August 2019

Going once, going twice ... and sold to the man from Adelaide (or was it?)

The Federal Court of Australia recently confirmed that the word “Sold” can carry a number of different meanings and the owner of the land carries risk in relation to the use of the word “Sold” by its agents.

Additionally, the primary judge in Eckford v Six Mile Creek Pty Ltd (No 2) [2019] FCA 1307 found that where the developer knew, or had a reasonable suspicion that those properties marketed as “Sold” were not bona fide, were “bodgy” or were “dodgy”, the developer may be personally liable for committing the tort of deceit and/or fraudulent concealment.

Background of case

In about September 2007, Mr and Mrs Eckford, whilst on holiday from Dubbo, took a scenic drive from the Gold Coast to the Sunshine Coast.

Whilst driving, they came across a new land release owned by Six Mile Creek Pty Ltd (SMC), advertising blocks of land for sale, “many with ocean views FOREVER”.  Mr and Mrs Eckford met with a local real estate agent, who advised them that Lot 10 was the “premier lot in the estate” and its views would be kept “in perpetuity” as the adjoining lots (Lots 17, 18 and 19) which were situated between Lot 10 and the ocean, had been “sold” with building covenants restricting the height of both building and vegetation on those properties.

Despite displaying a large sign that Lot 10 had been sold, the real estate agent indicated that he would make enquiries with SMC to see whether it would be willing to terminate the existing contract and enter into a new contract with Mr and Mrs Eckford. SMC subsequently agreed to terminate the existing contract provided Mr and Mrs Eckford paid the same purchase price and the purchase settled within thirty days.

Many years later, Mr Eckford and his son, Jason Eckford (following the passing of Mrs Eckford), made several enquiries of SMC regarding the future developments on the adjoining lots. In 2016 after making those enquiries, Mr Eckford became aware that the adjoining lots were not sold by SMC at the time he entered into the contract to purchase Lot 10, and that when they were sold, were all sold without the building covenants.

Key issues

The key issues in the case were:

  1. Whether the adjoining lots were ever “Sold” at the time the Eckfords entered into the contract;

  2. Whether SMC and Mr McLaughlin (a director of SMC) knowingly allowed the real estate agent, who was engaged by Pangus Pty Ltd (subject to a put and call option), to market the adjoining properties as “Sold” in circumstances where they believed that those properties would never settle; and

  3. Whether SMC had any obligation to tell the Eckfords of the change in circumstances regarding the sale of the adjoining lots.

The judgment

Who got the benefit of the (mis)representation?

SMC and Mr McLaughlin contended that they never appointed the real estate agent or Pangus as their agent for “the purposes of making the sham contracts for the adjoining properties” and that the entry into those contracts were inimical to the commercial intent of the put and call option and outside the scope of the rights that were conferred on Pangus Pty Ltd.

That contention was rejected by the Court for a number of reasons, which included:

  1. SMC and Mr McLaughlin admitted to providing the real estate agent with the information as to the properties which had been “Sold”;

  2. Mr McLaughlin knew that the real estate agent would be using the up-to-date pricelist showing the lots which had “Sold” to secure further sales; and

  3. The mere fact that the real estate agent was engaged by Pangus did not exclude it from also being in a position where it acted for SMC in dealings with potential purchasers, when it was a term of the put and call option deed that SMC was the vendor on each contract.

The Court, in rejecting the contentions of SMC and Mr McLaughlin, made it clear that as the owner of the land it received the benefit from any representation, or in this case, misrepresentation made by the real estate agent.

What was the developer’s (dis)honest belief as to the sale of the surrounding properties”?

During the course of the hearing, in which Bartier Perry represented the applicants, the Court heard that:

  1. The previous contract for the sale of Lot 10 was with an individual who owed money to Pangus;

  2. The purchaser for Lot 17 had the same solicitor as Pangus, resided in South Australia, and had a Post Office Box in Kent Town, South Australia;

  3. The purchaser for Lot 18 had the same solicitor as Pangus, resided in South Australia, and had the exact same Post Office Box in Kent Town, South Australia; and

  4. The purported purchaser for Lot 19 was a related party of Pangus and was also a company registered in South Australia.

During the course of the trial, it was put to Mr McLaughlin that he knew that there was little chance of any of the adjoining lots settling in circumstances where there had been up to four extensions of time to obtain finance and no deposits paid on those contracts.

Mr McLaughlin agreed that he thought the purchasers (for each of the adjoining lots) would not be able to complete their respective contracts, and that in his mind those contracts were “very weak”, “bodgy”, “dodgy”, “a joke” and “not worth anything until they settled”.

The Court determined that Mr McLaughlin, despite knowing that each of the adjoining properties were unlikely to be sold, wanted to use their existence as a means to market other lots in the estate because he knew that was “the way real estate works”.

Did the SMC have an obligation to inform the purchaser of a change in circumstances?

The Court found by 1 October 2007, prior to the exchange of contracts to purchase Lot 10 that:

  1. The contract for Lot 19 had been terminated twice;

  2. The purchaser for Lot 17 had not complied with the contract and SMC had instructed the real estate agent to continue marketing that property; and

  3. The purchaser for Lot 18 had not complied with the contract and could not be located.

With this in mind, the Court determined that the real estate agent and SMC did not provide an entire picture to Mr Eckford. Rather, they only told him that Lot 10 had become available, but not about the concurrent termination of a number of other lots, and more particularly Lots 17 and 19.

Given this was information known to SMC only, it had an obligation to disclose that information to Mr Eckford and the failure to do so rendered each of the representations that Lot 17 and 19 had been “Sold” false and misleading. The Court went on to find not only misleading or deceptive conduct on the part of SMC, but also deceit and fraud.

Implications for developers

The Court is likely to hold the developer or owner of land liable for misrepresentations or fraudulent statements made to achieve a sale, irrespective of whether there was an intermediary, as there was in this case.

Further, if there are material changes in circumstances in respect of the property which was subject to the negotiations, a developer should inform a potential purchaser of that material change as the failure to do so can be deemed to be false, misleading or potentially fraudulent.

Authors: Gavin Stuart and Adam Cutri

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