factor alone is not usually enough to justify an order in the plaintiffs’ favour
· the return of the deposit to the purchaser in this scenario pursuant to section 49(2) of the PLA is the exception not the rule
the circumstances are not sufficiently special or exceptional to warrant the court making an order under section 49(2) of the PLA.
Issue 2: Are the plaintiffs entitled to be repaid the payment of $309,000 they made to the defendant on some other basis under common law or equity?
171As discussed above, there is no jurisdiction under common law or equity to relieve against the forfeiture of a reasonable deposit. I am satisfied that the deposit in this case was reasonable. It was fixed at 10% of the purchase price which is the customary deposit in conveyancing transactions in Victoria.
172Furthermore, I have found that the vendor did not engage in any conduct which could be described as unconscionable, misleading or deceptive. The vendor made no false representations to the plaintiffs in relation to the contract and has done no more than assert her rights under the contract.
173I find that, in the circumstances, there is no basis under common law or equity which entitles the plaintiffs to repayment of the deposit.
Issue 3: Are the plaintiffs entitled to repayment of some other amount by the defendant?
174The plaintiffs submit that, if I were not minded to order repayment of the deposit in full, they ought be entitled to repayment of some of the deposit sum. They contend that it would be reasonable for repayment of an amount which deducts only the losses suffered in the financial year ending 30 June 2020 from the deposit sum.
175I have concluded that there is no proper basis under statute, common law or equity which entitles the plaintiffs to repayment of their deposit. In so finding, I am satisfied that the vendor is doing no more than asserting her contractual right to forfeit the deposit sum and that she is entitled to that deposit.
Issue 4: If the plaintiffs are entitled to repayment of any amount paid to the defendant under the contract of sale, is the defendant entitled to set-off any loss and damage suffered as a result of the plaintiffs’ default?
176I have found that the plaintiffs are not entitled to repayment of the deposit or any part thereof. However, if I had found that the plaintiffs were entitled to the return of the deposit, the defendant contends that she would be entitled to a set-off of any loss and damage suffered as a result of the plaintiffs’ default.
177The defendant submits that the power to order a set-off is inherent in the court’s discretion under section 49(2) of the PLA.
178In Chatham v Coral Park[97] Daly AsJ remarked that the “all or nothing” effect of section 49(2) could be ameliorated by imposing conditions on the making of the order.[98]
[97](2020) 66 VR 171
[98]Ibid at [323]
179In that case, the plaintiffs sought to purchase a racehorse breeding and training facility from the defendant vendor. The parties agreed upon a purchase price of $5.05 million with a 5% deposit being payable upon the execution of the contract of sale. Settlement was postponed twice due to the purchasers’ difficulty in obtaining finance. Two days prior to the anticipated settlement, the plaintiffs inspected the property and it became apparent that, contrary to their expectations, they would not obtain vacant possession of the property upon settlement. The purchasers purported to terminate on the basis that the section 32 statement was deficient as it failed to specify that there was a lease to a third party which could prevent them from gaining vacant possession. The vendor denied the statement was deficient and said that, if the purchasers failed to complete the purchase, the deposit monies would be forfeited to the vendor.
180Her Honour found that the purchasers were entitled to rescind the contract of sale under section 32K(2) of the Sale of Land Act 1962 (Vic) and ordered that the deposit be repaid to them. However, Her Honour said that if she were wrong about the purchasers’ entitlement to do so, she would have made an order for the return of the deposit under section 49(2) of the PLA subject to a condition that the purchasers pay the vendor’s costs thrown away by reason of the failure of the purchasers to settle the purchase of the property. Such costs were defined as the legal costs incurred by the vendor between the date of execution up to and including the date of the scheduled settlement.
181If I had found, exercising my discretion under section 49(2), that the plaintiffs were entitled to the return of their deposit, I would have allowed for the deposit amount to be set off by the loss suffered by the defendant.
182As set out above[99], the deposit plays more than one role in a conveyancing transaction. I am not satisfied that, in circumstances where the failure to perform cannot be attributed to the conduct of the vendor, the vendor should suffer a loss in defending the claim.
[99]See above at [38]
183In Chatham[100], both parties were at fault in failing to be ready for settlement: the purchasers did not have sufficient funds available and the vendors could not give vacant possession and failed to disclose the existence of a lease with a third party. Here, Yuan’s conduct did not contribute in any material way to the plaintiffs’ inability to secure finance in time for settlement.
[100](2020) 66 VR 171
184If I had ordered a return of the deposit under section 49(2), such an order would have been subject to the condition that the plaintiffs pay Yuan’s costs and losses incurred as a result of the plaintiffs’ default.
Issue 5: If the defendant is entitled to set-off, what is the amount of that set-off?
185The defendant submits that her costs incurred as a result of the plaintiffs’ default are set out as follows:
(a) commission paid to Feng in the sum of $31,500.
(b) legal costs of Oakfair Lawyers totalling $3,033.80
(c) interest of $3,781.00 calculated between 6 December 2019 and 9 December 2022 at 16% per annum based on the outstanding amount of $2,875,089.43 and pursuant to Special Condition 13.5(f) of the Contract
(d) $91,666.90 being the defendant’s net loss incurred in the period between default and re-sale.
186The plaintiffs contend that only the expenses from the first year following repudiation were foreseeable and any set-off, if allowed, should be limited to $38,192 being the sum of these losses.
Commission
187The invoice issued by RT Edgar to Yuan for the payment of commission states that the commission payable to the agent is 1% of the sale price namely $31,900. The invoice was issued on 2 July 2019, after the contract of sale was signed but before settlement was due to occur. Payment of the commission was received by RT Edgar in September 2019.
188Presumably, Yuan incurred a similar commission fee, albeit slightly higher given the increased purchase price, in 2021 when she contracted with new purchasers to sell the Property.
189There is an unexplained discrepancy of $400 between the figure submitted by the defendant and the figure stated in the invoice. It is of little consequence.
190The plaintiffs questioned Feng’s right to retain the commission paid by Yuan after the sale fell through. Without any evidence as to the terms of the commission agreement between Yuan and RT Edgar, I cannot be certain when this commission became payable. However, my experience over more than 40 years of dealing with cases regarding real estate agents leads me to believe that it is most likely the commission became payable once there was a binding unconditional contract to sell the Property.
191Feng’s evidence was that the money is in the trust account of the real estate agents until settlement and when the case is closed, the vendor takes out whatever belongs to them and the remaining funds constitute the commission.[101] However, she also gave evidence that the commission was payable upon receipt of the deposit, not upon completion of the contract.[102]
[101]T 66-7
[102]T 67
192I am satisfied that, but for the plaintiffs’ default, Yuan would have incurred only one commission fee because the real estate agents would not have needed to prepare the Property for sale a second time. Accordingly, I would allow this element of the set-off.
Legal costs
193Yuan claims $3,033.80 for the legal costs of Oakfair Lawyers pursuant to Special Condition 13.5 of the contract of sale which reads:
“Despite General Condition 27.1 and without limiting General Condition 28, the Purchaser hereby agrees and acknowledges that should the Purchaser be in default under this Contract then it shall indemnify and reimburse the Vendor for all reasonably foreseeable loss, damages or expenses whether or not any written default notice has been served on the Purchaser, which shall include but are not limited to:
(a) Additional legal fees calculated at the rate of $220.00 per hour for each default for advising the Vendor of the Purchaser’s inability to settle, advice regarding Vendor’s rights to penalty interest and rescission of contract, communications with the Purchaser’s representative and such other attendances as may be required;
(b) All costs, charges, expenses and damages which are incurred or suffered by the Vendor arising from any default in payment of money due or from any breach or failure by the Purchaser to observe any of the terms and conditions of this Contract;
(c) All penalties or other expenses incurred by the Vendor arising from the default;
(d) All additional costs incurred by the Vendor including, without limitation, interest, discount on bills and borrowing expenses in relation to this Property or any other property which the Vendor now or later purchased in anticipation of or in reliance upon this Contract; and
(e) Should a Notice of Default be served on the Purchaser, the sum of $880.00 being the Vendor’s legal costs for preparing and serving each Notice of Default on the Purchaser; and
(f) The provisions of General Condition 26 shall not apply to this Contract. If the Purchaser defaults in payment of any money under this Contract then interest at the rate of 16% per annum computed on the moneys due and payable during the period of default shall be paid by the Purchaser upon demand without prejudice to any other rights powers and remedies of the Vendor under this Contract or otherwise.”
194The defendant did not provide any evidence as to how this cost figure was arrived at but the figure does not seem to be contested by the plaintiffs and appears to me to be reasonable. I would also allow this element of the set-off.
Interest
195I note that there is a discrepancy between the interest figure and the dates provided by the defendant and infer that the sum of $3,781.00 is calculated between 6 December 2019 and 9 December 2019 (not 2022 as stated in the defence and submissions).
196Accordingly, the defendant is only claiming interest at 16% per annum, pursuant to Special Condition 13.5(f) of the Contract, on the outstanding amount of $2,875,089.43 for the three days between when the contract was repudiated by the plaintiffs and when the defendant accepted that repudiation. This seems reasonable.
Net loss
197The net loss incurred by Yuan between default in December 2019 and re-sale in October 2021 is calculated to be $91,666.90. Yuan tendered at trial her tax returns for the financial years ending 30 June 2020, 30 June 2021 and 30 June 2022 respectively. I attach as Annexure A to these reasons a table setting out details of the expenses in relation to the Property which Yuan says she incurred during these financial years. In summary:
(a) in the financial year ending 30 June 2020, Yuan says that she earned rental income of $35,850 and incurred costs of $74,042.64 thereby incurring a loss of $38,192.64;
(b) in the financial year ending 30 June 2021, Yuan says that she earned rental income of $67,065 and incurred costs of $76,271.60 thereby incurring a loss of $9,206.60;
(c) in the financial year ending 30 June 2022, Yuan says that she earned rental income of $1,082 and incurred costs of $45,349.66 thereby incurring a loss of $44,267.66.
198At the hearing, the plaintiffs queried whether the whole of the loss claimed by the vendor was referable to the plaintiffs’ breach of contract which occurred only in December 2019.
199I consider that part of the plaintiffs’ concerns on this issue are justified. In the financial year to 30 June 2020, the amount claimed for interest is $62,720.86. That this represents the interest payable for the full 12 months is confirmed by the interest figure ending 30 June 2021 of $63,562. The defendant did not explain to my satisfaction why the plaintiffs should be responsible for the whole year’s interest when the defendant herself would have had to pay the interest in any case on her own account up until settlement in December 2019.
200If I had been minded to grant the plaintiffs’ application subject to the condition that the plaintiffs pay costs and expenses representing the defendant’s losses arising from the repudiation of the contract, I would not have been inclined to allow the full amount claimed by the defendant. I would have reduced the interest claimable in the June 2020 financial year by approximately five twelfths, giving an interest amount of about $36,587. This mean the claimable loss for that year was about $1,605.
Conclusion
201For the reasons set out I find that the circumstances are not sufficiently special or exceptional to warrant the court making an order under section 49(2) of the PLA. Further, I find that there is no basis under common law or equity which justifies the repayment of the deposit to the plaintiffs. Accordingly, the plaintiffs’ claim must fail.
202I direct the parties to confer about the form of final order and costs in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4:00pm on 9 November 2023, each party is to file with my chambers and serve a written submission setting out the final orders sought and the reasons therefor. The submissions are not to exceed five A4 pages, a minimum 14-point typeface, 1.5 spacing and 40mm margins on either side of the page. Unless I consider it desirable or the parties require it, I propose to determine the question of final orders and costs on the papers without an oral hearing.
ANNEXURE A
EXPENSES IN RELATION TO THE PROPERTY FY2020-2022
| FY2020 | FY2021 | FY2022 | |
| Advertising for tenants | $814 | -- | -- |
| Council rates | $3,997.22 | $7,950.68 | $4,094 |
| Gardening | $85 | -- | -- |
| Insurance | $1,307.83 | $1,370.69 | $1,507 |
| Interest expenses | $62,720.86 | $63,568 | $39,580.66 |
| Agent fees | $4,576.53 | $2,255.85 | $69 |
| Repairs | $99 | $737.38 | $99 |
| Sundry expenses | $442.20 | $395 | -- |
| Sub-total of holding costs | $74,042.64 | $76,271.60 | $45,349.66 |
| Rental Income | $35,850 | $67,065 | $1,082 |
| Net loss | $38,192.64 | $9,206.60 | $44,267.66 |
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