Focus: Vendors should leave no stone unturned to obtain statements of compliance
4 October 2012
In brief: A recent Victorian Court of Appeal decision has held that a vendor under an 'off-the-plan' contract of sale, who is required to use its 'best endeavours' to register the plan of subdivision, must, in certain circumstances, enter into a section 173 agreement with the local council. Partner Michael Graves (view CV) and Lawyer Tim Chislett consider the impact of this decision and the role that section 173 agreements have to play in off-the-plan contracts.
- The facts of the case
- The outcome
- Use of s173 agreements to obtain statement of compliance
- Buyer beware though...
How does it affect you?
- 'Best endeavours' is an onerous obligation that should be carefully considered before being agreed to.
- Section 173 agreements can provide flexibility to the timing of a subdivision process and a vendor's ability to sell lots quickly.
- In some contracts of sale, vendors will be required to enter a s173 agreement in order to obtain the statement of compliance in a timely fashion.
- If the required subdivision works are to be carried out after settlement under a s173 agreement, the purchaser should be a party to that agreement and the negotiations with the relevant local council.
In Joseph Street Pty Ltd & Ors v Tan & Ors  VSCA 113, the vendor under an 'off-the-plan' contract of sale of real estate was required to use its best endeavours to procure registration of the plan of subdivision by the Registrar of Titles within 15 months after the date of the contract. The vendor failed to procure the registration within the required timeframe (citing problems with its appointed builder) and purported to rescind the contract. The purchaser sued for specific performance of the contract of sale.
The purchaser argued that, in order for the vendor to satisfy its obligation to use its best endeavours to procure registration of the plan of subdivision, it should have attempted to enter into an agreement with the local council in accordance with s173 of the Planning and Environment Act 1987 (Vic). The purchaser argued that this would have allowed a statement of compliance to be issued under the Subdivision Act 1988 (Vic) within 15 months after the day of sale, as relevant infrastructure works could be carried out following the statement of compliance being issued.
The court held that the vendor had breached its obligation to use its best endeavours to procure the registration of the plan of subdivision within the required timeframe. In the circumstances, the vendor should have entered into a s173 agreement with the local council to enable works to be completed following the registration of the plan.
The court considered what an obligation to use best endeavours requires of the obligor and held that:
The words best endeavours mean what they say – best endeavours, not second-best endeavours; and so, within reasonable limits, they require the obligor, broadly speaking, to leave no stone unturned to achieve the object in view.
It is becoming increasingly common practice for parties to agree to enter s173 agreements with local councils requiring certain infrastructure works (that are ordinarily required to be completed before a local council will issue a statement of compliance) to be completed following the statement of compliance being issued and the plan of subdivision being registered. Local councils require some form of bond or financial guarantee (eg, cash deposit or bank guarantee) to be provided as security for completion of those infrastructure works after the statement of compliance is issued. This arrangement can make the subdivision and sale process more efficient and is clearly beneficial to vendors. However, following Joseph Street Pty Ltd v Tan, if a vendor is required to use its best endeavours to register the plan and timing becomes critical, it may be necessary for the vendor to enter into a s173 agreement, rather than it simply being an option.
Where a s173 agreement has been entered into, it is important for the purchaser to ensure that it will not be liable for the carrying out and completion of the relevant infrastructure works under that agreement simply by virtue of being a successor in title to the vendor, unless that is what the parties intended. So, if the intention is for the vendor to carry out those works following settlement, the vendor's obligations regarding the carrying out and completion of those works should be agreed with the purchaser and clearly set out in the s173 agreement. Depending on the circumstances, it may also be appropriate for the vendor to provide some form of financial assurance (eg a cash retention amount deducted from the sale proceeds or a bank guarantee) as security for completion of those works in addition to the bond/financial guarantee provided to the local council. In these circumstances, the s173 agreement should also specify each party's entitlement (if any) to have that bond/financial guarantee returned to them by the local council upon completion of the relevant infrastructure works.
In those circumstances, it is clearly not appropriate for the purchaser to assume all of the vendor's obligations under the s173 agreement by virtue of being the vendor's successor in title, which is commonly the case under s173 agreements, as they are intended to run with the land. Rather, it would be prudent for the purchaser to be a party to the s173 agreement and to participate in its preparation and negotiation.
Section 173 agreements provide an alternative route to obtaining a statement of compliance for a subdivision. Indeed, in many cases, to discharge an obligation to use best endeavours to have the plan of subdivision registered, a vendor will be required to take that route in leaving 'no stone unturned' in procuring registration of the plan of subdivision within the required timeframe. Care should be taken to ensure that the s173 agreement is properly drafted so as to make the purchaser's and vendor's rights and obligations regarding the carrying out and completion of any necessary infrastructure works perfectly clear.
- Michael GravesPartner,
Ph: +61 3 9613 8814
- Chris SchulzPartner,
Ph: +61 3 9613 8772
- David McLeishPartner,
Ph: +61 3 9613 8954
- Mark StubbingsPartner, Sector Leader - Real Estate,
Ph: +61 2 9230 4257
- Victoria HolthousePartner,
Ph: +61 2 9230 4303
- Nicholas CowiePartner,
Ph: +61 2 9230 4025
- Paul NewmanPartner,
Ph: +61 7 3334 3514
- Tony DaviesPartner,
Ph: +61 7 3334 3250
- John BeckinsalePartner,
Ph: +61 7 3334 3520