Off the plan sales: when does an amendment to a plan of subdivision materially affect a lot?

  • Author : Bill Stark - 02-05-2013

Justice Judd of the Supreme Court of Victoria this week handed down a decision about whether an amendment to a plan of subdivision materially affected a lot, entitling the purchaser to rescind the contract and have the deposit repaid from the vendor (see Lockwood v PSP Investments P/L [2013] VSC 10).

Background

In January 2010 the plaintiff (“Lockwood”), entered into eight contracts of sale of real estate with the defendant, PSP Investments Pty Ltd. Four contracts related to apartments, and four contracts related to car parks to be constructed on the Ecosquare site. Each contract was for the sale of land ‘off the plan’ and as a result section 9AA of the Sale of Land Act 1962 applied.

The price of each apartment was $215,000. A deposit of $21,500 was paid on each. The price of each car park was $45,000. A deposit of $4,500 was paid on each. There were to be only 10 car parks, but 86 apartments.


 

The proposed development was for seven levels of apartments constructed over a ground floor providing car and bicycle parking.

In early 2012, the City of Port Phillip required the deletion of the car park lots from the Plan of Subdivision. As a consequence, they would merge into ‘common property’.

The amendment was first disclosed to Lockwood after the plan had been registered.

As a result of these changes, Lockwood rescinded each of the contracts for sale for lots 609, 611, 709 and 711 pursuant to section 9AC(2) of the Sale of Land Act and asked for the deposit monies paid for each of the eight lots to be refunded immediately.

The developer’s lawyers argued that Lockwood signed eight separate contracts and each contract stands alone.

The issue between the parties was whether the deletion of the car park lots and the consequential failure of those contracts, permitted Lockwood to rescind the apartment contracts under s 9AC(2) of the Transfer of Land Act.

Lockwood also contended that there were other amendments to the Plan of Subdivision that permitted rescission of the apartment contracts, even if not permitted to do so by reason alone of the deletion of the car park lots and the consequential failure of those contracts. There were changes to the configuration of the apartments; that lot 800 had been deleted; and that common property had increased. He also alleged a change to each lot entitlement.

Justice Judd concluded (At paragraph 10) that:

  1. Under Section 9AC(1), the defendant developer was required to notify Lockwood of the ‘proposed amendment’ following its request for amendment and before registration.
  2. Lockwood’s right to rescind was only available if the amendment to the Plan of Subdivision, once made, would materially affect the lot to which the contract relates.

The defendant contended that:

(a) The material effect must be adverse or ‘affect rights deleteriously’ that it must involve a change of substance of that contracted for and that the effect of the change on a lot must be determined by an assessment of entitlements and liabilities only in relation to that lot;

(b) The deletion of the car park lots, and the consequential failure of those contracts, did not have any material effect upon the apartment contracts and resulted in an insignificant adjustment to lot entitlements;

(c) The contracts were not conditional one upon the other;

(d) There was no basis to contend that the bundle of eight contracts should be considered as a whole, or that an apartment lot and car park lot should be considered as connected or interdependent; and

(e) S 9AC(2) of the Transfer of Land Act should be construed to limit the material effect to one prejudicial or deleterious to the purchaser’s rights.

Lockwood contended that even if an amendment had the effect of improving rights, it would nonetheless materially affect the lot to which the contract related. He argued that whether or not a purchaser elected to rescind was beside the point.

Judd J referred to the decision in Besser v Alma Homes Pty Ltd, [2012] VSC 460 where Pagone J considered that question. His Honour held:

Whether an amendment will materially affect the lot to which the contract relates is something to be determined objectively. A change in entitlement and liability is something which may materially affect the lot to which a contract relates.

Whether an amendment will materially affect the lot is not to be judged by reference to the reason the amendment is made but by objective facts and circumstances. Nor is it to be judged by reference to whether a person in the position of the party affected by the amendment might not, or that some might think the party affected should not, elect to rescind. The amendment of the entitlements and liabilities of the lot owners affects them in various ways. The rights of the owners in this subdivision are governed by the Owners Corporation Act 2006 (Vic). Section 74 provides that a lot owner with more than 25% lot entitlements has the right to call a special general meeting and, by s 83, the right to call a ballot. One of the ways to obtain a quorum under that Act for the purposes of decision-making by owner corporations can be by “at least 50% of the total lot entitlement”. A special resolution can be placed by ballot or poll passed by “75% of the total lot entitlements of all of the lots affected by the owners corporation”. Lot entitlement also affects votes at a standard meeting. It is not possible to forsee the issues that may arise in relation to the property in the subdivision and, in particular, to the common property. However the change does have an effect upon Lot 4 by reducing the entitlements and liabilities attaching to the lot.

Judd J agreed with the conclusion of Pagone J that the amendment need not be detrimental.

As section 9AA does not expressly require proof of detriment, His Honour concluded (at paragraph 27) that:

… there is no occasion to impose upon a vulnerable purchaser the additional burden of proving detriment if the purchaser, seeking to rescind, is able to establish that the amendment will ‘materially affect the lot’ to which his contract relates. I am of the opinion that it is unnecessary for the plaintiff to establish that the amendment of the plan was detrimental, deleterious or otherwise prejudicial in addition to establishing that it will materially affect the lot to which the contract relates. Of course, an objectively defined deleterious effect on the rights of a purchaser under a contract may more readily establish materiality.

Judd J accepted that Lockwood had purchased eight lots that were part of a development scheme, the essential elements of which changed with the amendment. There were three relevant elements. The existence of 10 car park lots and lot 800; and the common property. The change had the effect of enlarging the common property, thus changing the corresponding rights and obligations of the owner of each apartment lot. Whether or not the eight contracts, or each pair of contracts (apartment and car park lot), could be considered together when assessing the material effect on an apartment lot, the project or scheme had undergone such a change with the elimination of the car park lots and lot 800 as to materially affect each apartment lot. The subject matter of the apartment contracts had changed, not only because the defendant could not perform the car park contracts, but because the scheme, plan, or project under which the apartment contracts had been made had changed in material respects.

Lockwood also argued that each contract for an apartment lot precluded the defendant from reducing ‘the actual size area of any car park sold to the Purchaser without the consent of the Purchaser’. The point of this argument was to establish the interdependency of each contract for the sale of an apartment lot and a contract for the sale of a car park.

However, Judd J concluded (at paragraph 37) that:

The attempt by the defendant to drive a wedge between each contract, and in particular the apartment and car park contracts, overlooked that which must have been apparent to any reasonable bystander. There was a symmetry to the transaction. Ordinary common experience compels the conclusion that both parties would have understood that the acquisition of a car park, in short supply, would enhance the value to [Lockwood] of each apartment. The transaction, viewed as a whole, was in substance the acquisition of four packages, each of which consisted of an apartment and a car park. It is entirely artificial to look only at each individual contract, on a standalone basis, when considering the impact of an amendment to the plan on a particular lot and contract.

And at paragraph 38:

I find that the deletion of all car park lots, and the inability of the defendant to complete those contracts, materially and adversely affected each apartment lot.

At paragraph 40, His Honour decided:

 … an analysis of the proportional entitlement and liability is not determinative. Such an analysis overlooks the various elements of the project in which [Lockwood] invested, the obvious connection between the apartments and car park lots, and the consequential change to the project from one in which there would be 10 privately owned car park lots to a project in which the ground floor and the whole of the rooftop became common property.

At paragraphs 42 and 43, His Honour decided:

Even if the Court were to consider each apartment lot and contract in isolation, as the defendant would have it, the amendment will materially affect each lot to which an apartment contract related. The amendment brought about a substantial change by increasing the common property. On one view, the change might be thought to be beneficial to an apartment lot. The plaintiff contended that, beneficial or not, the increase in the common area had a material effect on each apartment lot because of the operation of s 30(1) of the Owners Corporation Act. That provision vests in the apartment owners, as tenants in common, a substantially greater proportion of common property, than would have been the case under the plan annexed to the contracts. While that contention was focused upon the position of the owners, rather than the effect on the lot as such, it highlights a substantial change in the bundle of rights comprising each apartment lot. Following the amendment, the entitlement of each owner of an apartment lot would be different to their entitlement prior to the amendment.

Such a change in entitlement, even though it might be regarded by some as beneficial would, in my view, materially affect each apartment lot. The effect is significant, and may not be as beneficial some might first think. The change resulted in the conversion of 10 privately owned car parks and lot 800 into common property.

Conclusion

As a result of this decision and Besser, it seems that developers will need to take care to ensure that they comply with the relevant provisions of the Sale of Land Act, 1962 if there are any changes being made to a Plan of Subdivision between a sale off the plan and the registration of the relevant Plan.

It seems also that the Supreme Court of Victoria will support rescinding purchasers when the Plan of Subdivision is altered. Whilst some changes to plans are almost inevitable due to planning issues, they should be kept to a minimum, especially in relation to changing lot entitlements and common property.

About the Author

Bill Stark

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