Allens

Real Estate

Focus: Representations about future matters

11 July 2012

In brief: A recent NSW Court of Appeal decision (under the now repealed Trade Practices Act (Cth)) shows how developers can effectively remove the onus of proving they have reasonable grounds for their representations about future matters. Partner Tony Davies (view CV) reports on the decision and its implications.

How does it affect you?

  • A NSW Court of Appeal decision on representations about future matters (Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200) indicates that:
    • developers can, in effect, remove the burden of proving they had reasonable grounds for a representation by producing evidence that tends to establish they did have reasonable grounds; and
    • oral examination of an experienced representative of the developer may be sufficient, on its own, to reverse the onus.
  • Despite the decision, it is strongly recommended that developers retain documentary evidence for all representations about future matters.

The law

Under section 51A of the Trade Practices Act 1974 (Cth), now replaced by s4 of the Australian Consumer Law (the ACL), if a person makes a representation, without reasonable grounds about a future matter, the representation is misleading. Representations as to future matters are particularly important for developers selling property 'off the plan' as a buyer is totally reliant upon such items as brochures, models, and what a sales person says as the buyer cannot inspect the property for themselves. Therefore, just about everything being relied upon by a buyer would be a future matter whether it relates to the property itself or its amenities. In court proceedings, where a misrepresentation as to a future matter is being relied upon by a buyer, a person making the representations (for example, a sales person) is taken to not have reasonable grounds for making it unless evidence is adduced to the contrary. This means that the developer must place some convincing evidence before the court of material in existence at the time upon which the representation was based. For example, experts' reports, contemporary sales data, local government policy etc. Once the developer has done that, the deeming provisions in s51A(2)(now s4(3) ACL) do not apply and the court has to decide, on the balance of probabilities, whether the developer had reasonable grounds for making the representations. If the court finds that no reasonable grounds existed at the time of the representation, the developer will be guilty of misleading conduct.

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The facts

The developer (Twin Creek's Properties Pty Ltd) was developing an 800-acre rural residential subdivision (called Twin Creeks) in New South Wales. In February 2005, a real estate agent engaged by the developer sold a vacant block of land to Mr and Mrs Awad. The contract of sale settled in late February. The Awads alleged they relied on various representations in the promotional material, reinforced by oral representations made by the agent, in respect of the following matters (which were the subject of the appeal to the New South Wales Court of Appeal):

  • The Twin Creeks development would comprise of 177 residential lots only, each of at least one acre in size; and
  • Peppers Retreats, Resorts and Hotels would manage the proposed resort hotel and various recreational and restaurant facilities at Twin Creeks.

The Awads alleged that the representations turned out to be false. They claimed that, as a result of the developer's misleading and deceptive conduct, they were entitled to rescind the contract of sale and retransfer the property back to the developer (with appropriate recompense for the false representations).

The Supreme Court (at first instance) held that only the representation relating to Pepper's management of the hotel and certain facilities was misleading or deceptive. However, the court did not grant rescission of the contract of sale but awarded damages to the Awads.

Both the Awads and the developer appealed to the Court of Appeal (NSW).

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The appeal decision

The Court of Appeal (NSW) handed down its decision on 3 July 2012. The key aspects were to:

  • The 177 maximum lot issue: The Awads alleged that at the time of the representations relating to the 177 lots, the developer had no intention to proceed in that way. This was because the developer had lodged an application with Council for an approval to construct 80 villas, which had been rejected (in August 2004), and without such approval the development was in serious difficulty. Significantly, the brochure material had stated that the development was strictly limited to 177 home sites.

    The court accepted the evidence of the director of the developer company that the villa rejection did not impact on the project proceeding. The 177 lots of one acre each were in accordance with the planning approval, and the director's oral evidence was clear that the then intention was to proceed with the 177 lots.
     
  • The Peppers management issue: The court accepted the director's evidence that, despite the rejection of the application for the 80 villas (to comprise the resort hotel), the development had a strong financial standing and it was still intended that Peppers would manage the restaurant and bars.

Particularly important was that the court was impressed by the evidence of the director (based on his expertise). The court said that:

he...(was involved in)... 22 past developments ranging in size by value from $1M to $70M... He also identified four projects upon which he was working, one of which was valued at $500M. ...He plainly had deep experience in land development and its commercial undertaking.

The court highlighted that, in considering representations about future matters, if a developer could produce evidence to the contrary to defend a claim of lack of reasonable grounds, then the automatic deeming provision (ie that there were no reasonable grounds) did not apply. Effectively, the onus was removed from the person making the representation but the court had to decide, based on the evidence, whether reasonable grounds existed. Evidence to the contrary must tend to establish, or admit of the inference, that there were reasonable grounds for making the representation.

The court held that the developer had adduced evidence that there were reasonable grounds for the representations – as a result, the Awads had to prove there were not.

The court said:

One could readily infer from Mr Wiesener's evidence that there were valuations and finance in place as at 2004 for the construction of the whole development that did not depend upon the cash flow from the sale of the 80 villas. Thus there was evidence from which one could infer that there were reasonable grounds to represent that the developers would build the one part of the whole development that was in question.

The Awads were unable to contradict the director's evidence and, as a result, failed in their appeal. Accordingly, the developer was successful in its appeal.

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The decision's relevance

The case highlights again that whenever a representation about a future matter is made, there must be reasonable grounds for that representation. However, this case is particularly significant because the developer, merely by the oral examination of one of its directors, was able to produce evidence that tended to establish that there were reasonable grounds for the representation. The experience of the director and his strong performance under oral examination were critical to the developer's success.

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Postscript – Impact of the ACL

The s4 ACL (Schedule 2 of the Competition and Consumer Act) replaced s51A of the Trade Practices Act from 1 January 2011. Significantly s4(3) has expanded the repealed s51A to expressly provide that:

  • merely because the representor has adduced evidence to the contrary, the representor is not taken to have reasonable grounds for the representation.  All that adducing evidence to the contrary achieves is to remove the application of the automatic deeming provision (ie that the representor did not have reasonable grounds);
  • the onus is not placed on any person (for example, the representor) to prove that there were reasonable grounds for the representation. Ultimately the court decides this, based on the evidence.

In addition, under s4(4), even if there are reasonable grounds for a representation, a representation may still be misleading.

These new provisions highlight the absolute importance of reviewing all marketing material and the training of sales/marketing staff (including clear guidelines in sales manuals) to ensure, as far as possible, control of representations made.

For further information, please contact:

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