Szanto v Bainton [2011] NSWSC 278

Prior to settlement a purchaser discovered an illegal sewer connection and attempted to discuss it with the vendors. The vendors advised they were not aware of any issues and referred to the special conditions in the contract whereby the purchaser warranted that it accepted the property in its current state of repair and subject to any defects and agreed not to make objection or delay completion on this basis.

The purchaser failed to complete. The vendors sent a notice to complete. The purchaser missed settlement again. The vendors then offered to accept a delayed completion with $4000 of the sale proceeds to be paid into a trust account to fix the sewerage connection. The purchaser refused and said he wanted the problem fixed prior to settlement and disputed the vendor’s right to terminate the contract.

According to the purchaser, discussions continued and agreement was reached that the sewer issue would cost $50,000 to resolve but no agreement was reached about when it would be resolved. The vendors offered to rescind the contract. The purchaser was amenable to that proposal but no agreement was reached. The vendors then purported to rescind the contract and sent the purchaser a notice of termination, knowing he was abroad and obtained possession, selling the purchaser’s furniture and holding the proceeds on trust. The purchaser disputed the vendor’s purported termination and right to retake possession and sued for breach of contract, unlawful ejectment, conversion of personal property, specific performance and sought repossession and damages.

The purchaser then lodged a caveat which was challenged. The test for caveats is:

  1. Whether there is a serious question to be tried?
  2. Where does the balance of convenience lie?

Serious question to be tried
The court found that a number of serious questions were raised.

Whether the sewer or an undisclosed easement is a defect in title?

Yes, but absent knowledge by the vendors, the special conditions preclude objection being taken to such defects.

Whether the vendors knew of the defect in title before the contract was entered into?

If knowledge is established, the vendor cannot rely upon special conditions to prevent the purchaser objecting to such defects, unless full and frank disclosure of their existence is made. The vendor is then precluded from serving a notice to complete and/or obtaining specific performance of the contract. This was an open issue.

The court noted that breach of warranty prescribed by Conveyancing (Sale of Land) Regulation 2010 (that there is no matter unlawfully carried out that could be ordered to be rectified) might have applied to enable the purchaser to claim recission for breach under s 52A(7) of the Conveyancing Act 1919, but this was not claimed.

Hence there was no bar to the vendors serving notice to complete unless they knew of the problem before the contract was entered into.

Whether the power of the Sydney Water Corporation to fix the sewer is a defect in title?

No. A sewer issue entitles the Sydney Water Corporation to enter the property and fix the sewer but like improvements not authorised by council, the possibility of the exercise of powers by local authorities does not constitute a defect in title, unless those powers are exercised (or notification of their exercise is given). This was not done.

Whether the vendors were entitled to terminate the contract?

The court found that if the purchaser claimed $50,000 to fix the sewer issue, the contract required that the purchaser serve the vendors with a statement of the amount claimed, in which case the vendors could rescind the contract if it exceeded $1. No notice was given by the purchaser and hence this could not be relied upon as entitling recission.

Where does the balance of convenience lie?
The vendors sought to refinance their existing loans by mortgaging the property. The court found there was no evidence of hardship to the purchaser from the refinancing. Even if the purchaser was found to be entitled to enforce the contract, the purchaser would not be entitled to restrain the vendors from refinancing, provided that the vendors used the sale proceeds to discharge the mortgage. Given the mortgage was less than the purchase price owed, the mortgage could be discharged from those proceeds with unencumbered title conveyed to the purchaser. So even if there was a serious question to be tried that the vendors were not entitled to terminate the contract, the caveat should not be permitted to remain to prohibit the vendors’ refinancing.

The court also took into account that the purchaser gave an inadequate undertaking as to damages, being unsecured and given by a non-resident making it difficult to enforce.

The caveat extension was refused.

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