Default notices and the purchasing of residential property
Agreeing to buy or sell residential property can be an exciting commercial transaction for many people. A contract for the sale of land is also a significant legal transaction.
For many people, the purchase of land with a house on it in which to live is the most significant commercial transaction of their lives. If people sign up to contracts and then fail to comply with their legal obligations under a contract, the legal consequences can be significant. Failing to comply with contractual obligations is usually described as a ‘breach of contract’. Termination of the contract, whether it be called ‘rescission’ or ‘cancellation’, is not usually automatic because there are legal rules against automatic termination. This means a breach of contract or a repudiation of an obligation does not automatically terminate the obligation of the parties to perform their obligations under the contract or to be ready willing and able to perform those obligations. Where the contract requires the parties to provide notice of the contractual right to terminate, a default notice should be used. Legal advice should be obtained about, and to assist with, breach of contract and termination.
In all jurisdictions in Australia, a contract for the sale of an interest in land must be evidenced in writing. Often the Real Estate Institute of Western Australia (REIWA) Joint Form of General Conditions will be used, plus other special conditions may form part of the contract. Before signing a contract and paying a deposit, purchasers should read through the general conditions and special conditions of the contract, carefully to make sure they understand their legal obligations and any encumbrances affecting the certificate of title. If possible, prospective purchasers should obtain legal advice about the contract and the property they intend to buy before they sign the contract and pay a deposit.
Purchasers sometimes overlook or do not fully understand the legal consequences of encumbrances or restrictions on property they seek to buy. The certificate of title may be affected by various legal features, such as easements and restrictive covenants.
Advice about matters that are revealed on the certificate of can be important. It reveals things such as restrictive covenants which may prevent certain uses of the land. The purchaser should also consider defects before paying the deposit and signing the contract because the purchaser may not be able to avoid his or her legal obligations to complete the contract if the seller has complied with its legal obligations about disclosure of the property. This principle is often described as ‘buyer beware’ or ‘caveat emptor’. If the seller unlawfully conceals a latent defect, the buyer may have the right to sue the seller for misrepresentation. In most instances, however, the buyer will be legally required to complete his or her obligations under the contract, rather than avoiding those obligations, if the seller has complied with the statutory disclosure requirements that apply to the sale of land.
One situation where a purchaser may be unable to comply with his or her legal obligations under the contract of sale for the purchase of land can arise if he or she is unable to obtain finance from a lender for the purposes of the purchase of the property. Another situation where a purchaser may seek to avoid his or her legal obligations under the contract after signing and paying a deposit can arise when he or she becomes aware of a defect affecting the building work or the certificate of title to the property. These are areas of potential legal dispute between the seller and the buyer where legal assistance can be beneficial.
In addition to other special conditions, contracts for the sale of land may include the Real Estate Institute of Western Australia (REIWA) Joint Form of General Conditions, which prescribe what each party must do by virtue of its legal obligations under the contract. The REIWA Joint Form of General Conditions of Sale contain provisions that apply to situations of default under a contract. The REIWA General Conditions also contain requirements that apply to default notices.
Contract law principles apply when a party who has entered into a legally binding and enforceable contract defaults under the contract. In many instances a contract will provide for a right for either party to terminate the contract in certain circumstances. The right to terminate has been described as the right to ‘rescind’ and the right to ‘cancel’.
In situations where the buyer is in default under the contract, unless the default or defaults are remedied, legal options available to the seller may include rescission of the contract of sale and suing the buyer to recover the seller’s solicitor’s legal costs and interest. The seller may be able to resell the property by public auction or private contract and sue the original defaulting buyer for the resale expenses and expenses occasioned by the default of the original defaulting buyer for non-performance as liquidated damages. It is, therefore, important to obtain legal advice and assistance in situations of default or breach of contract because requirements of notice, including the use of default notices, can constitute a significant part or component of legal action against the defaulting party.
About the authors:
Kate Bretherton is a Perth lawyer and an Associate at Lynn & Brown Lawyers. Kate practices in the area of commercial law and employment law. She is currently completing a PhD at UWA. Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.