Ensure your property contract's special conditions are sound

Real estate agents should always strongly encourage their clients to obtain independent legal advice in respect of all matters pertaining to property contracts and other documents prior to execution. In the recent Queensland Supreme Court decision of Sekler v Kim Carroll Investments Pty Ltd [2021] QSC 312, the Court examined special conditions in a contract of sale of property and determined whether the contract should be specifically performed.

Background

On 30 August 2021, the applicant, Alex Sekler (buyer), entered into two separate contracts to purchase two properties at Buderim. The first contract was for the purchase of a property known as "Malumba Estate" for $17.1 million from the sellers, Kim Carroll and Heidi Meyer. The property consisted of 4.07 hectares of land with the benefit of a development approval obtained by the sellers for the development of a five-star luxury hotel and conference resort.

The second contract was for the purchase of an adjoining property comprising 3.86 hectares and known as "Aquila Retreat" for $3.4 million from the respondent, Kim Carroll Investments Pty Ltd (seller). Mr Carroll is the sole director of the seller. At the time the contract was entered into, there was an existing business being conducted by Aquila Retreat Space Pty Ltd, of which Mr Carroll and Ms Meyer were directors. The two contracts were to settle together.

On 15 September 2021, the Malumba Estate contract settled and the buyer became the registered owner. However, the contract for Aquila Retreat did not settle and the seller purported to terminate it.

The buyer subsequently applied to the Court seeking an order that the Aquila Retreat contract be specifically performed.

Aquila Retreat contract

The Aquila Retreat contract included an annexure of special conditions, which, inter alia, included:

"1. Future Bookings

It is understood that Aquila Retreat Space P/L uses this property to conduct accommodation bookings and events.

1.1. The Buyer may: -

1. a) Request that the Seller cancel all bookings from the Settlement Date; or

2. b) Honour the future bookings and be entitled to any profits gained from that accommodation booking from the Settlement Date onwards.

1.2. The Buyer must give to the Seller three (3) months' notice in writing if they wish for the bookings to be cancelled.

1.3. The Seller will continue to make future bookings until such time that the Buyer instructs otherwise.

2. Transfer of Business from Aquila Retreat Space Pty Ltd

2.1 This Contract includes the transfer of the business known as 'Aquila Boho-Luxe Retreat' which is owned by Aquila Retreat Space Pty Ltd and operated at Aquila Retreat, 21 Box Street, Buderim.

2.2 The Seller warrants that the Directors of Aquila Retreat Space Pty Ltd will enter into an Agreement with the Buyer for the transfer of this Business.

2.3 The transfer will include all matters associated with the business such as income from forward bookings, websites, social media handles, IP, good will, stationery and computers and all other indicia of the business.

..."

In accordance with clause 2.2, the buyer and Mr Carroll and Ms Meyer were required to enter into an agreement for the transfer of the business at some time in the future.

The buyer requested that the Aquila Retreat contract proceed to settlement on 27 September 2021 and for the transfer of the business to be dealt with separately. However, the seller wished for the transfer of the business and the sale of the Aquila Retreat to be contemporaneous.

It was the seller's position that a condition of the Aquila Retreat contract included the transfer of the business and the condition would not be satisfied until either the business transfer occurred, or a business contract had been entered into.

The buyer subsequently proposed that the agreement for the transfer of the business incorporate certain terms including that all deposits that had been paid in respect of forward bookings from 1 November 2021 (which was approximately $180,000) be transferred to a recently formed entity called ASV Retreat Pty Ltd on settlement of the transfer of the business.

However, the seller argued that there was no requirement to transfer the deposits for forwarded bookings and would not agree to do so.

On 6 October 2021, the seller sent email correspondence to the buyer advising that it no longer wished to sell the property and any previous contract was null and void.

The buyer lodged a caveat on 7 October 2021 and subsequently sought to rely upon the seller's email of 6 October 2021 as constituting a wrongful termination of the Aquila Retreat Contract by the seller.

However, the seller maintained that no order for specific performance should be made as the contract was lawfully terminated in circumstances where the buyer refused to perform "a fundamental part" of the contract by failing to enter into an agreement for the transfer of the business.

The Court noted that although the Aquila Retreat contract included the transfer of the business, the contract did not expressly make the sale of the property either contemporaneous with, or contingent upon, any agreement to transfer the business. The Court stated that Clause 2.2 only records the seller's warranty that the directors of Aquila Retreat Space Pty Ltd will enter into an agreement for the transfer of the business.

Furthermore, the Court noted that the seller's submissions proceed on the basis that Clause 2.2 is an essential term of the contract (a breach of which would give the seller a right to lawfully terminate). However, a breach of a non-essential term only gives rise to a right to terminate the contract if the breach is of such seriousness as to deprive the innocent party of substantially the whole benefit it was intended to obtain from the contract.

The Court held that Clause 2.2 was not an essential term for the following reasons:

• The Aquila Retreat contract is for the sale of the "Property", which is defined as meaning "the Land", the "Improvements" and the "Included Chattels";

• The contract does not provide that the sale of the property is conditional upon any agreement to transfer the business;

• Although Clause 2.2 is contained in Annexure A which is headed "Special Conditions 'Aquila'", it is expressed as a warranty; and

• Aquila Retreat Space Pty Ltd is not a party to the contract and Clause 2.2 does not create any enforceable obligation as against that company.

The Court said that it was not necessary to determine whether there was any breach of Clause 2.2 by the buyer because, in the Court's view, the alleged breach would not deprive the seller of a substantial part of the benefit of the contract, which was a contract for the sale of residential property.

Decision

The Court therefore concluded that the seller's purported termination of the Aquila Retreat contract by email of 6 October 2021 constituted an unlawful termination of the contract and the buyer was entitled to an order that the contract be specifically performed.

Orders

The Court made orders that the Aquila Retreat contract be specifically performed and the seller execute all such documents and do all such things necessary to specifically perform the contract.

The seller was also ordered to pay the buyer's costs of and incidental to the Application.

Conclusion

This case serves as a reminder that real estate agents should always strongly encourage their clients to obtain independent legal advice in respect of all matters pertaining to property contracts and other documents prior to execution.

In order to minimise agents' risk of exposure to claims, agents should never alter a term of a property contract (or other documents), nor insert additional terms, including special conditions, without obtaining written instructions from the relevant party and ensuring that the relevant insertion or amendment (including special conditions) has been prepared by an Australian legal practitioner.