Vendor Disclosure & Warranty

AUSTRALIAN INSTITUTE OF CONVEYANCERS (NSW DIVISION) 2017 EDUCATION PROGRAM Vendor Disclosure & Warranty PRESENTED BY: TONY CAHILL 10 APRIL, 2017 CROWNE PLAZA NEWCASTLE CNR MEREWETHER STREET & WHARF ROAD, NEWCASTLE AUSTRALIAN INSTITUTE OF CONVEYANCERS (NSW DIVISION) Vendor disclosure and warranty Tony Cahill Legal Commentator and Author TABLE OF CONTENTS About the author ..................................................................................... iii Purpose of investigations 1 The general law duty of disclosure 2 Statutory intervention – the “anti-gazumping” legislation 6 The range of investigations 7 The timing of investigations by the purchaser 7 Some issues regarding section 149 certificates 8 Some issues regarding drainage diagrams 19 Building certificates 20 Swimming pools 23 Home Warranty Insurance and Vendor Disclosure 25 Changed disclosure obligations as from 15 January 2015 33 A summary of the home warranty provisions 37 Mine Subsidence Compensation Act – a “special” warranty 41 – – i – – – ii – ABOUT THE AUTHOR Tony Cahill started practice in 1981. After 13 years with a medium-sized city law firm, Tony commenced practice on his own account at Chatswood until June 2002. Tony is currently undertaking a ’sabbatical’ from private practice to concentrate on projects in continuing professional education. Tony is a member of the Law Society’s Property Law Environmental, Planning and Development Committees. He has been a member of the Re- Draft Committees for the 2000 and 2004 editions of the Contract for the Sale of Business, and the Contract for the Sale of Land since the 1992 edition. Tony was a co-author with Russell Cocks and Paul Gibney of the first New South Wales edition of 1001 Conveyancing Answers, and is currently a co- author of the Conveyancing Service New South Wales, and Annotated Conveyancing and Real Property Legislation New South Wales, both published by LexisNexis. Tony is also the General Advisor on the recently released online product LexisNexis Practical Guidance – Property Law Module. Tony has been a part-time lecturer at the University of Technology, Sydney, in subjects including Construction Law, Legal Studies, and Real Estate Law, and a part-time lecturer at the Sydney and Northern Sydney Institutes of TAFE in various law subjects. He lectures in the Applied Law Program at the College of Law, Sydney. – – iii – – – iv – Vendor disclosure and warranty Tony Cahill ____________________________________________________________ Purpose of investigations When acting for a vendor, investigations can be undertaken for several purposes: ➢ to enable the vendor to comply with disclosure obligations imposed under the general law; ➢ to enable the vendor to comply with statutory disclosure obligations (principally under the Conveyancing (Sale of Land) Regulation 2010 Schedule 1, but also, for instance, under the Home Building Act 1989); ➢ to determine whether there are circumstances which may give rise to a breach of statutory warranty (Conveyancing (Sale of Land) Regulation 2010 Schedule 3); ➢ to preclude objection to a breach of an implied term (Conveyancing (Sale of Land) Regulation 2010 Schedule 2); ➢ to comply with non-statutory disclosure obligations imposed under the contract (for example, the provision of a section 109 certificate); ➢ to check whether it is necessary to preclude objection to a matter affecting the property via an express term of the contract (typically clause 10.1.9, but also note clause 17 dealing with disclosure of tenancies); and ➢ to facilitate the transaction – even where disclosure is not strictly necessary, it may be helpful in the marketing of the property or in encouraging a cautious purchaser to proceed to exchange. From the purchaser’s perspective, investigations may be undertaken: ➢ to investigate the quality of the property being sold; ➢ to test the validity of statutory warranties; ➢ to verify information supplied by third parties (for instance, obtaining certificates of currency to verify information in a section 184 (formerly section 109) strata information certificate); – 1 – Vendor disclosure and warranty Tony Cahill ➢ to quantify any adjustable rates, levies and charges affecting the property; and ➢ to determine whether any amount is owing to an authority which may give rise to a charge on the land. The general law duty of disclosure The general principles regarding the vendor’s duty of disclosure are as follows: 1. The vendor will generally have to disclose any latent defects in title. A latent defect is one which is generally not discoverable on an inspection of the property. Some examples include: drainage or sewerage easements not discoverable from a surface inspection (Micos v Diamond (1970) 72 SR (NSW) 392); restrictive covenants (Re Roe and Eddy’s Contract [1933] VLR 427); or an undisclosed public or private right of way (Ashburner v Sewell [1891] 3 Ch 405). 2. A purchaser’s remedies for failure to disclose a latent defect in title will depend on the gravity of the defect. If the defect is “serious” or “substantial”, the purchaser can terminate the contract, or seek specific performance with compensation. In any other case, the purchaser’s remedy will be the usual “error or misdescription” remedy of compensation. 3. Whether or not the vendor knew about the defect at the time of making the contract is irrelevant. The purchaser’s state of knowledge is relevant. If the defect in title was irremovable (that is, could not be rectified by a payment of money – for example, a mortgage would not be an irremovable defect, and so the fact that the purchaser knew of an existing mortgage would not of itself mean the purchaser was taking title subject to the mortgage) and known to the purchaser (which knowledge includes an awareness that it is intended that the purchaser take subject to the encumbrance), then the purchaser will have to “put up with” the defect, in the absence of an express contractual obligation to provide an unencumbered title. 4. A vendor does not have to disclose a patent defect in title – one which is visible to the eye, or which is discoverable by the exercise of reasonable care when inspecting the property. For such – 2 – Vendor disclosure and warranty Tony Cahill defects the principle of caveat emptor – let the buyer beware – applies. Courts have been reluctant to find that a defect in title is patent in any but the most clear-cut cases. For example, in Yandle & Sons v Sutton [1922] 2 Ch 199, a track was situated on the property. The track ran, irregularly, from one side of the property to the other, and showed signs of periodical use by a number of people. The Court held the matter was latent rather than patent on the basis that even though the track’s use was reasonably apparent to the naked eye, this did not necessarily indicate a legal right to use the track (it was, in fact, a public right of way). 5. If the defect is a defect in quality – whether latent or patent – the principle of caveat emptor again applies. Some common examples of defects in quality include: ➢ town planning restrictions (Pottinger v George (1967) 116 CLR 328; Lavery v Nelson (1984) NSW ConvR ¶55-169; Carpenter v McGrath (1996) 40 NSWLR 39); ➢ breach of development consent provisions (Sullivan v Dan (1997) NSW ConvR ¶55-805); ➢ structural danger of a building (Kadissi v Jankovic [1987] VR 225); ➢ termite infestation (Eighth SRJ Pty Ltd v Merity (1997) NSW ConvR ¶55-813); ➢ flood-prone land (Maybury v Constantinou (1984) NSW ConvR ¶55-171); ➢ a consolidated coal mining lease (Borda v Burgess [2003] NSWSC 1171: 11 December 2003, per Young CJ in Eq); and ➢ the lack of home warranty insurance (or its predecessor) under the Home Building Act 1989 (Festa Holdings Pty Ltd & anor v Adderton & ors [2004] NSWCA 228, 13/7/2004, discussed in more detail below). The caveat emptor rule is subject to a number of important qualifications. 1. Where the vendor has fraudulently concealed a defect in the property (for example, a serious structural fault is concealed by the vendor), the vendor intending that the purchaser acts on the – 3 – Vendor disclosure and warranty Tony Cahill concealment and the purchaser does so. Some of the leading cases have involved papered-over settlement cracks (Anderson v Daniels (1983) NSW ConvR ¶55-144); subsidence (Gronau v Schlamp Investments (1975) 52 DLR (3d) 631); or, in one case, even a cockroach infestation (Rowley v Isley [1951] 3 DLR 766). 2. Where the vendor has made a representation about the property, and that representation is untrue, the fact that the matter is one of quality will not necessarily preclude action. 3. Where the contract involves a house under construction or to be constructed by the vendor, there is an implied term that the house will be constructed in a proper and competent manner, using proper materials, and the end result will be reasonably fit for human habitation (Barber v Keech (1987) 64 LGRA 116). If these matters are expressly dealt with in the contract there will, of course, be no room for the implied term to operate. 4. The failure by a vendor to disclose an important defect in quality may be relevant to the exercise of a court’s discretion regarding an action commenced by the vendor for specific performance of the contract or an action by the purchaser seeking a refund of deposit under section 55(2A) of the Conveyancing Act 1919. 5. The purchaser may in some situations have a remedy under the Competition and Consumer Act 2010 for misleading or deceptive conduct relating to an otherwise non-actionable defect. For a useful discussion of the principles see Clancy v Prince [2001] NSWSC 85; [2001] ANZ ConvR 354; (2001) NSW ConvR ¶55-981; [2001] ACL Rep (Issue 5) 355 NSW 24. A recent case of interest raising issues of misleading conduct by silence is Hinton & Ors v Commissioner for Fair Trading [2006] NSWADT 257; affirmed on appeal – Hinton & Ors v Commissioner for Fair Trading, Office of Fair Trading (GD) [2007] NSWADTAP 17.

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