Can parties to a Contract of Sale of Real Estate for a sale 'off the plan' agree to make the purchaser responsible for the costs of subdivision?

  • Author : Bill Stark - 20-12-2016

The unanimous decision of the Court of Appeal of the Supreme Court of Victoria in Bisognin v Hera Project P/L [2016] VSCA 322, confirms how important it is for lawyers in Victoria who draw Contracts of Sale of real Estate to take great care in drafting special conditions in the contract. 

The case concerned a dispute over the interpretation of certain special conditions in a Contract of Sale of Real Estate of part of a rural property by the owners to a developer.

Gino Andrew Bisognin and Leah Joan Bisognin ('Mr and Mrs Bisognin') are the joint owners of a rural block at Cranbourne.  In 2012, they received an unsolicited approach on behalf of a developer who was seeking to buy the southern portion of their land.  The developer told Mr and Mrs Bisognin that he proposed to develop the southern portion of their land by the construction of a supermarket. He said he had already discussed the matter with the local municipality. In 2012, the parties entered an agreement for the sale and purchase of a lot on an unregistered plan of subdivision. Subsequently, Hera Project Pty Ltd (‘Hera’) was nominated as the ‘purchaser.’ The contract was in standard form save that it contained a number of special conditions relating to the preparation and eventual registration of a plan of subdivision.  After a delay in performance, Mr and Mrs Bisognin issued a notice of default. Hera commenced proceedings to restrain the termination of the contract.  The proceedings settled on terms that a new contract was to be executed that contained the same special conditions as well as two further special conditions: (1) a sunset clause such that, if the plan of subdivision had not been registered by 25 August 2015, the parties could terminate the contract; and (2) an obligation upon Mr and Mrs Bisognin to use their best endeavours to assist in the registration of the plan.

The appeal (and the original trial) required the Court to interpret the meaning of two of the special conditions in the Contract. 

The proceeding commenced as a summons pursuant to s 49 of theProperty Law Act 1958; the vendors sought answers to three questions that related to the construction of those special conditions in the second contract.  

The developer brought a cross-application seeking injunctive relief against termination of the contract upon the basis that the conduct of Mr and Mrs Bisognin had prevented it registering the plan of subdivision by 25 August 2015.  

The trial judge held that, in order to make good title, Mr and Mrs Bisognin were obliged under the new contract to enter certain agreements and undertake the associated financial obligations to the 'referral authorities' with a view to their providing services such as telecommunications, water and sewerage to the blocks after subdivision.  

The Court of Appeal concluded in essence, whilst ordinarily a vendor would bear the burden of performing all steps required to register a plan of subdivision (including the burden of entering into agreements with referral authorities and making payments to them) the parties here chose to shift the burden from the vendors to the purchaser. That is reflected in the contract that they made.

Special condition 3(a) of the 2012 contract was to the effect that the purchaser:
... shall at its own cost and expense prepare a Plan of Subdivision in respect of the land comprised in the Parcel in or to the like effect of the Plan of Subdivision annexed hereto and submit the same to the City of Casey for sealing in accordance with the provisions of Part 1 of the Act and shall use its best endeavours and do all things reasonably required to expedite and procure the registration of the said Plan pursuant to the provisions of Part II of the Act.
Throughout the period when the relevant contracts were on foot, the parties have engaged in various pieces of litigation. 

The dispute that was resolved by the unanimous decision of the Court of Appeal confirming that Hera was responsible for certain financial obligations to the relevant referral authorities (the sum involved was over $700,000, and possibly as high as $920,000). 

In the application for leave to appeal, Mr and Mrs Bisognin, as applicants, contended that, in reaching her decision, the primary judge erred by failing to read special condition 10 by reference to special condition 2(a) of the second contract, which made it plain that the obligation was with Hera to do all things reasonably required to procure registration of the Plan of Subdivision, and special condition 2(c), which imposed an obligation on Mr and Mrs Bisognin to allow Hera access to the property for the purpose indicated.

Mr and Mrs Bisognin also contended that if the second contract was ambiguous, it is permissible to consider the circumstances surrounding its making. In the standard case, it is the responsibility of a vendor of land to make title.   However, the present case was not standard.  The very existence of the special conditions altered the normal course of things.  There had been no prior consideration to the sale of the property by Mr and Mrs Bisognin.  The primary purpose of this transaction was to facilitate an opportunity for the purchaser to engage in a commercial property development.  The purchaser was to be responsible for the size, scale and nature of the proposed development and, in particular, the construction of it. Litigation occurred because there was delay in the settlement of the first contract. That proceeding was settled on the basis that the 2012 contract was replaced by the second contract. In bringing about the second contract, a sunset clause, which required registration of the plan by 25 August 2015, was added. It was added to address the very matter (the delay in completion) which led to the first proceeding. 

Importantly, special condition 10 was also added. It similarly did not exist in the 2012 contract. Special condition 10 was inserted to impose a specific requirement upon the vendors to cooperate and use their best endeavours and do all those various other matters that are set out elsewhere in the other special conditions. Again Mr and Mrs Bisognin submitted that it requires them to facilitate Hera’s endeavours to procure registration within the time limited by the sunset clause.  They re-emphasised that special condition 10 does not override the primary obligation of Hera under special condition 2. Rather, it provides a level of assistance to Hera so as to help it comply with special condition 2 within the period confined by the sunset clause.

The principal question in the appeal was whether the primary judge erred in holding that, by reason of the terms of the second contract, Mr and Mrs Bisognin were required to enter into the relevant agreements with the referral authorities and to make payments to them under those agreements.  No provision in the agreement expressly dealt with the entry into those agreements, nor with who was responsible for meeting the financial commitments under them.  Accordingly, the question became whether the special conditions imposed the obligation upon Mr and Mrs Bisognin or Hera.

The Court of Appeal noted that the special conditions are expressed in general terms and are poorly drafted.  The Court concluded that consequently, in construing the contract and, in particular, special conditions 2(a) and 10, regard must be had to the text, context and purpose aided by reference to the surrounding circumstances known to the parties at the time that the contract was entered into.

The Court concluded (at paragraph 79) that 
... the effect of the special conditions in the [second] contract is to shift the risk of registration of the plan of subdivision and the financial expenses associated with it from the vendors to the purchaser.  In part, our opinion depends upon the text and context of the special conditions; in part, it depends upon a consideration of the circumstances surrounding the making of the [second] contract.
The Court analysed the use of the word 'procure' in special condition 2(a) and concluded 
It is the word customarily used by lawyers to place the risk of performance of some necessary step onto a party that might not necessarily be able to perform that step without the involvement of another person.  If the step cannot be performed by the party which is charged with procuring it, that party will nonetheless be in breach of covenant if the obligation is not performed.The court also took comfort from the wording of Special condition 10, which it concluded imposed obligations upon Mr and Mrs Bisognin to assist in securing the registration of the plan of subdivision.  One of those obligations is to make ‘the duplicate title available for the purposes of registration’ (of the plan of subdivision).  If the obligation to register the plan of subdivision rested upon Mr and Mrs Bisognin, the Court noted that the obligation cast on them to make the duplicate certificate of title available would be redundant.  The natural meaning of the obligation is that the title is to be made available at the request of someone else: the person charged with the task of registration.

In assisting with the interpretation of the Contract, the Court looked at the circumstance in which this contract was made.  The Court noted that special condition 2(a) formed part of the 2012 contract (as special condition 3). Mr and Mrs Bisognin had taken no steps to develop, let alone sell all or any part of their land.  They were approached by a developer who had already developed plans for the commercial exploitation of the southern portion of their land.  As a matter of common sense, one would not expect Mr and Mrs Bisognin to have taken on the commercial risk involved in the registration of the necessary plan of subdivision.  The cost of registration (including the payment of bonds and fees to referral authorities) was unknown; had it been at the risk of Mr and Mrs Bisognin, the impact on the purchase price might have been very significant and made the sale unattractive.

The Court also concluded that the addition of Special condition 10 as part of the terms of settlement of the 2013 proceeding confirmed that it is best understood as auxiliary to special condition 2(a) and special condition 8.  Unless the plan of subdivision was registered by 25 August 2015, the parties could terminate the second contract. As the risk of registration was to lie with the purchaser, there was every reason to ensure that the process was facilitated by Mr and Mrs Bisognin.

The Court concluded that on its proper construction the second contract required Hera to pay the amounts provided for in the referral agreements, albeit that it was for Mr and Mrs Bisognin to enter into those agreements.  

It is a most unfortunate situation that the parties find themselves in. This is even more especially so due to the fact that the Contract of Sale currently remains on foot, and there is still ongoing litigation about whether the Contract can be specifically performed. 

The lesson here is for lawyers who draft special conditions in contracts of sale of real estate to take extra care in ensuring that the Special Conditions clearly identify the obligations that each party is agreeing to undertake in the relevant Contract.

About the Author

Bill Stark

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