The property market for the sale of apartments in Victoria, Australia has become more challenging recently.
Lockdowns and other restrictions resulting from COVID-19 such as density limits and mask wearing combined with absent foreign buyers, as well as general concern about the viability of some projects, caused banks to impose limits on off-the-plan lending. Further, stamp duty increases have also helped to create downward pressure on values. Finally, we now have upward pressure on interest rates adding to the uncertainty in the apartment market.
In August 2021, Associate Justice Matthews was called upon in the Supreme Court of Victoria to decide an application in relation to Section 9AC of the Sale of Land Act 1962 (see Burger & Ors v Longboat Holdings Group 2 Pty Ltd  VSC 469).
Readers will be aware of the decisions in Besser and Lockwood (see my post of 3 May 2013 - here https://rb.gy/rs1otu) where purchasers of property off the plan were held to be entitled to rescind after material amendments were made to the plans.
Facts in Burger Case
Between when contracts were signed and the plan of subdivision was lodged for registration, the developer made several changes to the Plan. These included:
- decreasing the area of the apartment (predominantly the master bedroom by 4.39%).
- reducing the size of the light court resulting in a decrease of natural light into the master bedroom.
- reducing the size of the common property by vesting part of it in the local council as a council reserve.
- decreasing the area of common property 1 by creating common property 2. Common property 2 was converted into a roof terrace, which the purchaser as a member of common property 1, could not access. Prior to the change, all owners were able to access the roof terrace (however, prior to the changes to the Plan, that terrace was inaccessible to everyone).
- changing the size and location of the car spaces, including reducing the size of one car space by 11% and relocating the other from the top of a car stacker to the bottom.
The developer notified purchasers of the changes (as it was required to do). However, it had not notified the purchasers of several interim alterations.
In response the purchasers of two lots purported to terminate their contracts in accordance with section 9AC of the SLA.
The developer refused to accept each termination and refused to return the deposits on the basis that the changes to the Plan did not materially affect the purchasers’ lots. Developers have traditionally relied upon a less than 5% change in apartment area is being the benchmark to determine that the lot has not been materially affected.
Her Honour disagreed with the developer's position and upheld the termination of each of the contracts by the purchasers and declared that the respective purchasers were each entitled to have their deposits refunded.
In reaching her decision, Matthews As J considered whether each of the changes made to the Plan materially affected the purchasers’ lots.
In her deliberations, the Associate Justice rejected the developer's arguments that there was only a "modest change" to the size of the master bedroom and the total reduction in the size of the lots of 4.39% was less than a 5% reduction in size. The developer argued that a 5% variation had previously been held as "generally regarded as tolerable". In that regard, the developer relied on the decision of County Court Judge Kennedy (as Kennedy JA then was) in Birch v Robek  VCC 68. In that case, the developer had a similar clause in which purchasers acknowledged that a 5% reduction in size did not materially affect the plan. However Judge Kennedy concluded in that case that the purchaser was entitled to rescind the contract and have the deposit paid returned (the change in area in that case was 12%).
It goes without saying that County Court decisions are not binding on the Supreme Court of Victoria. However, Judge Kennedy has since been promoted and is now a Justice of Appeal in the Court of Appeal, at least implying that her decisions should be given more weight.
The developer also relied upon the decision of Teague J in Buckley v DRK  ANZ ConvR 423, where Justice Teague was disposed to see 5% for a suburban allotment at least in a general sense as being if not the most appropriate balance point, then at least a better one than 2% or 10%.
Readers will note that the wording used by Justice Teague is not exact, and certainly left open room for argument in later cases about whether the arbitrary nature of 5% was sufficient to dispose of a claim that the plan had not been materially changed.
Matthews As J concluded:
- Decrease in area - a change in an area of less than 5% can be material, depending upon the location and nature of the change and its effect.
- In this case the Court commented that a reduction in size of almost 4m2 (which effectively reduced the size of the master bedroom by a quarter), ‘to a master bedroom that could hardly be described as palatial prior to the change, is clearly material’ (paragraph 79).
- Additionally, the Court agreed with the purchaser’s argument that the change was exacerbated by the creation of the alcove which created unusable space, making it very difficult for typical bedroom furniture to be manoeuvred into the room. The changes also impacted the ‘attractiveness of the room’.
- Despite providing no expert opinion of the light flow, and the vendor disputing that the size of the light court between the plans had changed, the Court was satisfied the change had materially affected the lots. The Court acknowledged while the change in the light court in isolation may not have been material, in combination with the changes to the master bedroom, the flow of light in to the bedroom was sufficiently impacted.
- The presence of a special condition where the purchasers agreed that a decrease of less than 5% was not material, standard in many off-the-plan contracts, did not protect the developer in these circumstances.
- Light court change - this change was not significant on its own. However, when it was combined with the changes to the master bedroom size, it did materially affect the lots.
- Creation of council reserve - once the council reserve was created, the purchasers no longer had exclusive rights over the area. This change on its own materially affected the lots.
- Change in common property - although the size of the newly created common property 2 was relatively small in the context of the development, the loss of potential use of the terrace was not insignificant and as a result materially affected the purchasers’ lots.
- Car space changes - these changes did not affect the type of car that could use the car spaces. Her Honour concluded therefore that these changes did not materially affect the purchasers’ lots.
Matters to consider
The decision in Burger confirms that no matter what provisions are included in a contract of sale (including the now common acknowledgement that a change in area of less than 5% is not material) it is not possible to contract out of section 9AC.
In reality, the practical impact of any change will always need to be assessed to determine if a change is material.
In those circumstances, developers should include in their contracts of sale off plan, plans of subdivision that are finalised as much as possible and endeavour to keep changes to a minimum.
They should also engage with purchasers affected by material changes to manage the impact of those changes.
Whilst many changes are obligatory in order for the proposed plan of subdivision to be accepted by council, it is always recommended that developers obtain legal advice on the specific changes before they are made to the Plan to manage any risk that a purchaser may rescind.
Since material changes to a plan of subdivision can entitle a purchaser to rescind their off-the-plan contract lawfully, any such rescission can impact a developer's pre-sales and financing arrangements, resulting in reductions to total pre-sales amounts, as well as potential breaches of conditions in development facility agreements.
Developers need to be acutely aware of their financier's conditions in relation to purchasers' rights to rescind contracts and obtain legal advice when entering into financing arrangements which are conditional upon a development's pre-sales.
Developers should also ensure compliance with the strict timeframes set out in Section 9AC, and notify purchasers of changes and potential changes early in an attempt to manage the impact of those changes.
Clearly, communication with purchasers is key.
While the case turns on its own facts, this decision still sounds a warning to developers in increasingly difficult times.
The decision confirms that the attempts by many developers to impose an arbitrary figure of 5% variation on purchasers as being not material will not always be successful.
This post originally appeared on The Melbourne Property Law Blog