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Which case won?

casea
The case for the property buyer
  • It is not our fault that the bank’s valuation changed, and we were unable to obtain finance.
  • We never told the sellers that we would be unable to complete the purchase. We simply flagged that we might not be able to complete.
  • The notice to complete was invalid because it allowed less than 14 days for completion after the date of service of the notice. The notice was served on 20 July 2018 and required completion by 3 August 2018. That is only 13 days for completion, if you exclude the day on which it was served, which is the general rule when interpreting contracts of this nature.
  • Since the notice was invalid, time was not of the essence, which is a legal requirement for the sellers to terminate the contract.
  • The sellers cannot make time of the essence by extending the completion date under an invalid notice to complete. The sellers should have withdrawn the original notice and served us with a new notice to complete.
  • In any event, the conduct of the sellers in negotiating the extension of time was inconsistent with maintaining that time was of the essence.
  • The sellers’ conduct amounted to a wrongful repudiation of the contract and the contract was therefore validly terminated by us, not by the sellers.
  • In those circumstances, the sellers cannot recover anything from us or from the guarantor. The guarantee only extends to the guarantor performing its obligations under the contract, and there are no obligations under that contract if it was terminated by us.
  • We seek an order that the sellers repay our $141,500 deposit.
caseb
The case for the property sellers
  • While the general rule of construction may be that the date of service is not to be included in calculating a notice period, that rule did not apply in this case. There was a specific provision in the contract stating that the notice period would commence “at midnight on the day on which the notice is served”. That is, under this contract the day of service was included when calculating the 14 days.
  • The notice to complete was therefore valid and time was of the essence.
  • When the buyer agreed to an extension of the completion date under the notice to complete, they never made any suggestion or complaint that the notice to complete was invalid.
  • Since the notice to complete was valid, so was the agreed extension. Time continued to be of the essence, and we were entitled to terminate the contract for breach of an essential obligation.
  • Irrespectively, the buyer’s behaviour conveyed to us an intention not to be bound by the contract any longer. This was a repudiation of the contract that also entitled us to terminate.
  • If we cannot recover damages from the buyer, of course we can instead recover damages from the guarantor, since the guarantee makes her liable as if she had purchased the property herself.
  • Because the sale did not proceed, we have subsequently made a loss on the resale of the property and we seek an order for damages in the sum of $600,000, less the five per cent deposit already paid.

So, which case won?

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Case B won. You were right!

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a30%
b70%

Expert commentary on the court's decision

“This case demonstrates that entering into a delayed settlement contract when finance is required is inherently risky for both the purchaser and the vendor.”
Supreme Court finds in favour of seller

In Cole v Raykir Holdings Pty Ltd [2019] NSWSC 1017, the Supreme Court of NSW found in favour of the sellers, Mitchell and Katherine Cole, declaring that the contract for sale was validly terminated by them on 27 August 2018.

The court held that the buyer, Raykir Holdings Pty Ltd, and the guarantor, Ekaterina Charonova, were liable to pay the Coles $458,500.00. This amount was the difference between the initial sale price ($2.83 million) and the subsequent sale price ($2.23 million), less the part deposit released prior to termination ($141,500.00).

Notice to complete makes time of the essence for completion of contract

The court had to determine whether the notice to complete served on 20 July 2018 was valid, and whether it made time of the essence. This turned on whether the completion date set out in the notice was not less than 14 days after the date of service of the notice, as required by the relevant clause in the contract.

The court noted that “the general rule of construction is that where an instrument requires a period of time to be computed to a particular date, the date [of service] itself is not included and thus the period commences at the end of that day”.

However, the court also stated that this general rule can give way according to the context. Unlike the general rule, the clause in the contract operated so that 20 July 2018, the date the notice was served, was included in the notice period.

On that basis, the specified date for completion, 3 August 2018, was no less than 14 days after the date of service. Therefore, the notice to complete was valid, and it was effective to make time of the essence for completion.

Given that the notice to complete was valid, the court rejected Raykir’s argument that the extension of the notice was invalid because the original notice was invalid.

The court also found that the Coles gave no reason to Raykir to believe that their asserted position, that time for completion had been made of the essence, was no longer maintained.

Sellers entitled to terminate for breach of contract

The court noted that the evidence clearly established that Raykir Holdings was not in a position to complete by 24 August 2018. Therefore, it would have been useless for the Coles to perform their obligation to complete by that date.

Accordingly, the Coles were excused from performance of the obligation to complete and became entitled to, and did, terminate the contract.

Sellers entitled to terminate for repudiation of contract

The court noted that the Coles could have also terminated the contract on the basis that Raykir Holdings had repudiated the contract.

According to the court, “the relevant test for repudiation is whether the conduct of one party is such as to convey to a reasonable person in the situation of the other party, renunciation either of the contract as a whole or of a fundamental obligation under it”.

The court concluded that the conduct of Raykir Holdings was such as to convey to a reasonable person in the position of the Coles a renunciation of the essential obligation to complete by 24 August 2018.

Buyer liable for damages under contract

In those circumstances, clause 9 of the contract entitled the Coles to keep or recover the deposit to a maximum of ten per cent of the purchase price.

This clause also entitled them to recover the deficiency on the resale of the property, with credit for any of the deposit kept or recovered.

Clause allowing for part payment of deposit on completion unenforceable as penalty

Raykir Holdings argued that the Coles could not recover the unpaid balance of the deposit because the relevant clause in the contract was penal in nature.

The court concluded that despite the relevant clause describing the balance owing as a deposit, that balance lacked the character of a deposit. This was because it would not have to be paid before the actual completion of the contract.

In any event, the court pointed out that the practical significance of this argument was doubtful given that under clause 9, credit had to be given for any amount of the deposit recovered in the calculation of the deficiency on resale.

Guarantor also liable for damages under contract

The court noted that when a provision in a contract of guarantee is ambiguous, it should be construed in favour of the guarantor.

However, the guarantee in the present case expressly provided that the guarantor would be personally liable for the due performance of the buyer’s obligations under the contract “to the same extent as if that person were the Purchaser under this Contract”.

The court therefore found that Ms Charonova had promised to be personally liable for the due performance of the obligations as if she herself were the buyer, Raykir Holdings.

Further, the court stated that because the obligation of Raykir Holdings to make a payment under clause 9 was clearly an obligation “under this Contract”, Ms Charonova was personally liable for that payment.

The court also pointed out that even if the guarantee had been limited to a promise by Ms Charonova that Raykir Holdings would perform its obligations under the contract, the failure by Raykir Holdings to perform the essential obligation to complete would have caused Ms Charonova to breach the contract of guarantee.

Delayed settlement contracts when finance is required are inherently risky

This case demonstrates that entering into a delayed settlement contract when finance is required is inherently risky for both the purchaser and the vendor.

Finance approval is usually for a three-month period, after which it is usually necessary to re-apply. A bank, or the like, generally does an independent valuation of the property on application for finance approval.

If the property value goes down during formal finance approval or prior to a subsequent reapplication, the buyer may find itself with insufficient funds to settle. This exposes the buyer to significant legal and financial risk.

If the buyer is unable to complete, the seller may be able to terminate the contract and recover damages, such as the difference between the original purchase price and the resale price. Depending on the wording of the contract, the buyer may also forfeit their deposit.

Delayed settlement contracts can also be risky for the seller, especially if the seller needs the funds from the sale of the property to settle on the purchase of another property.

Court is reluctant to enforce payment of a deposit payable at completion

We can also see that the court is reluctant to enforce the balance of the part payment of a deposit unless it is accounted for independent of completion and on a specific date other than on completion.

Guarantors should ensure they understand the scope of their guarantee

Before acting as guarantor, a person should carefully consider the wording of the proposed guarantee in order to understand its scope.

In this case the court interpreted the wording in the guarantee literally, and that wording was such that the guarantor was liable for damages.

NOTICE: This article is accurate as at the time of publication and does not constitute legal advice. Please see our legal notices page for more information. Information related to coronavirus can be outdated very quickly.
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