Contracts For Sale of Land

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The usual way of transferring property is by purchase. There are different requirements for the sale of different types of property

  • Personal property (chattel):
    • No formal requirement unless purchased on credit. In such a case, governed by Consumer Credit Code.
  • Real property (land):
    • Agreement must be in writing, and signed by the parties: Conveyancing Act 1919 (NSW), s 54A, s 23C.
      • To be a sufficient agreement, an agreement must include the description of the (:ANZ v Widin):
        • Subject matter (ie, the property).
        • The signature of the parties.
        • A reference to the transaction.
      • Documents may be combined together to constitute such an agreement, so long as the document which is signed by the defendant party makes a reference to the other document which the plaintiff seeks to incorporate (it does not need to be signed): ANZ v Widin.
      • For the purposes of identifying an ambiguity relating to the combination of these documents, parol evidence (oral) is allowed. However, it cannot be used to incorporate terms: ANZ v Widin.
    • Agreement must be made with the use of an approved form: Real Property Act 1900 (NSW), s 46.
    • Transfer is only effective once registered: Real Property Act 1900 (NSW), s 41.
      • An unregistered transfer (ie, contract for sale is made but not registered) transfers an equitable fee-simple interest to the purchaser. Vendor still has legal fee-simple interest, but it is held on a constructive trustfor the purchaser (as are any profits made from the property after the purchase): Bunny Industries v FSW Enterprises
        • For this to apply, the contract must be capable of specific performance.
        • This applies to lease agreement as well (limitations apply): Walsh v Lonsdale.

This article is a topic within the subject Property, Equity and Trusts 1.

Contents

Required Reading

Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008, pp. 291-311 [4.8-4.35].

Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012, pp. 12-24 [2.1-2.20].

Introduction

The most common method to transfer a proprietary interest is by purchase from the previous owner. The law in this regard has been codified by legislation; in its absence, equity may determine the acquisition of an equitable interest in property.

There are different requirements for the sale of different types of property:

  • Personal property (chattel):
    • Delivery.
    • Deed (a document under seal, enforceable even without consideration).
    • Contract (governed by Sales of Goods Act 1923 (NSW) s 23).
  • Real property (land):
    • Under the old system - conveyance (use of a written instrument, usually a deed).
    • Under the torrens system transfer and registration (governed by the Real Property Act 1900 (NSW), s 41)

The requirements to effect a transfer of property will now be discussed in detail.

Chattel

[1] There are no formal requirements to transfer legal title in chattels (ie, simply to exchange money and chattel, receive a receipt). However, all states have adopted a Consumer Credit Code, which governs contracts for the sale of goods, when the chattels are bought on credit.

  • s 15 stresses the requirement of 'truth in lending'. This operates to restrict credit providers (lenders) from preying on people, by obliging the credit providers to disclose all material info (name, amount of credit, interest details, etc).
  • The code specifies maximum interest rates, and prohibits or caps other fees.
  • s 66 specifies that if a debtor has a reasonable cause for default (eg, illness) but could meet modified terms, then they may apply to the credit provider to modify the agreement.
    • s 68 specifies that if the parties cannot agree on the modified terms, then the debtor may apply to the court to order the modifications.
  • s 70 specifies that a court may re-open any contract that is deemed 'unjust'.

Land

[2] Due to the high value of land transactions, there is frequently a longer time lapse and greater deliberation in the passing of title. At this stage, it is only necessary to be aware of the formal requirements.

  • The main requirement is that sale of land can only be effected through a written agreement or memorandum signed by both parties (ie, no oral agreements).[3]
  • Other requirements include:
    • Interest in land must be transferred by the use of an approved form.[4]
    • Transfer is only effective once registered.[5] Upon registration, interest passes to the transferee..[6]

The question of what constitutes a sufficient 'memorandum' or contract is debated in ANZ v Widin:

  • A memorandum must include the description of (a) the subject matter, (b) the signature of the parties and (c) a reference to the transaction.
  • Documents may be combined together to constitute such a memorandum, so long as the document which is signed by the defendant party makes a reference to the other document which the plaintiff seeks to incorporate (it does not need to be signed).
  • For the purposes of identifying an ambiguity relating to the combination of these documents, parol evidence (oral) is allowed. However, it cannot be used to incorporate terms.

Damage During the In-Between Period

[7] Another topic for debate in this area is what happens if something occurs to the property between the time of the time of sale and the time of settlement. According to Lysaght v Edwards,[8] the purchaser is entirely responsible once he acquires the equitable interest (although the vendor is required to take reasonable care of the property so long as he is still in possession). The following cases also discussed this issue:

  • A plaintiff cannot use the vendor's insurance to pay for damages after the vendor no longer has insurable interest in the land: Ziel Nominees Pty Ltd v VACC Insurance Co Ltd.[9]
    • Note, this no longer applies - the Insurance Contracts Act 1984 (Cth), s 50 specifies that the purchaser is deemed to be insured under the vendor’s contract of insurance.
  • Reaffirmation that a vendor has to take reasonable care whilst in possession: Clarke v Ramuz:[10] (a vendor was liable for damage caused by a trespasser removing a large quantity of soil after contract made but before settlement).
  • Where there is a conditional contract for purchase, the purchaser does not get an equitable interest until condition is met: Shanahan v Fitzgerald.[11]

The Conveyancing Act 1919 (NSW), ss 66J-66O offers protection in such cases where the property has been damaged in that in-between period.

  • s 66K - The risk of damage to land should not pass to the purchaser until the transaction is completed or until the time stipulated by the parties.
  • s 66L- In case of substantial damage to property after contract for sale, but before passing risk to the buyer, the buyer may rescind the contract.
  • s 66M- If buyer wants to proceed despite the substantial damage, the purchase price is to be reduced to such an amount as it just and equitable.
  • s 66N - court allowed to refuse to enforce the contract if it is deemed unfair in the wake of damage in in the in-between period.

Equitable Title

Whilst there is a requirement that land be conveyed/transferred and registered before title passes in law, a contract for sale of land which doesn't abide by those standards still has some effect - it passes equitable title to the purchaser.

  • The vendor holds the title on a constructive trust for the purchaser.
  • This gives the purchaser an equitable proprietary interest enforceable against third parties.

The above principles were stated in Bunny Industries v FSW Enterprises:

  • Once a contract for sale of land is entered into, the purchaser acquires an equitable fee simple. The vendor still has the legal fee simple title, but it is held on a constructive trust for the purchaser.
  • For this to apply, the contract must be capable of specific performance (ie, if a court may grant specific performance in such a case).
  • If the property has been transferred to a third-party, than the profits made by the vendor (who is the trustee of the purchaser now) off that sale were therefore held on trust for the purchaser, and belong to the purchaser.

Bunny Enterprises views the vendor-purchaser/mortgagee-mortgagor relationship as essentially a trustee-beneficiary relationship. This view was contested in Tanwar Enterprises v Cauchi, but Tanwar is not accepted today.

Equitable Leases

The idea that a contract for sale of land transfers an equitable fee simple interest to the purchaser (before it is made a legal fee simple through registration) also applies to leases.

There are three types of leases:

  1. A legal interest is conferred through the use of a deed.
  2. An common law lease is conferred by taking possession and paying rent.
  3. An agreement to lease confers an equitable leasehold interest (equitable lease).

The subject of equitable leases, and the equitable transfer of less-than fee simple interests, was discussed in Walsh v Lonsdale:

  • An equitable lease, where the court would grant specific performance on the agreement, should be respected as if it a legal lease.
  • The lessee acquires an equitable interest in the property, and accordingly, the lessor acquires some protections in return for that interest.

Limitations on Equitable Leases

[12] Still, equitable leases are not the same as legal leases. The main difference is that they probably less enforceable than legal leases. The holder of a legal lease would probably triumph over the holder of an equitable lease (this is disputed in Hunt v Luck).[13]

[14] Another limitation is that although the court may have power to grant specific performance of an agreement for a lease, it may decline to do so. This often happens in cases where the tenant may have breached the terms of the agreement.[15] Examples include:

  • The tenant had failed to carry out agreed repairs.[16]
  • The tenant had sub-let without the head lease’s consent.[17]

[18] Example of a case where an equitable lease was distinct from a legal one are:

  • Chan v Cresdon,[19] where a guarantor under an equitable lease was held to be free of his guarantee, because the guarantee operated only in respected of a legal lease.
  • McMahon v Ambrose:[20]
    • Facts: Ambrose was under a lease, but assigned it orally to McMahon. When the lessor was suing Ambrose for failure of payments, Ambrose tried to get McMahon to indemnify him.
    • Held: Because the assignment was oral, McMahon was not liable at law to indemnify Ambrose.

[21] In Foster v Reeves:[22], lower courts which had no equitable jurisdiction were held to be incapable of enforcing equitable leases. However, this was eroded by later decisions,[23] and reforms in NSW have granted inferior courts jurisdiction to grant equitable interests (ie, Foster doesn't apply).[24]

[25] It should be noted that equitable relief is only available where the common law remedy is inadequate. However, common law remedy of damages are generally considered as inadequate for breaches of contract for the sale of an interest in land.[26]

Relationship Between Law and Equity - History

Note: This section deals purely historical issues (ie, they no longer apply). For the purposes of keeping these study guides concise and focused on the most relevant issues, Uni Study Guides has determined that this section should be explained in minimal detail. Cases will barely be referred to, and even main points will be outlined in dot points.

[27] To gain a proper understanding of the way equity operates today, it is sometimes necessary to understand the history of equity, before the unification of the courts effected by the Judicature Acts.

  • Traditionally, the common law was not allowed to recognise equitable rights and titles as mentioned above. In the common law courts, the trustee, not the beneficiary, was the owner of the trust property.
  • Actions could not be brought for breach of a purely equitable obligation.
    • There were several notable exception to this rule, but they had little effect. The disadvantages of the separate administration of common law and equity far outweighed the advantages.
  • Equity had could not decide disputed legal rights and titles.
  • Equity could not award damages (only specific performance and injunctions).
  • Common law courts could not grant interlocutory relief, specific performance, injunctions or make declarations.
  • No power existed to transfer cases from one jurisdiction to the other.

The Judicature System - Modern Equity

[28] S 25(11) of the Judicature Act provided that wherever the rules of common law and equity were in conflict, equity would prevail. This was re-enacted in NSW under the Law Reform (Law and Equity) Act 1972 (NSW), s 6.

  • The Judicature Act fused only the administration of the principles of common law and equity, not the principles themselves.

The main features of the judicature system include:

  • All branches of the court have the power to administer equitable remedies.
  • Equitable defences can be pleaded in all branches of the court and the appropriate relief given.
  • All branches of the court must recognise equitable rights, titles and interests.
  • All branches of the court have a general power to determine legal rights and titles.
  • The common injunction is abolished.
  • Where the rules of equity and the rules of common law conflict, the rules of equity shall prevail.

Fusion Fallacies

[29] Some judges initially erroneously thought that the judicature act conferred a fusion of the principles of common law and equity (ie, that the 'bodies of law have merged'), which wasnot the case.

  • This is known as the fusion fallacy – the fallacious notion that the fusion of the administration of common law and equitable principles equates to a fusion of common law and equitable principles themselves.

A good example of a court falling victim to the fusion fallacy is presented in Walsh v Lonsdale, where Jessel MR states:

  • 'There are not two estates as there were formerly, one estate at common law by reason of the payment of the rent from year to year, and an estate in equity under the agreement. There is only one Court, and the equity rules prevail in it'.

[30] Taken literally, the judgment would remove all distinctions between common law and equity. This is not the case – trusts still exist.

  • The rules of equity only ‘prevail’ in case of conflict – not upon any consideration.
  • Decrees of specific performance are not automatic – many discretionary factors need to be taken into consideration.
  • The equitable estate, thus recognised, endures until the contract on which it is founded is avoided or dissolved.

Cases in which damages have been awarded against mortgagees found to have breached their duty to their mortgagors in exercising their power of sale (ie, the award of a common law remedy for an equitable wrong) have also been categorised as examples of fusion fallacies.


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End

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References

Property Textbook refers to Edgeworth et all, Sackville and Neave's Property Law Cases and Materials, 8th edition, Lexis Nexis, 2008.

Equity Textbook refers to Evans, Equity and Trusts, 3rd edition, Lexis Nexis, 2012.

  1. Property Textbook, pp. 292-3 [4.9-4.10].
  2. Property Textbook, pp. 293-. [4.11]
  3. Conveyancing Act 1919 (NSW), s 54A. s 23C is also relevant.
  4. Real Property Act 1900 (NSW), s 46.
  5. Real Property Act 1900 (NSW), s 41.
  6. Real Property Act 1900 (NSW), 51.
  7. Property Textbook, pp. 303-5 [4.21-4.26].
  8. (1876) 2 Ch D 499.
  9. (1975) 180 CLR 173.
  10. [1891] 2 QB 456.
  11. [1982] 2 NSWLR 513.
  12. Property Textbook, p. 308 [4.29].
  13. [1902] 1 Ch 438.
  14. Property Textbook, pp. 310-1 [4.33].
  15. Swain v Ayres (1888) 21 QBD 289.
  16. Cornish v Brook Green Laundry [1959] 1 QB 394.
  17. Warmington v Miller [1973] QB 877.
  18. Property Textbook, pp. 308 [4.30]; 311 [3.35].
  19. (1989) 168 CLR 242.
  20. [1987] VR 816.
  21. Property Textbook, pp. 309-10 [4.31-4.32].
  22. [1982] 2 QB 255.
  23. Cornish v Brook Green Laundry [1959] 1 QB 394; Kingswood Estate v Anderson [1963] 2 QB 169.
  24. Law Reform (Law and Equity) Act (NSW) 2 6.
  25. Property Textbook, p. 311 [4.34].
  26. Adderley v Dixon (1824) 1 Sim & St 607.
  27. Equity Textbook, pp. 12-17 [2.1-2.11].
  28. Equity Textbook, p. 17 [2.12].
  29. Equity Textbook, pp. 18-23 [2.19].
  30. Equity Textbook, pp. 19-20 [2.15].
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