Allens

Real Estate

Focus: Misleading and deceptive conduct and off-the-plan contract buyers

19 April 2012

In brief: A recent Federal Court decision emphasises that claims of misleading and deceptive conduct do not end after the settlement of an off-the-plan contract and developers must have clear evidence supporting representations as to future matters. Professor Bill Duncan (view CV) (consultant to Allens Arthur Robinson) and Partner Tony Davies (view CV) report on the decision and its implication for developers.

How does it affect you?

  • Settlement of an off-the-plan contract of sale does not close the window on a misleading and deceptive conduct claim under the Australian Consumer Law (ACL) (which embodies the repealed Trade Practices Act 1974 (Cth) (the TPA) provisions).
  • Representations about the future value of a lot are a 'no go' zone for developers and agents.
  • Further, representations about future matters must to be based on firm grounds.

The facts

Dr Bennett entered into a contract in early 2005 to purchase, off the plan, a lot in a proposed group housing development, to be known as Elysium Noosa Community Titles Scheme, for an amount of $2.1 million. The lot purchased comprised a house and land package in stage 1. Dr Bennett completed his purchase in March 2008.

On 20 September 2009, receivers and managers were appointed to Elysium Noosa Pty Ltd (the developer of the scheme) and it was subsequently placed in liquidation.

In May 2010 (approximately two years after the contract had been settled) Dr Bennett issued proceedings claiming misleading and deceptive conduct under the TPA.1 Dr Bennett made a number of claims, including the following:

  • Representations were made that a community centre would be developed (ie a representation about a future matter). The centre was to comprise a business centre with meeting and computer rooms, barbeque and dining facilities, child-minding facilities, tennis court, lap pool, relaxation pool, gymnasium, steam room, massage rooms and yoga deck.
  • Implied representations were made as to the future value of the lot.
  • The selling agents, by their silence, engaged in misleading and deceptive conduct by not disclosing to Dr Bennett that there were insufficient funds to complete the construction of the first stage of the Elysium Noosa Development.

In support of the representations related to the community centre, Dr Bennett relied heavily upon the oral representations made by the selling agents, together with advertising material.

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The law

A person (eg a developer or its agents) must not engage in conduct that is misleading and deceptive or is likely to mislead or deceive (s18 ACL).

In virtually all off-the-plan sales, representations are made about future matters eg what will be built on the land etc. Under the ACL, there must be reasonable grounds for making such representations (s4 ACL). The burden is effectively on the developer to prove there are reasonable grounds.

The ACL embodies the provisions previously contained in the repealed TPA.

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The decision

Justice Reeves gave judgment on 9 March 2012. The key aspects were:

  • the selling agents did not have reasonable grounds on which to make representations about the community centre. This was determined after a detailed examination of the documentation relating to the centre and oral examination of the developer representatives. The judge found there was no development approval, no final plans or design drawings, no construction program, no reliable costings and no genuine commitment to the centre. It was also significant that there was no contractual obligation, or anything in the disclosure documents, relating to the centre;
  • the court did not accept the claim of representations about the future value of the lot. His Honour said '... it may be accepted that in any negotiations for a real estate investment of the kind in the circumstances involved here, both sides to the negotiation may well be proceeding on the unspoken premise that the particular piece of real estate concerned will appreciate in value over time. However, to convert this circumstance into an implied representation... about future value ... would be, in my view, to introduce a radical reallocation of the risk involved in such negotiations, that could not have possibly been intended by... the TPA. The situation may have been different if Dr Bennett had expressly sought to obtain (from the selling agent) an assessment as to the likely future value...' (the highlighting is ours);
  • there was insufficient evidence to support an implied representation as to funding. In any event, the contract of sale provided that the stage 1 works had to be completed for settlement to occur;
  • damages of $500,000 were awarded to Dr Bennett. This was held to be the difference between the purchase price for the lot ($2.1 million) and the agreed value of the lot as at the date of settlement of the contract ($1.6 million). The damages represented the loss suffered by Dr Bennett in entering into the contract based on the misleading representation that the community centre would be built.

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Relevance of the decision

There are two main points to be taken from this decision.

The first is that settlement of a contract does not mean the risk of a damages claim under the ACL based on misleading and deceptive conduct is removed.

The second is that if advertising material or agents are making representations relating to future matters (which is inevitably in regard to off the plan sales), ensure that there are precise parameters on what representations can be made (for example, in a sales manual or Q&A) and that there are reasonable grounds for those representations. Reasonable grounds means more than a mere intention – it means, in regard to proposed improvements, detailed plans and costings, relevant approvals, a construction program etc.

Footnotes
  1. Bennett v Elysium Noosa Pty Ltd (In Liq) [2012] FCA 211.

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