Is it fair for a vendor to rescind a non-compliant property option and keep the payments received?

In an interesting judgment, Emmett AJA has found that a vendor is entitled to rescind and to keep the payments received under two residential property options which failed to comply with section 66ZI of the Conveyancing Act 1919 (NSW).

The judgment is Sieve-Storm Pty Ltd ACN 160 562 354 as trustee for Affordable Property Trust v Murphy [2016] NSWSC 1800 (15 December 2016) in the Equity Division of the Supreme Court of New South Wales.

In this article we examine why the options failed to comply and why the purchaser’s claims for restitution or compensation for the payments made under the options failed.

Why did the options fail to comply with Section 66ZI?

The Conveyancing Act 1919 (NSW) (Division 9 of Part 4: sections 66Z to 66ZK) contains a number of requirements for “Options for Purchase of Residential Property”.

Section 66ZI(2) specifies that required documents are to be attached to the option, namely:

a copy of the proposed contract for the sale of the property, excluding particulars of the purchaser but including particulars of the purchase price; and
the documents required by section 52A to be attached to a contract [i.e. title search, plan, covenants, planning certificate, sewer diagram, and so forth] before signature by the purchaser.

Section 66ZI(1) gives both the vendor (the grantor) and the purchaser (the grantee) the right to rescind the option if the required documents are not attached to the option document at the time it is granted.

The vendor (Murphy) granted two options to the purchaser (Sieve-Storm).

The first option was the Robertson Road Option, which was entered into on 27 July 2013 for a term of 3 years. The option document was a printed form completed by the purchaser. Neither party had legal assistance. The court described the form as “quite ill-suited for the grant of an outright option to purchase”. The form failed to comply with section 66ZI(2) in that the required documents were not attached – neither the proposed contract for sale nor the documents required by section 52A. The vendor rescinded the option under section 66ZI(1) by notice dated 24 March 2016, almost 3 years after it was entered into.

The second option was the Gillies Street Option, which was entered into on 5 September 2013 for a term of 24 months (extendable). The option document was prepared by a lawyer. Both parties had legal advice. The required documents were attached, but contract failed to comply with section 66ZI(2)(a) because the contract did not include particulars of the purchase price. The vendor rescinded the option under section 66ZI(1) by notice dated 24 March 2016, 2 ½ years after it was entered into.

The purchaser accepted at the hearing that both of the options had been validly rescinded.

The purchaser argued that the vendor was estopped by her conduct from asserting that the options were void. The Court observed that estoppel could be raised only if the purchaser had wanted to exercise the option and was able to demonstrate that it was induced either to enter into possession or to make the payments in question by any conduct on the part of the vendor.

In this case, the court did not consider that Ms Karin Siekaup (the sole director of Sieve-Storm) relied upon or was induced by anything done by Ms Murphy, and so no estoppel was raised.

Is the purchaser entitled to a restitution or compensation for unjust enrichment?

Section 66ZE deals with the consequences of a rescission under section 66ZI.

Section 66ZE(1) treats the rescission as being ab initio (i.e. from the date the option was granted), but reserves rights and obligations created by the section.

Section 66ZE(7) contains this statement of rights and obligations:

(7) Either party is entitled to make a claim for:

such compensation, adjustment or accounting as is just and equitable between the vendor and purchaser where the purchaser has received the benefit of possession of the property, or

the payment of damages, costs or expenses arising out of a breach of any term, condition or warranty contained or implied in the option,

The intent of section 66ZE(7) is that neither the vendor nor the purchaser can receive an unfair profit if they rescind the option. This explains why section 66ZI gives the vendor as well as the purchaser the right to rescind an option, even though it might appear unfair for a vendor to have this right, given that the policy underlying Division 9 of the Conveyancing Act 1919 is the protection of prospective purchasers.

The purchaser alleged that it was entitled to compensation because the vendor had engaged in unconscionable conduct within the meaning of the unwritten law and the terms of section 21(1) of the Australian Consumer Law.

Justice Emmett set out these considerations in relation to restitution:

It may be that Sieve-Storm would be entitled to restitution, to the extent that Ms Murphy has benefited from the payments made by Sieve-Storm.

However, allowance would need to be made for a reasonable occupation fee for the possession of the Robertson Road Property and the Gillies Street Property enjoyed by Sieve-Storm. Alternatively, Sieve-Storm would be required to bring to account moneys received by it from the occupiers of the Robertson Road Property and the Gillies Street Property.

The facts in this case did not follow the usual pattern of a purchase option in which a substantial option fee is paid on entry of the option. If the purchaser is granted possession, market rental and outgoings (Council rates, water rates and insurance) are paid.

In this case the purchaser was entrepreneurial. It paid a $1 option fee on entry of the option, was given possession, and paid the vendor’s mortgage payments and outgoings. The purchaser made a profit by sub-letting both properties to occupiers for more money than it paid to Ms Murphy. It also had the opportunity to sell the property at a higher price than the option price.

Justice Emmett made these concluding comments:

No claim for restitution or unjust enrichment has been quantified by Sieve-Storm, nor has Sieve-Storm applied for the taking of accounts. Having regard to the [fact] that Sieve-Storm received more from occupiers that it paid to Ms Murphy, it may be that no such application will be made.

It follows from the conclusions I have reached above that Sieve-Storm has failed to establish any entitlement to relief. The proceedings should therefore be dismissed with costs.

Conclusions

The provisions dealing with Options for Purchase of Residential Property in the Conveyancing Act 1919 contain several ‘trip wires’ which can either be used to treat the option as void (e.g. 66ZG) or to rescind and make the option void (e.g. 66ZH and 66ZI).

Either the vendor or the purchaser can use these ‘trip wires’ to rescind an option.

In this case, the vendor succeeded in rescinding the options without refunding over $50,000 she received under each option and without payment of compensation for unjust enrichment.

The decision is a warning to both the vendor and the purchaser legal advisers that they need to strictly comply with the Conveyancing Act 1919 when entering into an option for purchase of residential property.