31 Aug 2010

The Unfair Contracts Act and real property: should the seller beware?

by Matthew Castley

Sellers of real property under standard form contracts should review their standard form contracts to identify terms which may be at risk under the new Trade Practices Amendment (Australian Consumer Law) Act 2010.

Historically, real property contracts have been governed by the doctrine of caveat emptor, or "let the buyer beware". Sellers should be wary of the potential impact of the new Trade Practices Amendment (Australian Consumer Law) Act 2010 (Unfair Contracts Act) on contracts for the sale of real property.

The Unfair Contracts Act applies to "consumer contracts" which are in a "standard form".

What are consumer contracts?

Consumer contracts are contracts where at least one of the parties is an individual acquiring a product or service (including an interest in land) wholly and predominantly for personal, domestic or household use or consumption. Contracts for the sale of land to individuals for personal use (including occupation and possibly personal investment purposes) are likely to be consumer contracts.

Standard form contracts

The term "standard form" is not defined, however a court must consider:

  • whether one party has all or most of the bargaining power;
  • whether the contract was prepared by a party before any discussion;
  • whether the other party had an effective opportunity to negotiate terms;
  • whether the terms of the contract take into account the specific characteristic of another party or the particular transaction.

The scope for interpretation of the term "standard form" (and hence the application of the Act) is potentially very broad. For example, the Act may apply in circumstances where the affected party had the opportunity to take legal advice and to seek amendment to the terms of the contract. Certainly the Act will potentially apply to usual residential sales (ie. adopting standard form residential conveyancing contracts), "off the plan" sales by developers, sales by receivers and managers, mortgagees in possession, etc.

What are unfair terms?

A term will be unfair if:

  • it would cause a significant imbalance in the parties' rights and obligations arising under the contract;
  • it is not reasonably necessary to protect the legitimate interest of the party advantaged by the term; and
  • it would cause detriment to a party if it were to be relied on.

Importantly, the onus is on the party asserting a term is necessary to protect their legitimate interests to prove this to be the case.

The Act includes examples of terms that may be unfair. These include terms under which:

  • one party may unilaterally avoid or limit performance of the contract, terminate the contract, vary the contract or renew the contract;
  • one party is penalised for a breach or termination;
  • one party may unilaterally vary the up front price without the other party being able to terminate;
  • one party may unilaterally vary the characteristics of the subject matter of the contract (for example, the land or improvements to be constructed on the land);
  • one party may assign the contract to the detriment of the other without consent;
  • one party's right to sue another party is limited.

Terms will not be unfair to the extent that they:

  • define the subject matter of the contract;
  • set the up front price (ie. consideration) provided for under the contract and disclosed at or before formation; or
  • are required or expressly permitted by any law.

Effect of a term being "unfair"

An unfair term will be void and parties may not rely on it. However the contract will continue to bind the parties if it can operate without the unfair term. The reliance on an unfair term is not a contravention of the Act at first instance, however the regulator (eg. the ACCC, ASIC or relevant State department) can seek a declaration that a term is unfair, and if made, continued reliance on that term will contravene the Act.

There are numerous examples of usual contractual terms in existing real property contracts which may, on their face, be unfair having regard to the provisions of the Act. We look at two below.

Example 1: "Off the plan" contracts for sale of land or strata titled units by property developers

An "off the plan" contract for sale to domestic consumers will (in usual circumstances) be caught by the Act. Such contracts customarily include provisions allowing developers to vary the size, dimensions, boundaries or encumbrances affecting a lot, or alter or swap finishes to a unit, where the buyer would not be materially adversely affected by the change (or words to this effect). On face value, these provisions may be unfair as they unilaterally allow the developer to vary the characteristics of the subject matter of the contract.

Presently, developers would need to rely on the argument that such provisions are required to protect their legitimate commercial interests, considering that it is commercially not feasible to guarantee the finished product will not be amended from disclosure plans over the course of a development.

To minimise the risk of such clauses being unfair, developers may need to consider amending them, for example, limit the changes which can be made, or to allow buyers a right to terminate or to receive compensation in circumstances where the property being sold changes.

Example 2: Sale of land by receiver and manager - right to extend completion or terminate where prevented from completing

Contracts for sale of land by receivers and managers usually include the unilateral right for the seller to extend the date for completion or to terminate the contract, where the receivers are unable to complete the contract (eg. as a result of a caveat registered against the title). These clauses may be unfair as they allow the seller a unilateral right to extend or terminate the contract, subject to an argument as to what is necessary to protect the seller's legitimate commercial interests.

Receivers and managers could minimise this risk by making the right to extend or terminate exercisable by both parties.

Implications

At present, the extent to which contractual provisions will be read down as a result of the operation of the Act is not clear. While the extent of application of the Act by the courts will become clearer over time, in the interim, sellers of real property under standard form contracts should:

  • consider the potential application of the Act;
  • review their standard form contracts to identify terms which may be at risk;
  • if possible, identify alternative drafting (and evaluate the commercial impact of such drafting) or alternatively confirm the commercial requirement for retention of the term.

In all cases, effective severance clauses should be incorporated into affected contracts, and clauses should be drafted, so far as possible, to allow potentially offensive provisions to be easily severed from the contract.

 

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Disclaimer

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.